So confused by budgeting/personal finance-- Updated!

[texmati]

Let me begin by saying, I consider myself smart in math. (Or at least, I used to). I'm an electrical engineer, I aced all of my college math except for matricies.

I don't know if it's preggo hormones or what, but all of a sudden (I think after buying the new to us car), I want to understand more about where our money goes. Specifically, I want to know how much do we spend each month on average, and if those expenses are something that we could/should cut back on or not.

It should be easy, right? I have access to all this data, I should be able to reconstruct our income and out go for the last few months. It's not. I don't even know where to start. There is no '0' point, no starting point where I can start from. Bills from spending in one month get paid in another month. We just bought a new car, writing a check that's much larger than our monthly income. How do you account for that?


oops gg!

ETA: I never got to finish my post! Just some background-- DH has been handling the finances since we got married, and we tried really hard to live on only one income, and I know we max out our retirement accounts. He doesn't seem to work things on a monthly basis, there is just a big pot, and all spending comes out of that pot.

So many budgeting tips/software start out with the assumption that you have very little in the bank, it seems so difficult to start out trying to analyze a big jumbled mess.
Edited by texmati - 12/5/10 at 1:50pm

[montlake]

When I started, I downloaded 3-4 months of info from the bank. I tossed out any one-off things (like your car down payment) to get a baseline of what we had been spending in each category, per month. To start, there is no need to get into something being due one month but paid another month for this step. just take 30 days at a time and look at what went out.

[Virginia884]

I like using mint.com to track our spending. Check it out!

[Kyamo]

The most important figure to me is the average spending in a category over many months.  So I do not worry at all about whether something was a bill from another month, or a one time thing.  I just add up all the things in that category that were from that month.  (Using bank statements for auto billpay and debits, credit card statements for most everything else, and receipts for the odd cash thing.)  I do this once a month.  I now have about 3.5 years of data.  

[gumshoegirl007]

You shouldn't be ashamed at all.  And, just because you're good at math and are intelligent, doesn't mean that you ever learned some of these basic life skills such as budgeting.  Financial literacy and management wasn't something that was ever taught in school (and it's obviously a big problem, because there's so much work being done in this area including bringing curriculum to schools), and our parents for the most part never taught us these skills.

Now that you want to tackle this, it's easy to feel overwhelmed.  While I find mint.com to be great in someways, I find it doesn't work easily enough for us.  Start with getting a handle on a monthly budget.  You need to know what comes in and what goes out to do this.  When we went through this process 3 years ago (inspired because we drowning in debt from a house purchase), I started to follow a Canadian financial guru Gail Vaz-Oxlade.  I didn't even really understand all of the basic expense categories that should be included in a budget and how to allocate.  So, check out her resources here - http://www.gailvazoxlade.com/resources.html.  And, this how to make a budget overview is really helpful - http://www.gailvazoxlade.com/resources/guide_to_building_budget.html.  Start with one month and plug in the numbers.  If the online sheet doesn't work for you, set it up in excel.  To get the best picture, she does advise that you do averages over 6 months.  But, that's a pretty big task for some variable expense categories.  Keep it simple to begin with.  Just look at November.  Then, you can start tracking December.

Also, watch her show.  They have online episodes. I knew that we never wanted to end up in the mess that many of the people on her show do.  It was a real financial motivator for me to get our act together.

Once you have the numbers together, you can get a complete picture of how you're doing financially.  The ratios Gail recommends were useful to help us assess how well we were doing overall.  She recommends that you spend no more of your monthly income as follows:  35% housing, 15% transportation, 10% savings, 15% debt and 25% on life.

Good luck!  You can do this!!!

[texmati]

Originally Posted by montlake 

When I started, I downloaded 3-4 months of info from the bank. I tossed out any one-off things (like your car down payment) to get a baseline of what we had been spending in each category, per month. To start, there is no need to get into something being due one month but paid another month for this step. just take 30 days at a time and look at what went out.

I think I might try this. The majority of our spending is done on credit cars, which we then pay off each month. I was thinking of just tracking either the card sor the bank accounts seperately. But then, what's the point if we don't include every purchase, yk? Good tip on removing one-off expenses.

Originally Posted by Virginia884 

I like using mint.com to track our spending. Check it out!

