Budgeting For Everyone

By Charles Moran

Back to the Beginning

Have you ever taken a look at your finances and felt as if you were staring into a black hole? If so, then you probably don't budget your money-in which case you should take immediate action, and budgeting is the best place to start. Even if your situation isn't so desperate at present, setting up a budget now would help you plan for all eventualities and so avoid future problems.

I feel confident in saying this because, in 1989, I was the one staring into a black hole-or rather, a planet-sized ball of black spaghetti-in place of a clear picture of my finances. I had recently got a job as a factory worker earning a wage that was relatively low, but better than unemployment benefit. At first, because my spending habits stayed roughly the same as when I was out of work, I knew that the higher income covered all my living costs with some to spare. Consequently, I didn't budget-but at that time I didn't even know how.

Life was sweet compared to living on social security. Until, that is, I took out a loan. Actually, the first one was affordable, but then I extended it-twice. At that point I began to experience stress-not because I knew I'd taken on a level of debt I couldn't afford, but because I didn't know, only suspected it.

Having lived with this personal emergency for a few weeks, I realised that I had to gather up all the tangled strands of my finances and unravel them so that I could know, from one day to the next, exactly what was happening to my money. In other words, I had to budget.

The Problem with Money

Why had I never seriously attempted to budget my money before? Why is that also true for, probably, the majority of people? Not knowing how to go about it and complacency, of course, but there are other reasons. In fact, budgeting is so useful that there have to be serious obstacles to discourage anyone from doing it. Here are some of them:

1 ~ Emotional involvement

Not many things in life arouse a wider range of emotions in people than money, from anxiety at the loss of it, through anger when others try to take it from you, to the elation you feel on the rare occasions when you suddenly receive lots of it. Yet the skill of managing money effectively requires a cool head and a balanced perspective.

The images that constantly surround us of people whose riches allow them to live an idyllic existence are misleading, since reality hardly ever lives up to our fantasies and, if we have demons, we take them wherever we go-even paradise.

Yet the myth that money brings everlasting happiness generates much envy and resentment and encourages the virtual worship of wealth. Ironically though, worshipping money makes it almost impossible to manage-for who can control their personal god?

2 ~ It's all too complicated

If asked, the ordinary individual would probably say that money management can only be understood by trained specialists, brokers, bankers, economists, accountants, and so on. However, it is precisely those professions who encourage that belief, so as to protect their own monopoly on the control of wealth. Not surprisingly, since they are also the ones taking a very generous slice of it for themselves.

Just as a burglar-alarm salesman will highlight danger in order to sell security, some self-proclaimed experts emphasise the complexity of money so that they can (for a large fee) handle it on behalf of the befuddled punter who then doesn't have to face it personally.

When they do offer direct advice it often focuses on cost reduction, which has its place, but it is far from a complete solution to money problems. The fact is that financial security depends on some basic principles and actions, which anyone with a little guidance can do for themselves, and which make the advantage of getting a quarter percent less interest on a personal loan look relatively insignificant.

3 ~ Guilt

Money can be wrongly acquired. Theft and fraud are obvious examples, but even knowingly accepting money for faulty goods, poor service or bad workmanship has consequences. I have a theory (which you're completely at liberty to disagree with) that a person only ever truly benefits from honest income.

Money can also be wrongly used. For example, by hoarding it in spite of opportunities to spend it usefully, by wasting it on casual purchases-especially if that involves neglecting basic necessities like food or rent-or by destructive spending, such as on street drugs or weapons. The misuse of money sours our relationship with it.

4 ~ Numeracy problems

Finally, if you were to dig around in the educational past of someone with chronic money trouble, you would most likely discover that problems and confusions with numbers and arithmetic, early in life, were at the root of it. "Financial literacy" may be the latest buzzword going around, but "financial numeracy" is more to the point.

It's true that a person trying to get to grips with the subject of money could be stumped by terms such as "arrears" and "compound interest". However, a good grasp of basic arithmetic is actually more relevant to the practical side of the subject-handling your own money-than books full of theory or advice.

