Charles McDonald: 0:03

Hello, I'm your host, Mr. Chuck, a retired accountant turn truck driver, I reduce my debt in a relatively short period of time, debt reduction, to achieve financial freedom takes commitment, confidence, determination. How to budget, this is a quick and easy way to get started with a budget, knowing categories and the percentages of each is key in keeping a successful budget. I'm not talking here about reducing your spending, I'm not talking about this scrimp and save so that you can get that credit card debt paid down, or whatever you're trying to accomplish. By having a budget, everyone needs a budget, it doesn't matter if you make 200,000 a year or 35,000 a year, the more that you know about the income coming in, and your expenses going out. And what to expect, coming up between pay periods is important for everybody.

Unknown: 1:18

So this gets started,

Charles McDonald: 1:21

I have two articles in my show notes that I'm going to review deferring to. The first one is from quicken.com budget categories. And the second one is from family budget expert.com

Unknown: 1:34

budget categories. As you know,

Charles McDonald: 1:38

there are various ways to do a budget. But in the key to getting started and being successful. And knowing what you're doing. And understanding what you're doing is setting up some categories, ie doing have to get your budget set up yet. But knowing the categories that you're gonna start tracking, and tracking is the key in keeping a budget. So if you do not have a software, where you enter, all your transactions come in, in and out of your checking account, and all the transactions of every credit card that you use, and that you have a balance on, then doing the budget is going to be a waste of time because you don't know anything yet. So what are the categories? And why is it important to keep track of everything that you spend money on? Well, one, how are you gonna come up with the dollar amounts that you're gonna be using in your budget, you got to know what's happened in the past, you got to know what's going on and your financial life today. So that is what I call tracking the software that I started using it's $9.95 or $9.99 a year, I don't pay anything extra, it is a fairly good one, you can have multiple checking accounts, multiple savings accounts, multiple credit cards. And when you go to the opening screen, you can see the balance what you have, and every account that you have. And then if you keep it up to date. And part of entering to transactions is you got to select a category that has predetermined categories in there that you can use. And you got to be consistent on using those categories. So every time you pay rent or your mortgage payment is got to be rent or your mortgage payment under the category housing. And that is true for everything that you're gone to do. So even before you start doing a budget, step one is figuring out your categories. And my first article here is Quicken. They have categories housing, and you should be spending 25 to 35% of your income towards housing. Transportation is 10 to 15% of your income. Food, again is 10 to 15% of your income that means is groceries and going out to restaurants, fruit, that's every food that you eat. And then in this article, they have a separate category called utilities. I usually include in utilities within my housing, because why are you paying you two utilities? Well, it's part of your housing. So for me, to keep things simple, under my housing is also included utilities, you should be spending five to 10%. So the total housing now is anywhere from 30 to 45%. Because we have utilities included, I also include in housing, my home owners insurance, so I'm grouping everything related to housing, under housing. When I say that 25 to 35% spent on housing, that's only the monthly payment that you make, whether it's rent, or your mortgage payment, that's what the bank, when you go to finance, they're not going to ask you, or how much is your homeowners insurance, how much is utilities, they don't care, they just want to know how much of the loan that you're going to pay them. So when they look at your income, as long as that payment is less than 46%, or excuse me, 43%, you're going to be good, the farther under 43%, the better off you're gonna be. So if that loan payment, or rent is 25%, you're in really good shape. If it's 30%, you're doing okay. But for most lenders, that 35% is going to be the key. But what I'm talking about is the total cost of housing, which is your loan payment, your rent, your utilities can also be insurance, and homeowners home

Unknown: 6:51

owners or association fees.

Charles McDonald: 6:55

I have a hard time remembering that because I don't pay it because I don't have that. And then other categories insurance, which includes health insurance owners, homeowners or renters insurance, warranty, insurance, auto insurance, life insurance, disability insurance. So at the homeowners or renters insurance, I wouldn't put in or housing, the auto insurance, I put under transportation, I think you're getting the drift the where I'm going here. Another category is medical and health care, which is not the insurance part of it, it would just be what you're spending at the doctor's office, what you're spending for medication, dental care, I care, stuff

Unknown: 7:40

like that. That's five to 10% of your income.

Charles McDonald: 7:45

And then another category that's important is savings, investing and debt

Unknown: 7:51

payments 10 to 20%.