DH is weary of putting our stuff online; but I did get quicken. I think that's part of my confusion-- not really understanding how the quicken accts work. It adds a layer of confusion, even though I know it's supposed to make it easier.

Originally Posted by Kyamo 

The most important figure to me is the average spending in a category over many months.  So I do not worry at all about whether something was a bill from another month, or a one time thing.  I just add up all the things in that category that were from that month.  (Using bank statements for auto billpay and debits, credit card statements for most everything else, and receipts for the odd cash thing.)  I do this once a month.  I now have about 3.5 years of data.  

I see. Like adding up how much was spent on groceries etc each month. Do you worry that your categories may not be comprehensive or that you are missing some large expenses? For example, I don't think I would have thought to track health care expenditures in the past, since they were infrequent and not really optional. but this year they have gone into the 1000's where as 3 years ago a may have had 1-2 10 dollar copays.

Originally Posted by gumshoegirl007 

You shouldn't be ashamed at all.  And, just because you're good at math and are intelligent, doesn't mean that you ever learned some of these basic life skills such as budgeting.  Financial literacy and management wasn't something that was ever taught in school (and it's obviously a big problem, because there's so much work being done in this area including bringing curriculum to schools), and our parents for the most part never taught us these skills.

Now that you want to tackle this, it's easy to feel overwhelmed.  While I find mint.com to be great in someways, I find it doesn't work easily enough for us.  Start with getting a handle on a monthly budget.  You need to know what comes in and what goes out to do this.  When we went through this process 3 years ago (inspired because we drowning in debt from a house purchase), I started to follow a Canadian financial guru Gail Vaz-Oxlade.  I didn't even really understand all of the basic expense categories that should be included in a budget and how to allocate.  So, check out her resources here - http://www.gailvazoxlade.com/resources.html.  And, this how to make a budget overview is really helpful - http://www.gailvazoxlade.com/resources/guide_to_building_budget.html.  Start with one month and plug in the numbers.  If the online sheet doesn't work for you, set it up in excel.  To get the best picture, she does advise that you do averages over 6 months.  But, that's a pretty big task for some variable expense categories.  Keep it simple to begin with.  Just look at November.  Then, you can start tracking December.

Also, watch her show.  They have online episodes. I knew that we never wanted to end up in the mess that many of the people on her show do.  It was a real financial motivator for me to get our act together.

Once you have the numbers together, you can get a complete picture of how you're doing financially.  The ratios Gail recommends were useful to help us assess how well we were doing overall.  She recommends that you spend no more of your monthly income as follows:  35% housing, 15% transportation, 10% savings, 15% debt and 25% on life.

Good luck!  You can do this!!!

Thanks for the encouragement and the links! Like many budgeting worksheets, hers doesn't include anything about retirement. And even though it says to save 10%, the question is, for what? Both DH and I are savers by nature, for the most part, but we squirrel away money without a purpose, which I really want to stop, because it seem to make it easier for DH to spend, and harder for me to spend.

[texmati]

dp

[nd_deadhead]

Hi Texmati! There's no shame in learning how to do something new.

I think the best thing you can do to get a handle on your spending habits is to track every single dollar that you spend, and use specific categories (minimize the number of things that go into "miscellaneous"). I use an old-fashined 3-ring binder, and write everything down. I have also used a spreadsheet, which helped me keep track of long-term debt reduction.

Categories include mortgage, insurance premiums (car, home, health, life), heat, water, phone, cable, retirement savings, regular savings, groceries, gas, medical expenses, charitable giving, clothing, gifts, entertainment, eating out, school expenses, car repairs - you get the idea. Our Discover card statement on-line groups purchases into categories, which is handy.

I put items into the month in which they are paid - for example, a credit card purchase today will be paid in January, so I put that expense on January's page. If you do this for a few months, or if you can back-track for a few months, you'll get a pretty good idea of where your money is going.

If you were living on the edge financially, I would suggest that you literally record every penny; it doesn't sound like you're in that situation. I used to do it, and it wasn't that hard, since we hardly ever use cash for things, but keeping track of cash expenditures it harder than credit cards or checks. Now what I do is keep track of how much cash we spend (such as "instant cash, $100"), but I don't mess with exactly where it goes. At least this way I know that we took a certain amount of cash out of the checking account, or cashed a check, so I know that the money was spent.

