With the new year now upon us, I am proud to say my wife and I have hammered out our new budget for 2016. As a retired person for the past couple of years it has become increasingly challenging to maintain a comfortable life style when a big part of our income comes from my Social Security benefit and IRA distributions. Because of that, we have to plan carefully each year to try to increase our savings and emergency fund by finding new ways to save money.
This time around, instead of just preaching what you should do, I’m going to go through our approach to creating a budget and examine what it is we actually do. I’ll also show you how we erred this past year and how we’re planning to change so we can achieve all our financial goals this coming year!
Creating a Budget
The average US household income in 2014 was about $53,000. NJ, where we reside, has the second highest average income in the nation around $71,000. It’s an expensive place to live as you probably know, so I’m using an average NJ family income here as the base numbers. Although the examples I’m using here are not our exact numbers we had as our results (our numbers are remaining private here because we like a little privacy on the details—it's a personal decision), but the conclusions and methods of analyzing are true.
Our 2015 Results
First of all, we keep very detailed records all year long for all of our expenses and income and have been doing so for the past 10 years. To record it all, we use Quicken which allows us to do just about any analysis of our finances from simple checking to investments, retirement plans and everything in between. Having these records make it much easier to look at and plan the upcoming year’s expenses.
Our first step is to compare our 2015 budget with our actual income, savings, and expenses. We go over these items each month, so none of the information was startling. At first glance, our numbers from 2015 gave us confirmation that we had done a pretty decent job of budgeting.
Using generalized numbers, last year’s 2015 monthly expense budget equates to $6,000 per month and the results for the year 2015 equates to an average of $6,300 per month. On the surface that look like a decent balance doesn’t it? But in reality, That puts us in the hole a few thousand dollars. That’s why the numbers have to be closely examined, and when we did here’s what we saw: a few unplanned major purchases had put us into consumer debt last year. Last year we borrowed from our savings, emergency fund and a 0% interest credit purchase for the unplanned purchases of the new mattress (for our sore, aching backs) and the long postponed new front entry door and storm door. Combined these amounted to over $4,000.00. We felt we needed to do those things, but we didn’t plan them properly.
To add to the pain, last year’s 2015 planned income (all sources) budget equates to $6,000.00 per month and the actual 2015 income results (all sources) equates to $5,800.00 per month. That result wasn’t what we wanted and so it confirms that we have to adjust our spending this year.
So this led us to our goals for 2016: paying off that debt (currently residing on a zero interest credit card) and restoring our emergency fund and savings (which had helped to fund some of the income shortfall) to get back where we were in 2014.
Our 2016 Budget
Now that we have our goals set, it's time to look at how we're going to achieve them.
Income and Savings
First, we project our 2016 monthly income. We budget gross income and subtract our taxes as an expense, but you can also budget with net income. Just make sure you don't budget with gross income and ignore the taxes!
Next we need to pay ourselves first by taking care of our debt and our savings. We could wait until after we've budgeted our expenses, but that's a good way to slack off on what's important. Our plan is to pay enough each month on our debt to clear it before our zero-interest offer expires. At the same time, we need to gradually start building back up our emergency savings.
Our next step is to look at our continuing fixed expenses and budget for them. We use the term fixed expenses for a lot of items even though technically they aren’t things that are carved 100% in stone. They are more like minimums we have to budget for, like the mortgage we have is a good example. After all, if you’re in a place where you can’t afford your monthly mortgage, you need to do other things like refinance it or even sell your home and downsize, or rent rather than own. The same thing applies with car loans and the rest of what I call fixed expenses. We aren’t in an unaffordable position, but some people unfortunately are these days.
The “fixed” items are predictable and simpler to budget. We plan a monthly expense list (ours is broken down to over 50 categories, but you only need as many categories as you're comfortable with) and even though they are the same numbers every month except those things we pay quarterly like real estate taxes and sewer bills (we break those down to monthly payments on our plan), it’s the best place to start.