Charles McDonald: 7:55

When you're including debt payments, and you're struggling to get credit card debt under control, that's going to be probably a little bit bigger than that 20%. And your savings are probably not going to be hardly any at all. But that they category they put that together savings investing, that's investing would be long term investing like stock market, or money markets are certificate of deposits at their local bank that's more than three or four months. Savings Is this what you have in your savings account that's quick and easy to get to. And that's referred to as liquid. And they have personal spending, which would be gym membership clothes and shoes, home decor them furnitures and gifts. Also under housing, I would put in a maintenance item there. It may be zero most months, but if you just use like 25 bucks a month. And knowing when you do maintenance, say it's light bulbs, furnace filters, salt for your salt, your water conditioner, those types of things is what I'm referring to as maintenance and then repairs would be larger, more expensive stuff like

Unknown: 9:11

roofing and stuff like that. Or, or hot water heater,

Charles McDonald: 9:16

recreation and entertainment five to 10% and then they got a miscellaneous stuff that you can't really categorize but it's also an overflow category. If you need little extra, you're giving yourself a buffer. So under miscellaneous when you do spend if it's not in any of those other categories, you tried to use the dollars he got set aside on their miscellaneous and put it in one of those other categories. I used to do shopping in clothes and stuff like that. I'd say got 10 categories here. The more you can streamline it, the more it makes sense to you, the easier is gonna be So do what you think is easy for you do what makes sense to you, not what these articles are saying and you should be doing. And for now, the percentages, don't worry about it. Because we're just getting started, you have no idea. So once you set your categories, and I would say you could have housing,

Unknown: 10:27

transportation, food, could be insurance,

Charles McDonald: 10:33

savings and debt payment. There's one more in there, missile and everything else. I forget what I call it, but I have a name for it, that I have a spreadsheet. If I, if you use spreadsheets, I have a budget set up in a spreadsheet, I use Excel, but it can be converted to whatever spreadsheet, I have it set up for a monthly spreadsheet for all 12 months of the year.

Unknown: 11:02

Now how you're going to get started, once you kind of figure out your categories.