[BetsyS]

One way to view savings is to separate it out.  That might help you feel easier about spending, if you see where the money is set aside, how much, and where you are in relation to your goals.

Having a fund set aside for once a year expenses.  Different people call this different things.  It's a sinking fund, though, so if you like to spend, say $1200 on vacation, you put aside $100/month for that.  Once a year, you spend it.  Or Christmas.  Or more mundane things, like car insurance or the like.  This spreads out the bigger budget items over several months.  These are things you know are coming up, and you usually know when they are due.

Another savings fund for things that you can forsee are coming up, but you're not sure exactly when.  A new car, a new stove, maybe the roof even if yours is close to the end.  This would be more variable, based on your needs, plus the balance may be up and down some, because sometimes you know it's coming, but you can't predict when.

Another fund for retirement. 

Another fund for childrens' college.

And beyond that, building wealth.  Just money for investment. 

[gumshoegirl007]

Thanks for the encouragement and the links! Like many budgeting worksheets, hers doesn't include anything about retirement. And even though it says to save 10%, the question is, for what? Both DH and I are savers by nature, for the most part, but we squirrel away money without a purpose, which I really want to stop, because it seem to make it easier for DH to spend, and harder for me to spend.

You raise a valid point, and this gets into the tricky part for DIY financial types.  Once debt is paid off, and you have a 6 month emergency fund (sometimes as little as 3 months, sometimes as much as 12 months if you're self-employed), then it's usually recommended that you put your savings towards retirement.  (Again, there's so many variables here and you may chose to prioritize differently).  Every family has different savings needs.  Helping to pay for our kids' education is part of our savings plan.  In our current budget, we currently put about 18% of our monthly net income to savings which includes savings for my retirement, our kids education, our emergency fund and household repairs.

With respect to retirement, the gold star question is how much do you need?  This is when you really need to look at a retirement calculator to figure out what you're going to need and what kind of lifestyle you're going to need to maintain.  In my case, my DW has a gold star defined benefit pension plan.  Her company takes 7.5% off the top off of each pay for her pension, but they guarantee that she'll get 70% of her salary (indexed for inflation) no matter how much she contributes. Actually, if we were include her pension contributions, our savings rate would be MUCH higher. 

With respect to me, I will have nothing other than what I save, what I get from the Canada Pension Plan and Old Age Security (in the states, I think you call it social security).  We ran a bunch of scenarios and determined that with my age, retirement date, and the lifestyle we'd like to live, that I'll be able to meet that goal if I put away $500/month until that time.  So, we've built that into our budget.

We'd like to maybe one day own a cottage.  So, after school is paid for the kids (or rather, we've saved what we're going to contribute), we may set that as a new savings goal. 

You indicated that you want to save with a purpose, so what are your and your husbands shared life goals?

[montlake]

If you can afford it, I highly recommend mvelopes.com (I think it is $30something a quarter).  After years of going kicking and screaming into budgeting, that is what I started using after I got all of our spending tracked and decided on catergories. It is basically the traditional envelope system but electronic. There was definitely a learning curve to using it, but once I got it down it really did help to reign me in keep a grip on things tighter. Now I am on it every day to see what we have left in each "envelope" and make sure we aren't going over anywhere. I am just simply not going to do cash envelopes, it is too much of a hassle for us but this is the next best thing.

[heatherdeg]

I have to agree with EVERYthing gumshoegirl007 wrote (in both posts).

And it may help you to separate out different things.  For instance: we have one checking account for the monthly bills and that is where all of our "operating" month-to-month money goes.  We have a separate, but connected (for easy online transfer) account for sinking funds like annual insurance premiums, auto repairs, clothing, gifts, etc.  The "one-offs".  (Side note: I agree that in the beginning it's good to ditch tracking the one-offs, but keep in mind to backtrack to them so you can see where your money realistically goes so that you can budget for that stuff.  I didn't do that and set our clothing budget way too low.  :(  ).  

Most companies will allow you to split your paycheck's direct deposit into at least two accounts.  If not, you can often set up automatic transfers to other accounts.  We have dh's income split to got into the savings, operating account and sinking fund account.  Retirement money is deducted pre-tax before the rest is direct deposited.  But even if it weren't, we could take it from savings as needed.  Having it separated to begin with kind of makes it harder to touch.

