Budgeting Challenges : The Variable Categories

Broken down to its essence, creating a budget is not a difficult thing to do.  It is simply accounting in its most basic form; add up your debits (income) and credits (expenses), and subtract the credits from the debits.  Hopefully, the total amount of debits is more than the total amount of credits, although I know from experience that this isn’t always the case.

Of course, I am oversimplifying.  It certainly helps if you have some basic excel skills or even better, if you grab a simple budgeting application it can really help to keep everything organized.  For the numbers themselves, calculating your expected income is quite easy if you have a static paycheck.  You will know exactly how much you have to work with.  However, for anyone who freelances, has variable hours, or works on commission, your income can vary wildly month to month.  Your best bet is to look at your income for the past six months, and take the average.  When I am creating a budget, I typically leave off income that I get from side hustles (selling on eBay, blogging, freelancing), unless I know with absolute certainty, that payment is guaranteed.

The real challenge in creating a budget comes in estimating your expected expenses.  Your top goal in creating a budget is to get an overall view of your financial picture, and it is important to accept going in that your numbers are not going to be perfect.   You can certainly adjust each month for greater accuracy.  Some expense categories, like those in the list below, are very easy to estimate because they are static each month. Utility bills (gas/electric/water) can vary, but they are included in this list because you should be able to get a fairly decent estimate by looking at the same month from the previous year, or by setting up budget billing with your provider.

Some of your bills will likely be paid quarterly or even annually.  My approach to these bills is to setup a separate checking account and to transfer an appropriate percentage of the amount due each paycheck into that account.  For example, my trash bill is $60, due every three months.  Since I am paid twice monthly, I put $10 from each paycheck into the separate checking account, meaning that $60 will be there every three months to cover the bill.  Taking this approach allows for me to factor in these costs into my monthly budget, creating a true picture of how much these items truly end up costing me each month.

Which leaves us with the biggest challenge of all when it comes to creating a budget,  the variable categories.  The items in this list can vary wildly month to month, and your much like variable income– your best plan of action for creating an initial budget is to look at previous months and attempt to get an average.  However, this can be difficult when many of these items are often paid for with cash (and therefore have no electronic records), and often purchased together.  I do think that it is valuable to separate things like groceries, home supplies, and baby supplies, to get a true picture of your spending habits.

It should also be noted that these categories will not be all encompassing.  There will be additional items each month that certainly require you to spend money.  In a given month, you may need to purchase some school supplies, renew your license plates, get an oil change, and call a plumber to fix a leaking sink.  You can either break these into new categories (auto expenses, home repair, etc), or simply create a large miscellaneous category to cover all of the spillover.  I would recommend the former option of the two, just because you can never have too much information.

When Michelle and I first went through the exercise of creating a budget, our initial estimates on some of the items on this list were pretty far off.  We were proud of the fact that our “restaurant” spending was very low (we almost never eat out), but we were unaware that our grocery budget was sky high (well over $1000/month for our family of 5).  Identifying this is an area of concern let us know that we were going to need to find a way to get this cost down by using coupons, meal planning, and bulk purchasing.  A few of the categories above were not on the initial list, but were added to keep us honest.  It was easy to get out of hand buying cute clothes for my lovely daughter, or purchasing a morning coffee each day at work.  Setting a hard budget for these categories, goes a long way towards keeping things in check.

I am going to be truthful here.  Tracking spending in these categories will take you a bit of effort.   When you get home from the grocery store, you will need to check your receipt to indicate how much of the spend belongs in the grocery category, and how much belongs in the home or baby supplies categories.  Most budgeting tools include a facility for tracking this information, but I instead use a day to day journal for each category, as shown below.

Budgeting for variable expenses is certainly a process, but one that is well worth the effort.