How to Make a Budget: Unexpected Expense Tracking

Let's continue where we lift off last time.

After reaching Step7: Making an Annual Expense Projection, our homemade budgeting software is almost complete.

Let's face it, no matter how careful we are with our expense tracking, and save debt or money saving strategy, there will always be instances when we will spend for something not expected.

During the summer of 2004, we began the construction of my little home in Mandaue City, Cebu, Philippines. By July, my wife Ruvey and our two children, Magsy and Cybelle, moved to our new home from my father and mother's home. The experience of living in your own home away from the influence of your parents was a very liberating and exciting one. However, with the new freedom came also new challenges, and one of those was to budget everything. It didn't help that all our savings were depleted as a result of the construction.

In response, my wife and I implemented a very tight budget as our main financial planning strategy or means to cope up. As the saying goes, "Every centavo counts."

However, in spite of our best effort most often our budget was off for various reasons. This got me frustrated until I realized that a budget is merely our best estimate of how much we will spend for the near future. And since it's just an estimate, then there is always a possibility that we will go off (lower or above). And once we go off, we have to adjust according to avoid debt or to get out of debt.


STEP 8: MAKING UNEXPECTED EXPENSE LIST



The amount our actual expense will go beyond our estimated amount or budgeted amount is what we will call "Unexpected Expense."

So far what we had discussed in the previous posts, are expected expense tracking. The table above shows a very simple way of implementing an unexpected expense tracking. This list is very important part of our budget or homemade budgeting software.

Here are the high-lights of this list or table.

(1) Examples of unexpected expense are medicines (non-maintenance), doctor's bill, hospital bill, unplanned diner, unexpected school activities, unscheduled repairs and maintenance, etc. Anything not included in the expected expenses.

(2) The unexpected expenses were entered against the day it occurred. So it's possible that for a month you will have no entry or you will have more than one entry.

(3) At the bottom of the table, the entire unexpected expenses for the whole year is summed up.

At this point it's difficult to appreciate the importance of this list. But later, once we consolidate all the lists into one homemade budgeting software, this list will make sense. So be patient, and review the previous posts starting from STEP1, in case you haven't yet started making the lists.


PS: If you want to know more how to save money, how to avoid debt, how to get out of debt, and how to make a budget then click HERE.
PS: I am interested to know if you find this article helpful so please feel free to drop some comments.

How to Make a Budget: Making an Annual Expense Projection List

When you receive a sum of money larger than what your normal income like bonus, 13th month, leave conversion, commission, etc., how will you know that you can spend all of these or not?

Manang Clara (not real name) was my old neighbor. She and her husband worked as rattan furniture contractors. During the height of the business, it's normal for them to earn as much as P20,000/week. That is already a very good income when you are leaving in the Philippines, specially in the provinces like Cebu. But in spite of their high income, they were in debt, and was not able to save much. Why? Because they live the the "one-day-millionaire" lifestyle. They spend and spend, without saving, until there's not more money to spend. They had the illusion that their income will always be there. When the rattan industry declined they found themselves worse or at least unchanged in terms of financial status...

There are a lot of Filipinos who are living a "one-day-millionaire" lifestyle. They didn't realize that they not only wasted money but time, as well, which is one of the important ingredients of growing money.

How can we help yourself avoid this trap?

STEP 7: MAKING AN ANNUAL EXPENSE PROJECTION


The answer to the above question is to know what are our future expenses at least one year down the road.

How to do this?

By making an annual expense projection list, we will know how much money we still need to save to meet future expenses.

These are the things to take note of the list:

(1) List all your possible future expenses and estimate (if you are not sure of the figure) how much you will spend. Take note that you don't have to have a perfect list to be able to start doing this. If you cannot recall or anticipate all your future expenses, it's OK but try your best to anticipate as many as you can. After a year of doing this, I am sure your list will improve a lot.

(2) Write down the projected expenses under the Projected Expenses column in your spread sheet. If you do not have a computer, just make a list in a notebook and follow my format.

(3) Write down your projected expense cost under the Projected Amount column. Again, this number or figure doesn't have to be exact. Rest assured that after a year of doing this, your estimate will improve.

(4) If you were already able to save money for a particular expense write the amount in the Money Allocated column. For example, from the table above my estimate for the New years celebration is P4000 so I allocated P4000 for this event. By the time I made this list I was already able to save the said amount so I put P4000 under the Money Allocated column. Another example is the future expense, Magsy's birthday. Since I am yet to save money for this event, I put P0 under the Money Allocated column.

