Forecast Budgeting Explained
The mathematics of effective personal budgeting boils down to two main components:
- Having an effective system in place that dictates how you handle your income, expenses, and spending.
- Having the right budgeting tool to keep track of and direct your income, expenses, and spending accordingly
- Knowing the amount of income you will have each month is typically easy in most circumstances, and is easy to plug into a budget.
- Knowing what you have in "Fixed Monthly Expenses" (i.e. rent, mortgage payment, cable, internet, car insurance, cell phone, electric bill, etc.) is typically easy as well, and these are also easy to plug into the budget.
- The hang up most people have is with their "variable spending" which is money spent on groceries, gas, clothing, entertainment, car repairs, medical bills, etc. These items are typically purchased randomly throughout the month with a series of 60-100 separate transactions. On their own these transaction would be very hard to budget and keep track of, but then on top of those add in all of your other fixed expenses and income (typically all flowing through the same checking account) and it becomes almost impossible to get a handle on what your budget looks like.
So what's the solution? We simplify the process and use a budgeting method that turns our variable expenses into items we can budget for just like fixed expenses. If your mortgage payment comes out on the first of the month in one big payment (easy to plug into a budget), why can't we turn your grocery spending into one payment that comes out of your main checking account on the first of each month as well (which would then also be easy to budget for)? We can, and we can do it with all of your other variable spending as well.
So how do we do this? We create separation in your money which then allows you to see it clearly and manage it effectively.
Picture operating your personal finances like a business would. Big businesses don't just operate out of one pot of money. Each department has its own smaller pot aside from the big company pot and the spending for that department is done out of their specific pot.
The advertising department has their pot of money. The HR department has thier pot. The maintenance department has their own. The front office has their own. Why do they do this? Because if it's all muddled together in one big pot it would be a convoluted mess and make planning very difficult (sound familiar?).
-So how do we setup your finances to operate effectively like that businesses? Like this:
1. All money that comes into your possession goes into your Main Checking Account. This account is the traffic guard that directs money where it needs to go.
2. Every fixed expense is setup to come out of that Main Checking Account.
3. We setup the following separate checking accounts (smaller pots of money) for our variable spending:
- Household Necessity Spending (Gas, Groceries, Household goods, kid's clothing, etc.)
- Household Wants Spending (Entertainment, Eating Out, Date Night, etc.)
- Your Personal Spending (clothing, hair, self-care, and free-to-spend money - think Starbucks coffee, etc.)
- Spouse's Personal Spending (same items as above)
4. We then setup "a sinking fund" savings account for specific necessity variable spending that we know will happen eventually at some point in the future. This includes money for:
- Medical Bills
- Car Repairs
- Home Repairs