Charles McDonald: 11:10

And the categories can be done. If you have a program where you're tracking your expenses, you got your categories there, kind of look at what they're doing, and go with that flow. Because you need to do that for at least 30 days. If you never track anything out your checking account. I mean, back in the old days, we kept the check register. But you would record you know what your income was you put a you add a deposit, and then you subtract all the monies spent, and you kept a running balance. That's when I'm talking about but it's automated. Now, he can do it online, in a computer, you don't have to download software, into your computer, you just go online, it could be long as you have Internet service, you can go in there, and you can update it. So you want to go back the previous month. So if you're working in the current month, let's say it's August, you go back to July, and you start at the beginning of July, and you record everything that you did in the month of July in your checking account. You can also do it for your credit card account. And you got to record it and be careful on your categorization. And be consistent. Then once you get a month entered in, you've got an idea, you can go and do a report by category. So let's say you have a checking account, and you have three credit cards. So you put in all the detail in for one month, everything you spent money on, not for your checking account, and all three credit cards, you can start out with an opening balance and plug a number in there. So you have a positive number. So you have a beginning balance. Don't worry about getting it to the penny, if it works out you're doing great. But for now, you're mostly interested in knowing one, how much income you have coming in. And two, what are you spending your money on by category. And by doing it for one month, you will have that Emperor nation. And you do every port by category, which includes all three or four accounts that you've been working on at your checking account and all three credit cards that you've been using for that particular month. And you do a report by category that give you the total of all that stuff added together. And if you got everything in there consistently, you'll have a category will say housing, mortgage payment, utilities be one big number, even though you might put it in by natural gas, electric water and sewer internet, etc, you're getting the idea that there might give you one thing number for utilities. Or it might give you the numbers for each of them and individually. But when you're just getting the idea, then I'll have your car payments and gas and repairs and whatever you done for your transportation. If you had if you live in a big city and you pay for bus pass or subway or something that's also included in your transportation costs and all your insurance. Now, this may be a month where you didn't make an insurance payment. But we're gonna get to that later. You're gonna be some items in the category that you didn't pay for it yet, but it's coming up and maybe due in the next 30 to 90 days, maybe you make a car insurance payment every month, maybe you make your house insurance while your mortgage. And when you have an escrow, when you make your mortgage payment, you're making a mortgage payment insurance payment and, and your money for the real estate taxes. That's all one big number. You don't need to break them out, because then that's getting too much detail. But if you want to, you can, if you know what your principal and interest is, you can put that as one number you can put your insurance is one number, you can put your real estate taxes as one number, if you have an idea what those numbers would be, if not just lump it together one big number. We're trying to keep this as simple as possible. And the reason we want to keep it simple is, the easier it is for you to do, the more likely you're gonna do it, and you're gonna stick to it. So you got the first 30 days in and now you're in the second month, and you're maybe a week into the next month, go ahead and put in all the detail. And you're checking in those three credit cards for the month and get up to date. So that when you get done, the balance and all those accounts should match, the balance in your checking account should match the balance in each of those credit card accounts. And if it doesn't, let's say the balance and the credit card count is you entered all the detail and you're very sure that it's all pretty accurate, you got the right numbers in there. But your balance is off by say$500 your balance on your when you go and log in for that credit card, the balance that you're showing is $500 more than the balance on the credit card statement or that when you log into that credit card account, go back to your opening balance insert, then reduce it by $500. Now your ending balance shouldn't match. So you just adjust that opening balance, plus or minus to get your ending balance to match. And then from that point forward, every time you enter a transaction that should always match the statement or what you're looking at, for the credit cards and for your checking account. I hope you understand that. Don't go back and spend a lot of time trying to figure out if you made an entry err or trying to figure out because it's gonna be something in that opening balance that's causing it. That was a maybe a delay or a timing thing that caused it to be off. So just adjust the opening balance. And now all your accounts should match. And you can stay keep it that way. Once they all match and didn't do a reconcile and clear all those accounts. kind of bounced is made easy, because you just put in what the current daily balances. If it matches your statement, then you just set clear all and you're ready to go. If you have maybe a couple of items you might have entered in there that hadn't cleared yet, which would be common. And then don't unclear those one or two items, and it should match. And it should come to zero. And it's as simple and easy. For$9.95 a year. It's a cheap way to get started and stay keep track of everything in your life. There's also programs out there I see advertised on TV, I don't use them. I hadn't looked at them. But they kind of do the same thing for you, it may be an easy way, if you want to spend some money on doing this. I think if you manually do it, and you're more aware of what's going on, you're gonna be much better off in the long run. So now we got your accounts, tracked? What and you got your first month, and you did every report by category. You go into a budget and you're gonna have in your budget spreadsheet, you'll have three columns. The first column is called budget. The second column should be called actual. And the third column is the difference between the amount you budgeted and the actual amount that you spent in the current month. The difference is the plus or minus of that. Did you go over? Did you overspend? Or are you still understanding? Well, if you're in the first month of doing his budget, he take that report by category, and that's what you're gonna use for your budget

Unknown: 19:56

dollar amounts for the previous month.

Charles McDonald: 20:00

then you do a budget category from the current month, starting from the first of the month to the current date. And you get those same, he gets some totals, and you plug those in the actual month. And then a week later, when you update everything, again, it's the first of the month to the current date, you get some new totals in you, you don't add that to the actual, that you just update the actual to the new, actual totals. Now, I hope you can see why the tracking is most important. Because once you get the tracking done by category, and you're consistent and doing that, then doing the budget, you're just putting numbers in a spreadsheet, and it's doing the math for you. And it's doing the calculation, how much are you spending on housing by the end of the month, you should have a fairly have the your second month, and you get your first month budget done. You should know, okay, this is what I budget for housing, this is what I spent zero. So right on, I'm consistent for two months in a row. That's a good thing. And you do that with all your categories. Once you get that done, and you get your first full month completed. So now we got two months of data entered.

Unknown: 21:30

And you got that first month completed.

