I have created a simple spreadsheet to reduce the stress of planning and keeping on track with a budget. I have found that I cannot stick to a rigid budget, but if most of my financial moves are automatic I am much more likely to keep on the budget. The purpose of this sheet is to allow me to see a number of details of my financial life. I used to self calculate these values each year or so after a pay adjustment to make sure the numbers were right. Finally, I just built a Google doc out of it.
The sheet is useful to me in a number of ways such as:
- making sure that my spending is in balance with the 50-20-30 net income budgeting principal,
- being able to quantify what amount of money I can spend at my discretion each day,
- allowing me to calculate recurring costs to allocate for automatic bill pay,
- proving visibility into how much I am paying for services daily, monthly and yearly,
- set magic totals which give savings goals and ideas as to where I want my reserve funds to be,
- and of course play around with salary changes to see how it affects the end game.
The 50-20-30 budget has been around for some time and basically says I want to spend 50% on needs, 20% on savings, and my 30% on wants. I turn this rule on its head slightly because I find pinpointing every percentage of my spending impossible. Instead of apply the percentages against all recurring points of the budget. It helps me live within my means and still have some discretion as to how I’m going to live and spend money day to day. Basically this is structure to allow me to be as free as possible from financial angst. If you want your life to be a little more stress free, automating your budget with these principals can go a long way.
I spend a maximum of 50% of my net income on absolute needs such as power, rent, water, car insurance, gasoline and taxes. Having a place to live with running water and electricity are needs. A car can be considered a need or a want depending on the circumstance of your income. Is a car your only means to get to work every day? You should chalk the car, maintenance, gasoline and insurance up as a need for the time being.
Next, 20% of the net income Savings should be on a well diversified split between long term retirement vehicles, stock and mutual fund investments and more liquid options such as a savings account or bank CDs. Keep in mind that with 401k contributions you make pretax but should count it in with the savings percentage. How you split up savings should reflect your risk style. Since I am a younger investor, I am trying to max out my Roth IRA prior to maxing out the 401k as my salary will most likely increase over the years thus, theoretically, maximizing the tax savings as Roth IRA withdrawals are tax free. I find stocks to be the last thing I am investing in and see them more as hobby but you can get a good return. Remember the day you want to buy is the day everyone else sold because it hit rock bottom. If you believe the company will be around after the bad days, take the investment and run with it. Keeping your savings automatic is the key to maintaining the percentage.
Finally there is the 30% wants budget. Some people like to list the everything as the 50-30-20 budget, but needs and savings come first. Wants are the discretionary. They are the creature comforts and services you choose to use. You must be serious about identifying something as it really is. Cable, Internet or cigarettes are not needs, no matter how much you want them. Note that these are all recurring wants. The key to the spreadsheet is to list as many things that you pay for over and over as possible that you see as something you want but are not planning to cut off. You could include things like cellular phone, magazines, donations to organizations, Internet services, recurring software upgrades, credit card fees, travel budget and really anything you wish to plan for and use. Wants are what you want right?
The goal of the budget by percentages is to identify as many consistent, recurring costs as possible and quantify them against a yearly plan. If your income is unknown month in in and month out, the sheet can still help you plan your recurring needs and wants. Try your best to estimate your income. If you have a salary or somewhat constant income the sheet is even more powerful for giving you freedom.
Luckily or unluckily we have many recurring costs within our lives. By mastering our recurring costs, we are able to be more conscience in our ability to tackle unknown costs. By listing all recurring costs into the sheet, you can finally come down to your Left Over Number. The Left Over is the money left over after you have saved a percentage of your income, you have accounted for all your recurring needs and you have indulged in a number of recurring wants or services. This should be your money in the pocket number. It is a special number as it cuts down to give you a Cash Per Day number. If you budget is out of whack, it could be a depressing but in the end, this is the money in the pocket number.
Finally the key to all this savings and cash flow business is to make it as automatic as possible. By identifying how much money you need to work through a month, you are releasing yourself from the stress of forgetting to pay bills. Further, you are more conscience with you day to day expenses. I setup two bank accounts where one is for the left over want money and another is for needs and recurring wants that I was planning to keep. Each paycheck the Move To Bill Per Check amount in the spreadsheet is moved to a separate checking account. Then I only have available a limited pool of spending money and my automatic bills are free of overdrafts. In the end I had to go to a weekly cash allowance and when times get really bad, it is a daily cash allowance. If I spend too much, I cut to daily allowances until I have a buffer for another week. Buffers are your friend. Build the cushion if you can and feel a little more free.
I hope you find this post useful. Below is the link to the sample Google doc which you can use for your own planning.