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Writing a budget

When Martin and I got married we started budgeting in earnest. Not really because funds were tight (although they might have been if we hadn't kept such a close eye on them), but so that we could take charge of our finances and spend our money in ways that reflected our aims and values.

The first thing we did was to accumulate all our receipts (and written records of all our non-receipted spending) in a box for three months. At the end of that time we looked at them and figured out a set of categories that looked like they would include all of the sorts of things we were spending on. We then wrote up all of those expenditures in those categories and added up what we were spending in each of those categories.

Armed with that information, we started to write our budget. Firstly, we had to decide if we thought that the numbers we had were typical, and also if we thought, on looking at the numbers, that we were being overly stingy or generous in any area.

To those revised numbers we added in expenses that hadn't yet shown up such as rates that are paid once a year, or things that were paid by A/P or direct debit so may not have shown up in the receipts. We also made a guesstimate of how much we might spend per year on one-off non-consumable items (initially this was quite substantial, but now that we have met our basic requirements for household goods it is fairly small), and on house maintenance. Another guesstimate was made of how much we might not have taken into consideration, and an amount was set aside for 'unexpecteds'. This amount is fairly small at the moment as Martin gets a moderate amount of money from irregular things like being on-call and we also get a moderate amount of interest on our day-to-day spending account and we put that 'unexpected' income against 'unexpected' expenditures.

Next came the hardest bit: allowing for replacement of goods. We made a list of everything we own that is worth more than about $300, and figured out its approximate current replacement value. We then worked out when we bought it, how long we thought it would last, and hence which year we expected to replace it. That then was entered into a spreadsheet where we established how much needed to be set aside each year so we could replace it in the appropriate year, including factoring in each year for inflation. This money is put in a separate bank account so that the interest on it will off-set the inflation on the contributions already made. It was quite hard setting up this spreadsheet, so I can make mine available to you if you would like, but it's in Gnumeric format so you'd need to find a way of reading that or I'd need to find a way of converting it into Excel format. As we hadn't started it from when we first started buying things the spreadsheet indicated a substantial sum of money that we should have already saved up that we hadn't, but fortunately around this time Martin got a bonus that enabled us to set aside what we should have already saved. If that hadn't happened we would probably have added that backlog to our budget and aimed to set it aside through regular payments to that bank account. Somewhat scarily, Martin's teeth are now featured on this spreadsheet as he has been told he'll need three $1400 procedures in about five years time, so we thought we'd better start setting aside money for that now!

Finally we calculated how much we needed to save for our retirement, using the calculators on Sorted. We made the assumption that, when we retire, people like us won't qualify for National Superannuation any more. The calculators enabled us to figure out how much we would need to save in order to live more or less as we do now (allowing a little extra for not being able to cycle so much to get around and to cover increased medical bills). We then increased our mortgage payments to this amount as our mortgage interest is currently much more than we could get from any form of actual savings.

We then converted all those numbers into monthly amounts (as Martin is paid bimonthly) and compared them to his income. Obviously we wanted to make sure we weren't spending more than we earned, but we also wanted to make sure that we were giving away at least 10%. If we found we were spending less than was coming in we now knew how much we had to spare and could choose to give it away, save it for emergencies, or put it towards a special project. In our case we saved up this excess income until we had three months expenditure set aside, then began to give this money away. More recently we have set ourselves the target of living on an average NZ income. Taken from the 2006 census, two average adults earn a little less than either the average family or the average childless couple ($49k, $59k and $57k respectively). We decided to pitch ourselves as two average adults, but taxed as if all the income was earned by a single party. We tithe that sum, spend the balance on our budgeted expenses, and give away the remainder. The only regular expenses we allow ourselves that such a couple could not pay for are retirement savings (in our case a mix of Kiwisaver and mortgage payments above the required minimum) as we are actually rich and so probably won't qualify for Super when the time comes. However, if we are given monetary gifts we tithe these (rather than pass them on) and spend the balance in the spirit in which they were given. Currently we spend about $170 a month too much, but we're in the right ballpark so we aren't worrying about it too much. If we sell Martin's motorbike later in the year as is currently being considered then we'll be a lot closer!

To make sure we're sticking to this budget we keep track of financial transactions using a free program called GNUCash. This is open source, and is available for Windows as well as Linux. A program has the advantage over a ledger book in that not only does it add things up for you, it also makes you say where the money you spent came from. If the amount it says there should be left in a given account differs from what is actually there then that forces you to go looking for it (or declare it 'lost'), making your recording more rigorous. We tend to accumulate our receipts and scraps of paper with non-receipted expenditure written on and then most weeks I enter them into the computer. An alternative to programs like GNUCash are the various web-based accounting programs such as Mint and Wesabe that automate some of the recording process, but (at least in these free ones) they tend not to allow you to record what you do with your cash, just direct bank transactions. That might suit you better if you use very little cash, but doesn't really suit us.

Unfortunately GNUCash doesn't yet allow you to compare to a budget (I believe Quicken does, but it's not free and we don't believe in paying for things if we don't have to!), so we use a separate spreadsheet for that which I update monthly. That helps us to see if we're getting out of kilter and if we need to pull back on buying yummy seafood if we're spending too much on food or to spend more on getting out videos and doing fun stuff together if we're underspending on entertainment (our two most common discrepancies). In order to cope with such fluctuations, and because Martin is paid at the middle and end of the month but we spend money right from the beginning of the month, we start the year with a float of $1000 in our spending account that we roll over from year to year.

At the end of each year we then take what we actually spent and what we budgeted to spend in each category and increase them according to inflation. Initially we just used the annual CPI, but the last two years we have dug a bit deeper and used the CPIs for the individual categories we spend in, as our spending doesn't get well reflected by the CPI. We then look at those two inflated numbers, decide which one we want to go with in each category, and construct a new budget. Most times we use the inflated actual spending number unless we had deliberately over-budgeted a volatile area (like dentistry) and want to keep it generously provided for or unless we feel we let spending get out of hand in a particular area and want to bring it back in line with our intentions. I have a spreadsheet that makes this quite trivial but which took ages to figure out, and again, I can try and convert it to Excel and send it to you if you want, or you could download Gnumeric for free (the spreadsheet we use) if it is available for Windows and I can send you the spreadsheet straight. Again, this needs to be compared against income which may or may not have been similarly adjusted for inflation, and belt-tightening may be necessary in certain areas.

Year-end is also a time for re-assessing our budget categories and, in particular, looking at what has showed up as 'unexpected' and determining whether that should be budgeted for in the future.

At the end of the year we also determine how much over- or under-budget we have been. Any excess money is assigned to something (donations, a special project, emergencies etc.). Deficit years are harder to deal with, and the money to make up the deficit may have to be taken out of special project funds (if there are any) or donation money (rationalised as we don't give away a set percentage of our income, but rather as much as we can spare, so it's OK to take from this fund if we miscalculated what we could spare) or removed from the float and budgeted to be gradually repaid over the following year.

I haven't said anything here about how to actually reduce your expenditure to bring it in line with your income and your financial goals. You may find Simple Savings to be helpful with this. It has budgeting advice aimed at people who are less detail-oriented than me as well as lots of hints on how to actually save money. My best money-saving hints are: get rid of your car if you possibly can, eat very little meat and stretch it with lentils and beans (or get rid of the meat entirely in many of your meals) and cook from scratch as much as you can!