Our fixed categories include:
- Mortgage Interest and Principal
- Real Estate Taxes
- Condo Maintenance Fee
- Sewer Bill
- Car Loan (yes we have one of these, but it will be our last one)
- Life Insurance
- Health and Dental Insurance
Would you believe that these numbers represent 46% of our monthly expenses? These 7 item lines are just 7 of over 50 item lines we actually plan and categorize every month, so you can see that more than 50% our expenses have some degree of discretionary decision making and can be adjusted to help get us closer to our budget goals for this year.
The next step is to look at our discretionary expenses (things that we have control over) and decide if there are any areas we need to cut back on, or the flip side, those items we need to increase spending on for a variety of reasons. We debate those and make those adjustments.
The discretionary categories that have some little flexibility are categories like our electric and gas bills. Certainly we control the thermostat, but we have always been frugal in this area and keep our indoor temps at conservative levels and often don’t use any more wattage and therms than in previous years (in fact we used less this past year). The problem with a category like this is that prices fluctuate and despite less usage the bills can be the same or even higher. That’s why I have suggested things like energy audits from the utilities or buying a programmable thermostat to help control and improve here. Here’s a listing of the kinds of categories that represent another 32 % of our monthly budget.
- Phone/Internet/Cable TV
- Condo Insurance
- Water Bill
- Gas and Electric Bill
- Over-the-counter Vitamins and Medicines
- Haircuts and Grooming
- Household Furnishings and Decor
- Clothing and Accessories
- Groceries/ Dining out
- Educational expenses
- Miscellaneous expenses
We all make decisions that can increase or decrease those categories by our behavior and our wants versus our needs. Do we need higher speed internet or can we live at lower speeds? How many channels do we need from cable? Do we need cable at all? Do we shop with coupons? Do we buy generic versus brand names? Are we careful with our checking accounts and bank fees? Are we buying impulsively? You can see that there are many things that we do have some control over that can be planned out and controlled, even if only a little.
We go through every item and sometimes make hard decisions, like will we take a vacation this year or will we plan day trips or a weekend or two to save things like airfare and hotel expenses? Can we live another year with the “old door”? Apparently we couldn’t last year even though we tried (for reference, cold winter wind comes right through the gap underneath and around the door).
Difficult to Plan Expenses
The toughest part of any budget, especially in our situation, is those things that you need to plan for, but you just don’t know what may occur. Our biggest problems have continually been our medical expenses which last year for doctor visits, hospital stays and medications represented about 15% of our budget plan and resulted in expenses more than we budgeted for when I was unexpectedly hospitalized for a few days last March. If you include the cost of medical and dental insurance, that total becomes about 30% of the total budget. For us, that’s the big nut and to be honest it is difficult to plan to improve on it each year.
In previous years, we have planned for household repairs with a “reasonable” budget, but then had things happen like a major plumbing issue or needing a new water heater suddenly (the old one was just 6 years old!). Those things happen almost every year and we do use catch all like miscellaneous or other to cover some of it.
One saving grace was that our income spiked with a lucky winning of an online contest prize (which my wife won) that allowed us to make some of those surprise expenses more affordable. But as I have said in previous posts, don’t plan on that kind of thing happening to save you. I do plan, however, for credit card rewards in my income plan since I usually pay for most things with my reward card and collect the cash rewards every month.
One last point which I find to be very important is that we publish a report every month to track where we stand and if necessary we make adjustments along the way to keep us on track. It’s just for us and we discuss what we are doing and planning to do constantly.
When you are on a restricted budget (as we all are really, aren’t we?), you need to know where your money goes every month and plan appropriately. Those days when I spent impulsively are long gone, and I so wish I had learned that lesson when I was young. But It’s never too late to start steering yourself into the right direction. What occurred this past year has made me more determined to budget much better.
I hope that this approach will be a help to you. It’s not as complicated as perhaps I’ve made it sound. I think that planning and reviewing monthly is the best way to stay ahead of any problems. Even though we went off course in 2015, I’m very happy we had some funds available to use for our needed purchases saved up from previous years to use. Our excellent credit allowed us to get a no interest credit card offer, so at least we're avoiding paying interest while we pay down this debt.
Do you have a plan and budget for 2016? What decisions and goals have you made and what are your toughest decisions coming in the New Year?
Image courtesy of Stuart Miles at freedigitalphotos.net (with changes)