As far as mvelopes.com, the OP said that her dh isn't comfortable with online stuff.  I'm not, either.  But the idea reminded me that we use actual, physical envelopes with cash in them for the budget categories we struggled with the most (groceries and eating out).  When the cash was gone, we stopped and turned to the pantry.  I found that my "stocking up on sale items" ran us over budget too often.  Using the envelope system, I managed to get us to where I only ever had to use that money when there was a sale because I managed our household inventory WAY better.  :D

Don't be so hard on yourself.  Some people never get the interest in their money that you've gotten.  And it's wise that both adults in the home have a clear sense of what's going on money-wise.  Heaven forbid something should happen to the other (even temporarily), trying to figure it out under THOSE circumstances is just not necessary.  And like gumshoegirl007 noted, there is a HUGE push to get this kind of education into the schools (NJ just passed a law to incorporate it at every grade level including Pre-K... I know because I'm certified to teach there and my license is in "comprehensive business" which covers money :)  ).  If you look at the state of the economy, it's clear that people in extremely large numbers have been unable to make sound financial decisions--personally and via their jobs in corporate and gov't.  :(

[Kyamo]

Originally Posted by texmati 

Originally Posted by Kyamo 

The most important figure to me is the average spending in a category over many months.  So I do not worry at all about whether something was a bill from another month, or a one time thing.  I just add up all the things in that category that were from that month.  (Using bank statements for auto billpay and debits, credit card statements for most everything else, and receipts for the odd cash thing.)  I do this once a month.  I now have about 3.5 years of data.  

I see. Like adding up how much was spent on groceries etc each month. Do you worry that your categories may not be comprehensive or that you are missing some large expenses? For example, I don't think I would have thought to track health care expenditures in the past, since they were infrequent and not really optional. but this year they have gone into the 1000's where as 3 years ago a may have had 1-2 10 dollar copays.

Sometimes I do wonder if I have too many or too few categories, but not that I am missing any expenses. If we spent money on anything at all, it would show up on either the bank account statement or the credit card statement. Even ATM withdrawals show up on the bank statement, so I don't see how I could miss anything. When I was first starting out I did sometimes run into something that didn't fit into any category, but I just added more categories (or used misc if I thought that category wouldn't reoccur), I didn't just not record things that didn't fit in.

[montlake]

Yeah I ended up with soooo many categories to cover stuff like that but that is just what works for me. I like the health stuff you mentioned, we have a budgeted about for Dr. visits and prescriptions every month. (Mostly because we have those EVERY. MONTH.) I pad a little extra in it to cover actual acute illness that pops up, as they mostly go to my Husband and Son's chronic illnesses. The rare occassion it doesn't get used up, I use it to stock up on OTC stuff. I also keep a "Household" envelope that is very flexible. Sometimes it is really household stuff like air filters or new litter boxes or something. But sometimes it also covers if we need to go over the grocery budget or the water bill is high or something.

[sunnysandiegan]

I think it is great you are taking an interest now. Embrace it!

I have a degree in finance and have worked in many different facets of money management. I've also helped friends and employers get their financial acts together. Currently, I am helping my DD's school with fundraising and proper fund tracking.

From my years of experience, my best advice is to start with paper and pencil. The physical act of writing it all down tends to make it all feel more real for most people and it is easier for the average person to understand that way. You can choose to work from past records or you can choose to start with the present. Doesn't really matter for your situation. It also doesn't really matter for households when you define the expenses (date incurred or date paid). It definitely matters for business expenses, though. There are official accounting methods for all of this stuff, but it isn't that important for the average household.

Once you get a feel for your family finances on paper, then you can explore other options. A simple spreadsheet, Quicken, and a whole big list of other options. Quicken is awesome, but I don't recommend using it right off the bat. It confuses people who are just learning the basics.

When I work with individuals at the stage you have described, I have them write the dates and amounts of each paycheck for a given month at the top of the page (incoming). Subtotal those. Then, list each bill that is paid with the date and payee (name of company) and amount (outgoing). Subtotal those. Subtract the outgoing money from the incoming money and circle it.

I still have index cards from when I first started this eons ago! I moved to a spiral notebook the following year and then to a computer. Computers were not nearly as available as they are now and I am not advocating two years of tracking first!

