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Wednesday, November 3, 2010

Budgeting Basics

Confession time! Don't you just love that- when you get to hear all about my frugal flops and failures and things that I do that are less than ideal? I love sharing them, so here it goes:
I, the Penniless Frugalista, have started working on my very first budget today.

What!?! Whoa! Hold it there, Penny! You mean that you've been frugal for this long and had a blog teaching others to be frugal, and you've never even budgeted before? Why not, Penny???

Why No Budget Until Now?

Ok, I guess I'll backtrack.
When I first started this blog, our income was lower than it is now. Much lower. Not that it's not still very low, but we have a little more breathing room now than we had before.
I know the importance of budgeting and have always wanted to have a budget, but it just hadn't been practical before.

A budget, for those uninitiated, basically means dividing up your income so that you have a set amount of money designated for each expense. That means you have x amount to spend on that expense and no more.
The problem, and the reason why we never had a budget before, was simply because our spending was more than our earning. Big oops.
I mean, we weren't being very wasteful or extravagant, and I'd have to say that I was probably being pretty darn frugal... But when your income is very small, it doesn't take much spending to have your monetary outlay exceed your earnings.
What we did was try to lower our expenses in any way we could. I lowered my grocery bills by about 65%. We cut back on electricity and water use, cloth diaper, mama cloth and even family cloth. We went extreme...
Once we cut back as far as we could, I decided that we would make ourselves a budget, once and for all!

I plugged in all the numbers, allocating the least possible amount for each of the areas... and was left with a budget deficit! Even with all our penny pinching, it still wasn't enough!!! Our income was still less than our expenses!
What it came down to was upping out expenses, because cutting our expenses further is quite difficult, what with all the extreme frugality that we're already doing!
Until that point, the only budget we had was "spend as little as possible on anything!"

With some hard work, both mentally and physically, my husband and I increased our income. My husband will supplement his regular income by working double shifts occasionally, even though it means he is out of the house from 6:30 am till 11:30 pm.
I am now working 12 hours or more a week doing very difficult physical labor- cleaning homes. From the outside, it doesn't seem like this would be such physically taxing work, but you try doing it many hours a week and you'll also notice your knees, hips, shoulders, back, neck and feet begin to hurt, in addition to being physically exhausted!
Then I also found and took on another work from home job in addition to all that...
And now I can proudly say that our income is greater than our expenses! Yay!!! That means making a real set in stone budget once and for all!


Budgeting with Variable Incomes


From my research on budgeting, there are many different ways of making a budget. You can have a set in stone budget each month, that each month you get a set amount of money in each area, and this is set in stone. Alternatively, you can budget monthly, allocating each dollar towards the expenses that will be coming up that month.
When making my budget, I decided that having a monthly set budget. A budget that changes monthly and is based on our income each month would definitely not work for our family, especially because our income changes drastically month to month. On some months, our income is so low that it doesn't even cover our basic expenses... and on other months, our income is much higher. To spend all the money, even budgeted, on a higher income month would leave us with nothing to help us during the leaner months. Additionally, we've had experience trying to "budget in" irregular expenses, and it was hard for us to do so, especially because some of those expenses can be quite large and show up all at once.

The type of budget I opted to make was like this:
I made a spreadsheet listing all 12 months of the year.
For each month, I wrote our various income sources for that month. I added them all up and divided by 12. This way I found what our average monthly income is. Then I subtracted 100 dollars from it to be on the safe side.

Then I made a list of all the expenses I could think of that come up, also divided up by months. If an expense is a fixed expense, I put down the same number in all 12 spots. If it is a one time or an occasional expense, I put down that amount during the month it occurs.
Like I did with our income, I added up all the expenses in each category for each of the months, and divided the lot by 12 to get the average amount spent in that category. (For example, if I spend 150 dollars on shoes for the family two times a year, I add up that 150 and 150, and then divide that by 12 to get 25 dollars a month spent on shoes on average.

I found the average monthly expense in all these categories, added them up, and subtracted the total from our total average monthly income. With the excess, I added more money to some of the budgeted areas (like debt repayment), and kept some as padding for extras.

Now the way we'll be doing this from here is like this:

Budgets in Action


I like working in cash as much as possible.
I'll be using a file folder to make an "envelope system" for money.
Remember that monthly average expenditure in each category? I'll be taking that amount in cash and sticking it in a pocket of the file folder.
That 25 dollars monthly for shoes will go in the shoe file. Each month, I'll be adding another 25 dollars to that shoe "envelope", and when I need to spend money on shoes, I'll take out however much is needed.
Same goes for the rest of my budgeted money. It goes in cash into the file designated for it to be used as necessary. When the cash is gone, the spending is done!

With the steady monthly expenses like groceries, phone bills, etc, the money left over at the end of one month will be thrown towards our debt as part of our debt snowball. For the variable expenses, money will stay in the file until it is all used up.

Because of our variable income, most months we'll have less money budgeted than we are bringing in, leaving excess money in the bank to act as a cushion and to supplement our earnings during leaner months.

So what are the categories I made for which I allocated money?

Budgeted Categories
Savings
Childcare
Groceries
Holidays
Bulk food
Rent
Transportation
Electricity
Water
Gas (for the stove)
Cell phones 1 and 2
Land line
Internet
Medical
Debt repayment
Household "upgrades" and appliance repairs
Gifts (this includes money for birthdays as well as little gifts here and there. A little saved up every month so that on special times we can have the money available to spend more.)
Eating out (very small, but budgeted in for the times I hadn't had a chance to pack my husband a lunch or was too exhausted to make him something)
Clothing (for the whole family)
Shoes (mainly for the boys- they have growing feet. My husband's shoes last a long time, and I can't buy shoes here anyhow)
Bras (separate from clothing because I can't buy these second hand and they're much more expensive than the rest of my clothes)
Animals (We have one canary. This is a tiny amount to cover his 1 dollar every few months package of food.)
Moving (No plans to move yet, but I'd rather be prepared and save up a small amount each month so that we can afford a move when we need to without borrowing money or taking money from our emergency fund.)
Crafts/Projects (things like equipment for making a solar cooker or soap making or sewing things- crafts to save money)
Homeschooling supplies (also small because I get most of my supplies cheap or free)
Homebirth (again, not pregnant, but want to save up a small amount every month for when I do have my next child, because homebirths are not covered by insurance and I would like a homebirth next time)
Blow money (after everything's said and done, you do occasionally need some money to "blow").

So, there you have it. 
Do you think I've missed any category that I should include in my budget?
If you have a budget, how does yours work? Is it a set budget each month, or does it change every month to reflect variable expenses?
Do you use cash for your budget, or do you budget mainly on the computer and just use a debit card as needed? What categories do you have in your budget?

Linking up to Works For Me Wednesday

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