Wednesday, September 21, 2011

Financial Budgeting Tips

The following blog is a more detailed view into financial budgeting.  Whether you are making a large purchase (a house!) or taking a deeper look at your savings, these tips could be helpful for you.

Becoming "House Poor"
A classic piece of advice when buying a home is to avoid being "house poor".  This is the situation where you spend all your money to get the house, but then end up with an empty home because you can't afford to buy anything.

I am a bit torn on this concept - the advice is sound, but I think it really depends where you are in life.  Buying a home is a long term commitment andI think you need to think about both sides of the coin.

You didn't spend enough
You bought a house that you can somewhat easily afford.  You are paying off your mortgage and saving a substantial amount each month or maybe paying down the mortgage at an accelerated rate.  You also have plenty of money for surprise repairs and you get to go on vacations.  You aren't stressed about your monthly budget.  Sounds great, right?

The downside is if you bought a smaller home in order to save money.  Your family might be growing and you don't know where they will all fit.  What if you bought in a less desireable neigjborhood?  Are you concerned about crime or maybe don't get along with your neighbors?  Are the local schools decent or will that become a problem?  A lower priced house might prove to be more difficult when it comes time to sell.

You stretched your budget
You bought a great home in a great area.  You love your neighborhood and are proid to show off your home.  You also think you won't have trouble selling down the line.

The downside - you are embarassed to have an expensive home but have cheap furniture.  You have extra rooms in your house that you don't need and they remain as empty as the day you moved in.  You aren't able to save much money, much less go on vacation.  You are concerned that if the car breaks down or some surprise pops up, you may have difficulty paying for it.  This kind of stress can really weigh on your family life.

There isn't an answer to which one is better, but I would recommend that if you are younger and think your income and family may grow, you should probably stretch a bit.  If you aren't in that camp, do you really want to spend your next 30 years stressing month to month about the effect a flat tire might have on your finances?

Great Resources for Budgeting
I would highly recommend that you sign up for a free account with  By entering your credit card, banking, and other information and passwords, Mint will automatically pull your monthly statements and help you categorize.  And don't worry, Mint uses the same encryption technology that your banks use so it is just as safe.

The real value here is that you can track your spending in as little or as much detail as you like.  The site also provides charts to show the breakdown or how your spending has changed from month to month.

I've always been a bit fanatical about tracking my spending as well as my assets and liabilities.  I have an excel spreadsheet that I've updated every paycheck for years with this information.  While this has become more of a habit now than a valuable resource, I would recommend putting this information on paper and calculating your net worth.

Broadly, your net worth is the value of your assets minus your liabilities.

Monthly Budgeting Tips
The most important part about budgeting is putting together an actual monthly budget.  I've accomplished this using Google Docs.  I recommend Google Docs because it is a simple interface that is accessible anywhere, even on your phone, and it's free.

The key to good budgeting is making fair estimates.  This is where a site like Mint can come in handy and you might be surprised.  I thought, for example, that I probably spent $15 a month at pharmacies.  These trips were often because I needed something specific or was sick, but it was hard to remember how frequently I would make these mundane trips.  I would buy some contact lens fluid, toilet paper, Nyquil, etc., and be way over my budget every month.

Budgeting Walk-through
I put together a spreadsheet which you can access here.  It's a little bit rudimentary but hopefully it can help you get going on a budget of your own.  If you are signed into your Google Docs account, you should be able to click File then save a copy to your own directory which you can then edit.

I'm going to run you through some of the categories and inputs into my spreadsheet to help you through a real life example.

  • Income - obvious, but I would suggest putting your income and your spouse's income on separate lines (we'll get to that later)
  • Individual Expenses - I split individual expenses into separate sets just as I did with incomes.  I think this is a smart, fair, and open way to budget with your spouse, as you don't want to be in a situation where you can't support your bills with your income and are instead borrowing from their income.  Our expense line items include: shopping, golf (yes, I have a real weakness), trips, credit cards, and work-related.  Credit cards are a tough one - if you pay minimums, you end up suffering the most.  You'll probably be better off using monthly savings to pay down this type of debt first.
  • General / Household Expenses - these are a set of expenses that can generally be viewed as "shared".  These items include groceries, restaurants, gasoline, car payments, insurance and other cash expenses.  Some of these are set amounts each month while others can be harder to estimate.  One month you'll do a lot of cooking, the next will have more restaurant trips, the next might include a special (expensive) dinner.  Again, this is where Mint can help you come to reasonable estimates.
So how does it look?  Are you surprised by how much your budget tells you that you are spending or saving each month?  Do both partners contribute and spend fairly?  

If you've really sharpened your pencil to come to your savings amount, I would take that monthly amount and multiply it by 12.  I think that yearly amount is a fair representation, while the monthly amount tends to be very volatile.  I would also note that you should keep in mind whether you tend to have a tax bill or receive a tax refund after you file.  Owning a house does provide additional tax benefits, but I've always thought of this, in terms of budgeting, as a happy surprise I'll hope to see come May or June.

The second tab in the spreadsheet "Cash Flow" is something I used a lot as we were approaching the date our down payment was due.  Even if you know you are saving money each month, it may be important to know how much cash you'll actually have on the 13th of the month.  To use this, I entered a long list of expenses on the dates that they are due.

Keep in mind that your monthly budget will be volatile when thinking about how much you can afford to spend on a house.  A volatile month of spending can't lead to you missing your mortgage payment.

Lastly, it's a very good idea to pull your credit report in this process.  You can do it once per year for free through the government - be careful of ads you see on TV as these companies are simply providing you what the government is offering you, but they will try and upsell you on monthly monitoring services.

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