Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective
Click here for actual spreadsheet.

“Budget” is a dirty word in many households, and it’s no surprise why. Budgets are hard to create, hard to keep, and nearly always imply sacrifice. So for the sake of being pleasant, I will refer to budgets in this post as Spending Plans. A budget is, after all, simply a way to spend and earn money on paper before you actually spend and earn it, and therefore the term spending plan makes more intuitive sense to me. Answers.com defines budget:

budg·et (b?j’?t)

  1. An itemized summary of estimated or intended expenditures for a given period along with proposals for financing them: submitted the annual budget to Congress.
  2. A systematic plan for the expenditure of a usually fixed resource, such as money or time, during a given period: A new car will not be part of our budget this year.

The creation of a working spending plan frustrated me for many years, primarily because I was trying to create one using Quicken’s Auto Budget creation feature. The problem I had with it was similar to the problem I had with tracking spending in the past: Too many categories. I was being asked to figure out how much money I would spend on small things like a pair of sneakers simply because I had a Clothing:Men’s:Footware category in Quicken. So if I buy (1) $75 pair of sneakers per year, Quicken would fill in $6.25 per month for sneakers. Multiply this by dozens or a hundred other detailed categories and very quickly the whole thing become unruly.

As discussed in one of my first posts on Getting Out of Debt, one must first understand where his* money goes every month. Some things are easy to figure out: gather up your mortgage (or rent), auto loan, student loan, credit card, insurance, cell phone, and any other bills that are fixed monthly expenses. My list also includes things like Netflix, water, and internet access. List each of these items with the associated monthly payment. I use a Google Spreadsheet for this. You will notice that there are some discretionary expenses in here, and that’s okay for now.

Next, I went through the last few months of expenses in Quicken, and pulled out other essentials that aren’t necessarily the same cost from month to month or even year to year: food, fuel, pet care, utilities, etc. I put 4-6 months worth of each of these items on separate lines, and then averaged the each line to get a monthly expense. Utility bills usually have a 1 year rolling history of usage, so this can also be used to predict upcoming usage. Entering all these average or estimated expense creates a starting point.

The next thing I did was to look at expenses that occur on an annual basis: excise taxes on my vehicles, life insurance premiums, disability insurance premiums, Christmas presents, etc. I took each of these annual amounts and divided by 12 to figure out how much I need to allocate to each of these each month. I listed these next.

Last, but certainly not least, I have included my savings contributions. The last place inclusion should certainly not indicate the relative importance of these entries. Indeed, these may be the most important entries in the list under the “pay yourself first” mantra. If you already contribute to a 401(k) plan through payroll deductions, you may not need to even bother making an entry here.

Having entered most of your expenses (most discretionary expenses are still absent), it is now time to enter your income. For most of us, this will be rather easy since we get paid a fixed amount on a set period from few sources. Others with irregular and/or multiple source incomes will have to figure out a way to average this income to create a starting point for now.

Now add up all of the incomes and subtract all of the expenses. What’s left is what you can afford to spend on discretionary items. Is this number negative? If so, you had better go back through your expenses and start trimming until you get to at least zero. If you have an option to earn more income, that can help too. If the number is positive, then you’re already doing better than many people today. Now you need to decide if it’s positive enough to satisfy your wants during the month. The only way to change this number is to decrease other expenses or increase income. You have to weigh priorities against each other, and I strongly suggest that you contribute as much as possible towards consumer debt and savings. My sample budget spreadsheet includes a post-tax savings percentage calculator.

Congratulations! You have now created a budget! Next time we’ll look at how to tweak the budget to be closer to reality, as well as how to manage your budget going forward.

Please see Part II here.

*Too many Web 2.0 contributors would have written “their” (or worse “there”) here because of a political correctness fear of being labeled sexist. Personally, I prefer to use proper English, and “his” won the coin flip. In all likelihood I have made a grammatical or spelling mistake in this aside simply because it would be ironic.

8 Responses to “How to Create a Spending Plan: Part I, Getting Set Up”


  1. Chris Says:

    A comment on your footnote. The use of “their” is not simply one of modern political correctness. It has a history as a neuter form that goes back hundreds of years in English, and was employed regularly by authors like Billy Shakespeare. It was exorcised in the 19th century by grammarians who were preparing high school boys for prep school and college (because in those days, only boys went to college) and who were going to study Latin. This same movement came up with the silly prohibition on splitting infinitives (another entrenched tradition in English). English, despite having a large number of words of Latin origin (mostly through the French brought by William the Conqueror), is not a Romance Language; the grammar is Germanic, not Latin, despite what snobby 18th-19th century grammarians wanted to make of it.


  2. MITBeta Says:

    So are you saying that it is acceptable to use “their” as in the following example: A person should be careful with their money.

    Or are you saying that it’s not acceptable, but for more than just reasons of political correctness?


  3. Chris Says:

    I use it all the time (and I’m a linguist by training and profession). There are other linguists, however, who might disagree. It’s the difference between “descriptive” linguistics and “prescriptive” linguistics. I’m certain that Shakespeare knew what he was doing. Grammarians at that time had no problem with it.


  4. Michelle Says:

    I would like to create a budget and am having a terrible time finding someone/some place (hope my linguistics are correct!) to help me.

    When I look online for a “budget counselor” I come up with a lot of “financial counselors” etc.

    I met with a financial “person” (counselor/advisor, whatever!) yesterday. I had told the woman that I asked the wom an that I booked the appointment with if he was the type of person I was looking for… that I wanted help budgeting and saving. She put in the notes: “savings plan for a young family.”

    I had my 6 year old sleep at my mom’s, my 2 year old went to school, and my husband planned to take the morning off to come, too, (luckily he was called on an emergency for his job and had to go to Framinham.)

    I say luckily because after collecting our bills and making notes, and getting sitters, etc. I went in at the scheduled time (to have my son picked up from school, no deadline for kids or anything) ready roll up my sleeves for a few hours and attack what has been ignored for a very long time) I was disappointed when less than 17 minutes later I was in my van driving away with a suggestion to get life insurance, make an estate plan, and contribute to a 401K. And in his words, “as far as budgeting is concerned, add up what you owe, and what you make and there you have it.” Not exactly what I was looking for. In fact, not at ALL what I was looking for.

    I am disappointed, but not deterred. I am still trying to find someone who will meet my needs.

    Anyway, cause for my (long) post here is see if anyone can direct me toward the right resources!


Trackbacks

  1. Don’t Feed the Alligators » Blog Archive » How to Create a Spending Plan: Part II, Iterating
  2. Don’t Feed the Alligators » Blog Archive » Putting an End to Late Fees
  3. Don’t Feed the Alligators » Blog Archive » A 529 Plan for Our Daughter, Part I
  4. Don’t Feed the Alligators » Blog Archive » Economic Stimulus Received