Charles McDonald: 21:34

This is the time you start looking at the detail. Where is my money going? And where how much am I spending? Maybe you have a category called entertainment and entertainment for two months ago, you spent $500 and entertainment for this most previous month, you spent $800 Why was that a big increase, you got to look at the detail. If you can justify that increase, then you're good. But is that increase gonna be permanent is going to be the same $800 and future months if so, you need to update the budget amount. So that the when you compare in the budget to the actual is gonna be a better what happened in that most current month. Also, when you're looking at the detail, he should be aware of things that he may be pay once a year, annual subscriptions, which would be the most common one I can think of is anti virus for computers, may be gym memberships that you pay once a year, or any other memberships that you might pay once a year, maybe a book or magazine, stuff like that. He wants to include all that, even though he hadn't paid it yet. But really just getting started, you got a better handle on everything. Now you're looking at things and you're looking at why my utilities are really high. How can I reduce my utilities? Well, the first thing you got to do is where you live, what your environment is that hot outside, set your AC up a couple degrees, four degrees is a cold outside, turn your furnace down two or four degrees. And then you'll use less utilities. You need to start thinking like that, where am I spending my money? How can I reduce my spending? We got to start thinking of how am I gonna save money. If I keep spending Everything I make. You got to go from being in a spending environment as spending mindset into a savings mindset. And once you start doing that on a regular basis, you'll start thinking better. You start seeing things in your budget that you can live without, you can do away with, you can cancel the subscriptions, you can maybe cut back somewhere, spend a little bit less, and you'll be much better off for doing it. I'll be back in one moment was my final thoughts. For those of you who listened to my podcast on an app, please look to see if you can rate and review my podcast. If you know anybody that might benefit from listening to this podcast, please let them know and I greatly appreciate it. The first step in doing any budget is keeping track of everything you're spending your money on. I hope I made that clear in this episode. And do us a online application that help you do it is inexpensive and easy. you'll be able to wherever you can get logged in, you can do it wherever you are located, you don't necessarily have to do it on your home computer, you don't necessarily have to download the software like in the olden days. Now you can do it online. So if you're at work, and you're at lunch, you can log in and you can update it. Maybe you spent some money, stop and get gas on the way the work, maybe you got stopped and got a coffee and something to eat. And then you spend some money on lunch, we can get that all logged in, you can keep it up to date. If you do it consistently, multiple times a day, it's not going to take very long, then take one minute, two minutes, three minutes. And you'll be happy did that. The second article, which I really didn't get into, they have all kinds of categories. And then it shows lots of detail. I'm an advocate for simple, try to keep it simple. If you get too detailed, too much complication, it's likely that you're not gonna stick with it, you're gonna give up because you're gonna not be consistent in your categories when you're putting in your spending. So the first step with budgeting is always to track your spending, then let that inform how you make changes to cut your spending, so that you can save some more money, and invest for the future and pay off your pesky debt. That's right out of this article. And that's what I keep saying, the more detail you know about the more detail you can look at, to identify where you may be overspending, or maybe spending on things you want, instead of needs. Needs are things that you have to pay for every month, housing, transportation, there's three categories gotta have a place to live, you have to have a way to get around and to work, and you have to have food to eat. Now, you might want to include clothing in there, but clothing is not gonna be a monthly thing. It might be might be twice a year, you go out and buy new clothes. Maybe once a month, you go out and buy one pair of pants, maybe it's a little category, maybe once a month, you buy a pair of plants, and then the next month, you buy a couple shirts, and then maybe some underwear, it's ongoing. That doesn't have to be a big dollar amount. Again, if it's something that you're regularly spending money on, you need to include it in a budget. So you know how much you're spending. So if you're looking at your clothing, and you two months ago, you spent $2,000. What did you buy? Did you go out and buy a couple new suits that you buy maybe once every year, once every year and a half, okay, maybe a five? Or did you just buy a lot of clothes, because you'd like to go shopping and you're spending way too much on clothes and you were maybe wear them once or twice and you don't wear them you got a whole closet jam for clothes, maybe you need to look at that. Maybe you need to cut back. Maybe that's the reason you have a lot of credit card debt, and unable to get out of debt. Whatever it is having a budget by tracking all your spending, and putting the totals in a budget and revealing the budget by category. Know which category that you may be spending a big chunk of your money on this, then look at the detail tried to figure out how to reduce the spending in that particular category. And once you achieve that, you'll have more money to put aside in your savings. Whether it's for building up an emergency funds, whether it's a savings for retirement or savings to pay down that credit card debt to get out of debt sooner than later. It all works together. And once you figure that out, once you come up with a solution that works for you. I'm not saying that you have to use all these categories or every detail. Whatever works for you is what you need to be doing. I like to keep it simple. Maybe you'd like more detail in your life. That whatever works. set that up. Start doing it. Keep consistent. And do it again. Every month, month in and month out, even when you get the credit card debt under control, you still need a budget and never any the rest of your life to the day you pass away. You'll need a budget. It's gonna change and definitely gonna have different categories. As your children get older and leave, things are gonna change. There's no doubt about it. But you need a budget and stick with it. When you achieve that, and you can keep track of your spending and keep it under control. Most of the time, you'll be happy you have a budget, and you'll be glad you did.