If someone is already saving, then I have them write it in the appropriate category: incoming if it is pretax or you never see the money (separate deposits, for example); outgoing if it comes into your checking account and then back out to a savings account (of any kind, these are general terms) whether it is automatic or you initiate it. You need paycheck stubs in hand. I encourage people to write the gross salary and subtract out all the items that come out of their checks before they see the money (taxes, 401k, healthcare, everything). For most people, it is easier to have all this in the incoming section because they only see the net effect of all this stuff. Once you know this info, though, you have more control over it and it becomes more important to see it in black & white.

In the beginning, I don't recommend categories. Just write the date, name of company paid, and dollar amount. A couple months of this and most people get it and are ready to analyze further. Some folks never need or want to take it any further and that's okay, too. Incoming and outgoing really is the basic information. Everything else is extra. Your DH's "one pot" method actually will make your task easier. Once you understand it all, you may want to influence that strategy differently, but it is a good method overall for a lot of people. Simple can be best.

Best wishes!!!

[Smidge]

I just PM'd the OP about a super easy budget spreadsheet my brother set up (he's in finance/banking).  If anyone else would like a copy (It's MS Excel) just send me a PM with your email addy and I'll send it over :)

[texmati]

Originally Posted by sunnysandiegan 

I think it is great you are taking an interest now. Embrace it!

I have a degree in finance and have worked in many different facets of money management. I've also helped friends and employers get their financial acts together. Currently, I am helping my DD's school with fundraising and proper fund tracking.

From my years of experience, my best advice is to start with paper and pencil. The physical act of writing it all down tends to make it all feel more real for most people and it is easier for the average person to understand that way. You can choose to work from past records or you can choose to start with the present. Doesn't really matter for your situation. It also doesn't really matter for households when you define the expenses (date incurred or date paid). It definitely matters for business expenses, though. There are official accounting methods for all of this stuff, but it isn't that important for the average household.

Once you get a feel for your family finances on paper, then you can explore other options. A simple spreadsheet, Quicken, and a whole big list of other options. Quicken is awesome, but I don't recommend using it right off the bat. It confuses people who are just learning the basics.

When I work with individuals at the stage you have described, I have them write the dates and amounts of each paycheck for a given month at the top of the page (incoming). Subtotal those. Then, list each bill that is paid with the date and payee (name of company) and amount (outgoing). Subtotal those. Subtract the outgoing money from the incoming money and circle it.

I still have index cards from when I first started this eons ago! I moved to a spiral notebook the following year and then to a computer. Computers were not nearly as available as they are now and I am not advocating two years of tracking first!

If someone is already saving, then I have them write it in the appropriate category: incoming if it is pretax or you never see the money (separate deposits, for example); outgoing if it comes into your checking account and then back out to a savings account (of any kind, these are general terms) whether it is automatic or you initiate it. You need paycheck stubs in hand. I encourage people to write the gross salary and subtract out all the items that come out of their checks before they see the money (taxes, 401k, healthcare, everything). For most people, it is easier to have all this in the incoming section because they only see the net effect of all this stuff. Once you know this info, though, you have more control over it and it becomes more important to see it in black & white.

In the beginning, I don't recommend categories. Just write the date, name of company paid, and dollar amount. A couple months of this and most people get it and are ready to analyze further. Some folks never need or want to take it any further and that's okay, too. Incoming and outgoing really is the basic information. Everything else is extra. Your DH's "one pot" method actually will make your task easier. Once you understand it all, you may want to influence that strategy differently, but it is a good method overall for a lot of people. Simple can be best.

Best wishes!!!

Thanks sunny! It was partly your post on how you and your husband switch off, but still both remain involved that got me thinking about this. (DH has a finance minor as well, and I think business school warps your mind in such a way that all these accounting things make sense).

Just to be clear, I very much trust my husband, and under his direction we seem to be doing well. He also tries to involve in investment decisions, but the truth is that I don't feel confident enough to trust my own judgment. This car purchase really showed me that. I moved straight from my parents house in with him when we got married, and I think you miss out on something when you have never been financially independent. I don't think he's hiding anything or even making mistakes.

A couple of questions on your post-- what do you mean by incoming section and outgoing? And when you say 'saving', what if it's not an amount off the top, but just whatever is left after paying out stuff?

