Budgeting | Part 2 | “Using Your Budget”
If you have arrived at this blog post without prior knowledge of the first part in this series, please check out Start a Budget before you continue as this post may not make sense without understanding the first section.
Once you have created your budget in excel or Google Spreadsheets, you can now see how to put it to use with a variety of my own tips!
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After Your First Month
Now that you have suffered the awful confusing first month of using your spreadsheet budget, I would like to go over a few things that I have learned in the process.
#1 – It’s easy to screw up!
Do not fret if the numbers don’t add up. For instance, if your account balance column is not correct compared to the amount that is actually in your account. Make sure to update your budget on a weekly basis (if your budget is a weekly one like mine) so that you can correct mistakes easier.
Many times I have phoned my father pleading for assistance and it was a simple matter of typing the wrong formula or missing a withdrawal. Make your budget part of your weekly routine, it’ll save you tons of grief. Mistakes are made the longer you wait, and the longer the process to update!
#2 – Prepare in advance
I like to prepare my budget framework a year in advance. Meaning I make sure my rows are setup with all the right dates so that when it comes time to put the numbers in each week the rows should already be there and setup.
To do this quickly I like to use short-codes. Leaving one empty row after each month to keep it clean and organized, click on the next row number. In my example this is #14. Right click and select “Insert 1 Above”. My budget always has 7 rows, yours may be different. For my example, I add 7 empty rows, which will then push down my red total bar at the bottom.
On a PC, click row #14, while holding the shift key, click row #20 which should highlight all those rows in between. Right click again and you will see the wording change to “Insert 7 Above”. This is a quick way to add a bunch more rows without doing it one at a time.
#3 – Spreadsheets are smart!
If you click to edit the date a mini calender pops up so you can chose the right date. This is helpful if you aren’t sure what the date is going to be in later months.
#4 – I’m way over budget!
Don’t get too excited, the plan is to be over budget. The worst thing in the world is to end up under-budget, which can happen when bills are unexpectedly higher than normal. Do not dip into those extra funds as tempting as that extra cash looks right now, next month you could run into car trouble, require medications and that extra cash will be your saving grace!
Paying Off Debt
Now that you’re on your way with your budget, beginning to understand and see the numbers before your eyes, you may begin to ask yourself: now how do I start saving? This question is immediately followed by your logical self: hmm, I have a maxed out credit card I have to pay off somehow too… Before you can begin to save for fun, you need to save for paying off debt.
If you have debt: a line of credit, loan or credit card; you should make a column in your budget to begin separately money to contribute to paying it off. To do this click on the title of the last expense column you have (my example is Groceries) and right click on the column letter (J). Select “Insert 1 Left” to add a new column. If you add a new column to the left rather than right, your totals formulas will automatically adjust for the new column. If you add a column to the right you will need to manually update all your totals formulas.
Title this new column “Debt” to indicate money that is going to be paid onto the credit card or debt. Calculate a comfortable payment amount that is higher than your minimum payment. Maybe make yourself a little chart on paper to do the math, see what amount of time vs amount extra that suits you best. Write this number in your budget note line at the top of your budget so you remember each month (or at least to start!).
Let’s say your minimum payment is $15 each month (see also the next section for more on the Minimum Payment Trap!) to pay towards your credit card bill. If you don’t want to go too crazy to start, try paying the extra $5 for a total of $20. That will make just that little bit of difference in the long run rather than paying the minimum. In your new “Debt” column, divide up the amount you require at the end of each month to pay off your debt (our example requires $5 each week contribution.)
Once your budget is flowing smoothly, try contributing a little more each month. This is the only column I would not worry about the red total bar at the bottom as at the end of each month (or when your bill payment is due) ensure you empty this column.
The Minimum Payment Trap
The number one trap I hear friends falling into is “minimum payment” when it comes to borrowing money. They appear to have no problem paying the minimum payment on their Visa each month but they have this crazy idea that the amount they are paying is actually helping them pay down their debt (and “freeing up space!”. It is most certainly not!
If it looks like your debt is never going to get paid off, you’re probably right. The minimum payment is usually less than 5% of the total balance due plus interest upwards of 18%!
There’s a great article on Investopedia that outlines a few examples of the numbers you are actually spending your purchases.
Example for a $3,000 Credit Card Debt
- Balance: $3,000
- Interest rate: 18%
- Minimum monthly payment: 1% of your balance plus interest ($75 a month at first, declining gradually each month)
- Total time to pay off: 222 months, or 18.5 years
- Total interest payments: $3,923.08
- Total cost of your $3,000 purchase:
My father always recommended paying as much as you can without putting yourself into crisis mode financially in order to make a dent in your debt. The University of Illinois has a great example to show how a little extra can make quite a difference.
Example of a $550 Purchase
(With an interest rate of 19.9%)
|Monthly Payment||Time||Interest||Debt Paid|
|Minimum Payment||$15||4 Years 9 Months||$304.13||$854.13|
|Extra $5||$20||3 Years 2 Months||$190.43||$740.43|
Budgeting for Fun
No, saving money and paying off debts doesn’t sound like the most fun you’ve ever had, but it will be a huge sigh of relief when you see how easily it works to clean up your life. You’ll be on the path to peace of mind and financial stability in no time. There is one key factor I have yet to mention that is crucial to your new budgeted lifestyle: fun.
A lot of people that are wanting to lose weight usually give up after the first week because its hard and they feel they have to give up everything to be smaller. Same can be said for budgeting, to have smaller debt you need to give up having fun and put that money towards financial problems. Yes and no.
Yes you need to put money towards your financial woes, but no you don’t have to give up everything. I would recommend cutting back for sure! If your routine is going to the bar every Friday night for dinner and a few drinks; going to Tim Horton’s every morning for your coffee and bagel; you may not realize how much money is actually disappearing that could but easily put towards debt or savings. I’m not saying give up everything you love, I’m saying budget what you love into your lifestyle.
Give yourself a column for fun or entertainment. When my mother was young she gave herself a budget of $20 per week for fun, took out $20 from her bank on Monday and as soon as it was gone she was done. No more extras. No more “opps I spent too much this weekend”. But she is a very cold-turkey kind of lady.
For the rest of the population that is not like my mother and I (the cold-turkey-ers!) you can give yourself a little more wiggle room. But just remember, your credit card is developing interest and you might have an unexpected car problem arise. Add another column for your fun money OR in my case, any money that is not transferred to my budgeting/billing account is left for fun money or to be moved to another savings account.
One way to do a bit of both is if you have $100 left over after your budget for “fun” money, put $50 aside for fun and the other $50 into a savings account.