(5) When you are done paying, just put 0 in the Outstanding Payment column.

(6) From the Outstanding Payment column, you can see which future expenses are not yet settled, and how much money you need to save for these. This is the most important use of this list. Once you will see that you still need to save this much amount of money, in my case its P33,500, then once you receive a money then the temptation to spend it all will be minimized.

The list will not guarantee that you will not spend unwisely because it will still boils down to your self-discipline and determination to control your finances, specially your debt. This list, however, will help you see further down the road and will give valuable inputs for you to make a decision as to how you will handle your money now.

I hope this helps...

PS: If you want to know more how to save money, how to avoid debt, how to get out of debt, and how to make a budget then click HERE.
PS: I am interested to know if you find this article helpful so please feel free to drop some comments.

How to Make a Budget: Seeing your Expense Trend

Now that we have tabulated our expenses in a table. We can now create a graph using Microsoft Excel. Btw, without a graph or chart you can still use the budget method that I have shown to you. So this step is really optional.

A graph or chart is very useful way of quickly informing you visually the status of your expense versus your budget.



STEP 6: SEEING YOUR EXPENSE TREND



Since creating a chart is not new so I will not reinvent the wheel here. There are so many excellent sites in the internet that will teach you how to make a graph. Click below link:

http://www.internet4classrooms.com/excel_create_chart.htm

NOTE: Once you get to Step 5 of the link above, select XY line.

Once you were able to build a graph with your expense data, it should look like the graph above.

Now a brief explaination of the Total Expense vs. Budget graph of chart.

The blue line represents your total expense. The pink line represents your expected expense. When the blue line goes beyond the pink line like the one incircled in the graph this means that you exceed your budget. If the blue line will not go beyond the pink line or better yet will drop then your budget is on target.

So there you have it. A very quick way to check if you exceed your budget or not.

PS: If you want to know more how to save money, how to avoid debt, how to get out of debt, and how to make a budget then click HERE. This is the home page of my blog where I shared my knowledge and experience in budgeting, expense tracking, financial planning, and making a budget that is not only doable but I actually proven for 8 years. I also shared tips, which I actually use regularly, on how to save money, where to save your money, and in the process you will know how to avoid debt. Learning to avoid debt is easier than getting out of debt so I put more emphasis on staying out of debt. As a bonus, I also assembled information on how you can make your own financial planning and budget software. To get all this information for free, please click HERE.

PS: I am interested to know if you find this article helpful so please feel free to drop some comments.

How to Make a Budget: Making an Expense Summary List

Have you experienced wondering where did your money go? Don't worry you are not alone?

Do you want to be able to track down your expenses yesterday, last week, last month, last year?

If your answer is yes, then read on. I'll make it quick, promise.


STEP 5: MAKING AN EXPENSE SUMMARY LIST

This is an example of an Expense Summary List.



Things to take note of this list.

(1) The Expense Summary List is good for one year.
Each column is equal to one payday or 15-days. In the example, the payday is on the 5th and 20th day of the month.

(2) The items in the list are the same as those we can find in the Fund Allocation List. The order is also made the same to make it easier to process (to be discussed in the next posts).

(3) The total expense (TE) is equal to the sum of all the items from item 1 to item 18. The sum can be easily computed using Microsoft Excel.

(4) The expected expense (EE) is equal to your maximum targeted expense per bimonthly or per in-between paydays. This figure is the same as the total in the Fund Allocation List. (See How to Make a Budget: Making a Fund Allocation List)

(5) The out-of-budget is simply the difference between the expected expense and the total expense. Take note that I used EE - TE in my computation so that if you exceed your budget, the figure will become negative (-). This way, with just one glance you will know that you're already beyond your budget which is not a good thing. (The negative 70 (or -70) in the list means that you are P70 (seventy pesos) out-of-budget.)

(6) It is highly recommended that the entry is made at the same time as you pay your envelope (E-bank).

(7) With this list you can easily see and review where your money went. You can also use this list to make necessary adjustments to you expenses so as not to spend more than your earnings.

Congratulations! You now know how to monitor your expenses. As promised, I made it quick but I made sure that I covered everything essential in this topic. Now it's your turn! Start making that list of yours asap, and start enjoying the feeling of knowing that you can trace your expenses anytime, and that you now have the means to warn yourself from overspending.

Now live a peaceful and "bad-debt-free" life.

