It occurred to me the other day that I didn’t really explain how to budget in my post about The Basics of Budgeting. Sure, I listed some really great tools to help you get started, but I just kind of left it at that. Tracking your spending is a fabulous first step. You cannot create a realistic budget without knowing where your money goes first.
So you’ve tracked/logged your spending via Mint or some other software. Now what?
Make a list of every debit and credit to hit your account on a regular basis. I’m talking about car payments, rent, utilities, internet, paychecks and savings deposits. Don’t forget to include the day of the month as well. It should look something like this:
Day — Action Item — Amount
5th: Internet -$70
13th: Utilities -$75
15th: Payday +$1500
15th: Roth deduction -$450
24th: Phone bill -$95
30th: Rent -$1000
31st: Payday +$1500
This is a rough estimate of my fixed monthly expenses and credits. Adding it all up, I should have a cool $1310 leftover at the end of the month.
“But Gwen, what about things like food, gas, insurance and vacation money?”
Notice I said fixed costs above. Things like food, gas and vacation money vary from month to month. This is where Mint comes in handy. It tells me I’ve averaged (per month) $380 in food, $100 in gas and variable vacation money. Subtracting $480 from the $1310 leaves me with $830 for the month.
I’ve got non-monthly fixed costs as well. I pay my car insurance every 6 months. For simplicity’s sake, let’s say it’s $600 for 6 months, which means I need to save at least $100 each month before my bill becomes due. That means I won’t be surprised when I all of the sudden get a $600 bill one month. $830 – $100 is the final total of $730 a month unaccounted for, which usually goes towards travel of some kind or more food. Because I like eating and drinking out with new people as a social activity. Once I get a friend group firmly established, then I can start to host more get togethers at my house that cost less.
To keep the numbers easy, I didn’t include things like health insurance, taxes or contributions to my work sponsored retirement accounts. Mostly because I never see this money as mine, since it comes out of my paycheck before I get it. I like to pretend I only get paid my after tax amount, because if I look at the gross amount I get paid I get really sad.
After you’ve planned out your month, you can start automating your payments. Just about every service out there offers the option to either schedule your payment or automatically pay it. To schedule my payment, I go in to the service, click pay bill, and then pick a day I’d like to officially pay it on. For instance, my credit card bill was due the 27th, but I scheduled it to be paid the 24th instead.
To setup an account to autopay, all you have to do is schedule a payment to occur on the same day (or business day before it) of every month. My rent automatically comes out of my account two days before the end of the month. Which means, I’ll be paying rent tomorrow for August’s rent.
If you do set up autopay, keep a few things in mind. One, have enough money to cover the debit in the account. Either set up a transfer from another account automatically or do it manually a couple of days before hand. Two, make sure you adjust your payment should something change. When my credit card account got compromised, I had to switch my cell phone bill to automatically bill my other credit card.
Another pitfall to automatic payments is when companies keep your business but shift you to a new account. When I moved, the cable company (insert boos and hisses here) closed my first account and opened a new one for my new location. What I failed to realize was my autopay wasn’t connected to the company, it was connected to my account with the company. They opened the new account, but didn’t set up autopay. This meant I missed the first payment at the new place, but caught my mistake before I missed a second month’s payment.
The last thing to remember with transfers and autopay is it often times takes a few days to transfer money between different institutions. I have saving and checking accounts with two different banks, so I have to remember to include the transfer time when making payments. That’s why I make the transfers a few days ahead of time so I can be positive the money will be in the account (see point #1).
Let’s take a closer look at the monthly bills with the auto pay and transfers set up. I updated the format to include which account is used, so now it’s day of the month, action item, amount and account.
5th: Internet -$70 (on credit card)
12th: transfer Roth $ to checking account
13th: Utilities -$75 (on credit card)
15th: Payday +$1500 (into Savings I)
15th: Roth deduction -$450 (from checking account)
23rd: transfer CC payment, Roth $ and rent to Savings II
24th: Phone bill -$95 (on credit card)
26th: CC payment deducted (from Savings II)
28th: Rent -$1000 (from Savings II)
31st: Payday +$1500 (into Savings I)
So there you have it. This is the nitty gritty detail of how I pay my bills every month.
What does your bill paying setup look like?