I feel so excited! I've decided to at least start with nov. and december in just tracking. Once I get the hang of it, I"ll see if I can go back and try to average out monthly expenses. Why start from the most difficult thing?

[sunnysandiegan]

Originally Posted by texmati 

Thanks sunny! It was partly your post on how you and your husband switch off, but still both remain involved that got me thinking about this. (DH has a finance minor as well, and I think business school warps your mind in such a way that all these accounting things make sense). <-- TEE HEE HEE!!!! That just struck me as sooooo funny! It is partially true, too....
 

Just to be clear, I very much trust my husband, and under his direction we seem to be doing well. He also tries to involve in investment decisions, but the truth is that I don't feel confident enough to trust my own judgment. This car purchase really showed me that. I moved straight from my parents house in with him when we got married, and I think you miss out on something when you have never been financially independent. I don't think he's hiding anything or even making mistakes. <-- I never got the impression you thought any else. You seem to be just taking an interest in your family finances, which is awesome!

A couple of questions on your post-- what do you mean by incoming section and outgoing? And when you say 'saving', what if it's not an amount off the top, but just whatever is left after paying out stuff? <-- I could show this better than writing it out. I'll find my old index cards and scan one and PM you tomorrow. The info is ancient, but the format is the key. For visual learners, it will help.

I feel so excited! I've decided to at least start with nov. and december in just tracking. Once I get the hang of it, I"ll see if I can go back and try to average out monthly expenses. Why start from the most difficult thing?  <-- One step at a time will work out best in the long-term. You're doing great!

(The new formatting for quoting is throwing me off. Sorry if this is hard to read!)

[Tradd]

I'm single with super simple finances.  I split everything out by paycheck. What I do is this:

Take a sheet of paper. List each paycheck in a separate column, headed by the date of paycheck and take home amount. If both you and your DH work, then list both paychecks. Then right underneath each paycheck, start listing what bills have to be paid out of that specific paycheck. If something large, such as a mortgage payment, needs to come out of more than one paycheck, just list however much has to come out of a specific paycheck.

This has worked for me for years. I just scribble on whatever piece of paper is at hand. I don't save any of this info, though.

[texmati]

ok... I'm back. I've literally had my face in quicken for the past 4 days. I got a mini tutorial from my dad and Thursday, and just decided to roll up my sleeves and do it.  So I imported, sorted, and categorized my little heart out over 14 accounts (and no, that's not even all of them) for the past year.

And BOY! was it eye opening. I learned a lot:

• Trying to reconstruct a years worth of money life is hard. I have a new respect for auditors and accountants.
• We arent doing nearly as well as either of us thought in terms of how much we spent this year vs our post 401k paychecks. In previous years, we were spending much less than our pay checks. But this year (post baby), medical bills, child care, a loan made to family, a loan paid off and the new van, we are not even breaking even. (I'm still not sure how to feel about the van-- is that something that would normally come out of 'expenses' or is it 'ok' to use savings for that?) 
•  DH makes sure all the bills are paid, but there is no over reaching system or method to the madness (at least that I can see). Way, way, way to complicated for my taste-- but obviously, since he was doing it on his own,  I can't really complain. I'm not going to ask him to make any changes to the accounts or anything yet, but we've both committed to using the software, and tracking what's incoming and outgoing for the next few months, so we can have confidence about me SAH.
• Even DH was surprised when looking at the numbers as to how much we spent this year. His guesstimates were off by almost a third. Because of all the accounts and moving money from one place to another it was difficult to see that our total accounts were dropping. I felt almost sick when I figured this out, and a little peeved. I don't know why I always assumed that DH was much more money savvy than I. Luckily we are on the same page of being better about watching the pot going forward.
• The 'categories' that I thought would be big expenditures (like eating out) are really not that much. the big expenditures are the ones that I don't pay much attention to because I consider them non-negotiable-- mortgage, insurance, utilities, childcare etc. I'm still trying to get a handle on how we might make this work on one income.

I'm so glad for all the encouragement in this thread. I never thought that I would be in this position, but once a year conversations at tax time about how we are doing are simply not enough. Hopefully in a few months time we'll be back on track again.

Edited by texmati - 12/12/10 at 10:24am