PS: A budget is our main tool to staying out of debt but like every other tools, no matter how high-tech or effective it is, if the user will not use it properly then it won't deliver it's full potential. The secret to keeping a budget is discipline and consistency just like in most everything else.

PS: If you want to know more how to save money, how to avoid debt, how to get out of debt, and how to make a budget then click HERE. This is the home page of my blog where I shared my knowledge and experience in budgeting, expense tracking, financial planning, and making a budget that is not only doable but I actually proven for 8 years. I also shared tips, which I actually use regularly, on how to save money, where to save your money, and in the process you will know how to avoid debt. Learning to avoid debt is easier than getting out of debt so I put more emphasis on staying out of debt. As a bonus, I also assembled information on how you can make your own financial planning and budget software. To get all this information for free, please click HERE.

PS: I am interested to know if you find this article helpful so please feel free to drop some comments.

How to Make a Budget: Making a Fund Allocation List

Wouldn't it be easier if you have a means to remind you of your budget? In this way you will be reminded of how much of your income you are free to spend.

To do this you have to make a Fund Allocation List.

STEPE4: MAKING A FUND ALLOCATION LIST



The above image represents the fund allocation list of an average income family with one child.

Things to take note of this list:
(1) The list should show your estimated take home pay. Try to be as accurate as possible with the figures.

Take Home Pay = Income - Deductions

(2) The list should show all the items you allocated you money, the amount allocated to each, and the total.

(3) Make sure that your total allocated funds will not exceed your take home pay. Doing so without extra income on the sides is like digging a financial grave -- burying yourself with debt or burning your savings.

(4) Some funds don't have to go to the envelopes. Generally, these are the funds that will be used everyday (allowance, food) or will be exhausted soon (vitamins, grocery, etc.) Examples are allowances which normally go straight to the pocket, and food (grocery) and home-use items (soap, detergent, shampoo, etc.) which normally go straight to the department store cash register right after the payday.

(5) Be creative with your list; make use of colors to make it easy to read. For example, the items hi-lited in pink will be endorsed to the wife, the blue to the husband, and the green to the E-bank.

(6) Print your list and keep a copy in your office, and in the place where you keep the envelopes. Refer to this list before you make a withdrawal from the ATM machine, and when you make a deposit to the envelopes.

In making the list, you can use word, excel and other word processors. If you have no computer then you can write your list in a notebock or piece of paper.

Now live a financially disciplined life!

PS: Previously, in my budget portfolio I did not include this list. But after I incorporated it, it made quite a difference. It made me realize quickly whether I have a money to spare or not from my income. It also help me realize how much is the minimum amount of money I need to generate on the sides.

PS: If you want to know more how to save money, how to avoid debt, how to get out of debt, and how to make a budget then click HERE. This is the home page of my blog where I shared my knowledge and experience in budgeting, expense tracking, financial planning, and making a budget that is not only doable but I actually proven for 8 years. I also shared tips, which I actually use regularly, on how to save money, where to save your money, and in the process you will know how to avoid debt. Learning to avoid debt is easier than getting out of debt so I put more emphasis on staying out of debt. As a bonus, I also assembled information on how you can make your own financial planning and budget software. To get all this information for free, please click HERE.

PS: I am interested to know if you find this article helpful so please feel free to drop some comments.

How to Make a Budget: Securing the Allocated Funds

In step1, I shared to you how to determine "ALL" the areas in you life where your income goes. The most important thing to take note here is the word "ALL".

In step2, I shared to you how to allocate the right amount of funds for each area. The important thing to remember here is that the sum of all allocations must not be more than your take home pay. If you need to tweak your allocation -- reduce something here, change something there -- then feel oblige to do so.

The hundred-dollar question is, "Where are you going to place the allocated funds?"


STEP3: SECURING THE ALLOCATED FUNDS

Buy small white envelopes. Label each envelope with the name of the area where the money will go. For example,

"God Works" envelope
"Savings" envelope
"Rice" envelope
.
.
.
"Recreation fund" envelope

It is in these envelopes where you will put your allocated money. We will call these envelopes our E-bank.

To remind you of the amount of the allocated fund, and to help you trace your envelope deposits and withdrawals, let's put a piece of paper inside each envelope and write the following:

(1) The amount of the allocated fund (only once preferably at the topmost)
(2) The date and amount you deposited (per transaction)
(3) The date and amount you withdraw (per transaction)

Religiously fill-in the papers for every transaction you made to your E-bank. This will help you in the future to trace your money just like a bank book does. Put the envelope in a safe place preferably where there is a lock.

