Now for the nitty-gritty aspects of budgeting. First, you need to know how much you have coming in, so list all of your income sources. If you get paid regularly, that should be a piece of cake; if you work in a field with a more sporadic or seasonal pay schedule, you’re going to need to work especially hard and fast on having a cash cushion to cover the next month’s expenses or to get you through the slow season.
And now, because we’re grownups, we’re going to pay our real and necessary bills first, before we budget anything for conveniences and entertainment.
Most important is housing and utilities. If you have a mortgage, you may have your taxes and insurance bundled in with your mortgage payment and stored in an escrow account. We pay ours directly, and both are due at the end of the year, so we just divide the total amount we expect to pay by twelve and save that much each month.* Our utilities are just electricity, phone and internet, trash service, and an annual fill of the liquid propane tank that fuels the furnace and the stove. The electricity is somewhat variable from month to month, but it generally lands within $20 or so of $200, so that’s what I budget for. You may also have water and sewer bills. If you own your home, you also want to plan for repairs and maintenance. Things break, and no landlord will come around and fix it for you!
Cable television and cell phone service are not necessities and I don’t suggest budgeting them as such. In my case, the internet is also not a necessity, and neither is trash service, which is probably a service provided by whatever town you live in. Out here in the middle of nowhere, though, we provide for our own or we can carry it ourselves to the dump. At $20 a month, it’s a luxury I happily pay for. I pay the same for internet, which we use for entertainment, communication, education and business purposes. It has actually more than paid for itself in providing us with plenty of do-it-yourself advice and cheap solutions to expensive problems.
Next up is automobiles, which are a necessity in most areas of the country. When we lived in Germany, we didn’t need to use our car very often at all, and it mostly sat in our parking shed, but many places are not bike or walking friendly, and public transportation is virtually unheard of in all but urban areas. Whether you need one car or two is an interesting debate in and of itself. Certainly, the primary wage earner needs transportation, but David and I have lived with one vehicle quite happily for long stretches – including now. If I needed the car, I would simply drive him to work and pick him up at the end of the day. We didn’t have a second car until he worked 45 minutes from where we lived.
Your bills for vehicles include the car payment (and I really you hope you don’t have more than one), insurance premiums* (saved for monthly, due every six months), gasoline, annual registration costs, and… maintenance. Oh, yes. You know your car is going to need oil changes, new tires, brakes or something. Car parts wear down and wear out and you have to maintain them, so plan for it. I’m going to need new truck tires for my van this year. They’re $250 each, and I’ll need five this time, so I’m just going to allot a monthly amount for vehicle maintenance. It’ll save me a lot of scrambling and stress later.
My next category in the hierarchy is “medical”. We have medical insurance, paid annually,* and monthly bills for dental insurance and life insurance for each of us. If you are raising children, I think life insurance is pretty important, and suggest an inexpensive term policy to provide security for those children in case of your untimely death, especially on the primary wage earner. If you homeschool your children, it’s just as important, I think, because you provide a certain lifestyle that would be hard to replicate in case of your loss. A decent insurance policy buys them a little time, at least, before they have to be thrust into the world. I also save a little bit for medical co-pays, which we don’t often have, so it’s not a huge amount.
That’s it for the primary, inflexible expenses. You can subtract those from your income and find out how much you have left for your daily living expenses and luxury items.
*The Irregular Bills Account (or whatever snazzy name you’d like to call it): Several bills are semiannual or annual and they need to be planned for accordingly. We pay auto insurance twice a year, and we have annual bills for homeowners insurance, property taxes, LP gas, medical insurance and auto registration. Most of these are due in the last three months of the year, so I divide the totals by twelve and transfer that much each month to a separate savings account. When the bills come due in September, October and November, I have no trouble coming up with the several thousand dollars needed. If you are very disciplined about not going over your budget amounts, you could just leave it in your checking account, but one of us bought a $20 peanut butter cup at the gas station the other night, so we move it out of the account to protect it from accidental loss.