The next important question is, "When is the best time to pay or to make a deposit to your E-bank?"

VERY IMPORTANT1: Pay your E-bank as soon as possible right "after" you receive your salary, income, commission or sales; and right "before" you make any expenses. This way you will spend based on your budget.

VERY IMPORTANT2: Avoid using the money from one of your E-banks to pay something that the money is not intended for. For example, do not use the money in the children's tuition fee envelope to pay your electric bill. You will be courting confusion here later on, and this defeat the purpose of the system.

PS: I can assure you that this system works because I've been using this for about 8 years now and so far, with God's grace of course, my finances is in order. But I can also assure you that this will not work with you "IF" you do not discipline yourself, and maintain a strong desire to put your finances in order.

PS: If you want to know more how to save money, how to avoid debt, how to get out of debt, and how to make a budget then click HERE. This is the home page of my blog where I shared my knowledge and experience in budgeting, expense tracking, financial planning, and making a budget that is not only doable but I actually proven for 8 years. I also shared tips, which I actually use regularly, on how to save money, where to save your money, and in the process you will know how to avoid debt. Learning to avoid debt is easier than getting out of debt so I put more emphasis on staying out of debt. As a bonus, I also assembled information on how you can make your own financial planning and budget software. To get all this information for free, please click HERE.

PS: I am interested to know if you find this article helpful so please feel free to drop some comments.

How to Make a Budget: Allocate Money

STEP2: ALLOCATE FUNDS

After you have identified "all" regular and non-regular expenses the next step is to allocate funds to each one of these.

How will you know how much should be allocated to each item?

In my case I combined two methods: First, I made an estimate, and then I monitored all my expenses for at least a month, and I made adjustments to the allocated fund accordingly.

Let's put some figures on our previous example based on a bi-monthly payday. Yes, it's easier if we will use per payday as time frame.

(1) God's work = P500/pd
(2) Savings = P1000/pd
(3) Rice = P500/pd
(Based on a one month monitoring)
(4) Food = P3000/pd
(Based on a one month monitoring)
(5) Mineral water = P100/pd
(Based on a one month monitoring)
(6) Electric (VECO) bill = P800/pd
(7) Telephone (Globelines) bill = P300/pd
(8) Water (MCWD) bill = P100/pd
(9) Magsy's tuition fee, and trasportation = P750/pd
(10) Belle's tuition fee, and transportation = P750/pd
(11) Leyan's share = P800/pd
(12) Family milk = P600/pd
(13) Family vitamins = P800/pd
(14) Home expenses = P600/pd
(15) Miscellaneous = P500/pd
(16) Emergency fund = P500/pd
(17) Recreation fund = P500/pd
Total = P12,000/pd

Suppose your take home pay is only P10,500, what you should do then?

When things like this happened to me before I had two good options: Either I find a way to increase my income to add P1500 (or more) or (and) I adjusted my allocation in order to slash down the excess amount, P1500 in our example. I can change the food to P2500, the savings to P500, the miscellaneous to P250 and the recreation to P250. As a general rule, I choose the expense items which I know I can live with so little of it or without it.

The other options are borrowing money to fill in the hole or simply closing our eyes and hope that the problem will go away. The first option is the one we wanted to avoid as much as possible because this will bore a hole into our savings, and later bury us alive in debt. The second option is analogous to choosing to get inside a car when you know that there's a bomb inside, and hoping it won't explode. Either option will sooner and later lead us into deep trouble.

Allocating the right amount of fund is as equally important as identifying your expense items so spend some time on this to get the most realistic figures.

Stay tuned for the continuation..."Where to Put the Allocated Funds?"

PS: For those who are in doubt please rest assured that I've already proven this system to work, so I am confident that this will also work in your case. Just be patient and give this system a try.

PS: If you want to know more how to save money, how to avoid debt, how to get out of debt, and how to make a budget then click HERE. This is the home page of my blog where I shared my knowledge and experience in budgeting, expense tracking, financial planning, and making a budget that is not only doable but I actually proven for 8 years. I also shared tips, which I actually use regularly, on how to save money, where to save your money, and in the process you will know how to avoid debt. Learning to avoid debt is easier than getting out of debt so I put more emphasis on staying out of debt. As a bonus, I also assembled information on how you can make your own financial planning and budget software. To get all this information for free, please click HERE.

PS: I am interested to know if you find this article helpful so please feel free to drop some comments.