The Importance of Budgeting

No matter how many obstacles, real or imagined, stand in the way of tackling money troubles, it must be done because, whether we like it or not, money pervades every aspect of our personal and social lives. Without money as its fuel and lubricant, the modern world would grind to a juddering halt.

For that reason, decisions over money-whether to spend or save it, how much is needed and how much available, what to spend it on, etc.-could be, literally, a matter of life or death. That makes budgeting one of the most important life-skills there is-actually more important than simply having more money.

Without that skill, people resort to other "solutions" for their financial problems. Debts accumulate "out of sight, out of mind". Bills pile up, unopened and unread. Even the common practice of putting bill payments on direct debit so as to avoid handling money directly is risky, because budgeting, to be truly effective, should be "hands on". Money is universally in demand. If you don't take responsibility for your share, someone else will!

Time which could be used to work out practical solutions is wasted fantasising about a lost utopian world where money didn't exist, or dreaming of that elusive Lottery jackpot win-an event too unlikely to be relied on in emergencies. One morning, early, the dreamer could be woken up by bailiffs knocking on the door.

In the worst cases, bankruptcy may appear an easy option, even when actual bankrupts say how traumatic it was for them. Faced with insolvency, some people simply run away; some even take the ultimate escape route-they leave life itself! However, given the right guidance and skills, there is no reason why anyone should let their situation get so desperate.

Some Hard Facts

It is a natural law of money management that, according to Dickens' Micawber, income higher than expenditure brings happiness, but expenditure higher than income leads to misery. This is perhaps the hardest truth about money to confront or act upon, since it's so much easier to spend than to earn, especially nowadays.

While earning money still requires effort in the form of work, goods can now be bought at the touch of a computer key or telephone keypad. Therefore, anyone who yearns for a comfortable life without the need for self-restraint (most people!) will also be in danger of overspending.

Micawber's little rule is a simple way of defining where solvency ends and insolvency begins, and points a person towards the first step in budgeting: at least get a rough idea of whether you're solvent or not. It's something you can be pretty sure of without any detailed calculations. Just the fact you don't already know is an ominous sign, since finances can soon get out of control when ignored.

Ask yourself the following questions: Does thinking about money make you feel uncomfortable? In recent bank statements, is your account balance gradually falling? Can you no longer replace old clothing with new items of the same quality? Not sure how to pay for your family's next Christmas? Constantly dipping into savings to pay daily living expenses? Have you had more on your credit card each month for the last few months? If you've answered yes to most of these questions, then you've got problems.

How Much Do You Need?

For anyone unlucky enough to discover they're insolvent after this quick assessment, the wise words of Micawber also point towards the solution, which is brutal: either raise your income level or reduce your spending. In cases of genuine insolvency budgeting may not even work, because if a person's entire income is instantly swallowed up by living expenses and bills, they'll have nothing left to budget with.

Here, by the way, is the answer to the age-old complaint "not enough money": if you can budget with it successfully, it may not be as much as you'd like, but it's enough! Sadly, there doesn't seem to be any magic spell to boost income-"by any honest means" is the best advice on offer. It may however be possible to reduce an individual's or family's spending to the point that a budget can be set up and begin to improve the situation further.

On the subject of income, of course, "the more the better" is the general rule. From the narrower viewpoint of what is most suitable for budgeting, however, a modest but reliable income-regular, predictable pay-is preferable to one which occasionally goes sky-high, but has no guaranteed minimum.

The reason for this is that everyday living costs tend to be predictable. Food prices may rise but gradually; bills arrive as regular as clockwork; rent or mortgage payments fall due every month on the dot, and so on. It is better by far to balance predictable costs only against predictable income.

If you can never be sure from one payday to the next whether you'll be able to afford to eat the day after, it makes for a highly stressful life-and a much more complex budget. If you wished to set up a budget in those circumstances, it would still be necessary to establish predictability of income for it to work. Fortunately it is almost always possible to do this, and I'll explain how later.

The True Cost of Living

Tooth extraction is a nasty but necessary procedure. The same is true for making a detailed examination of your spending, to see what economies can be made. At this point however, Micawber's rule ceases to be useful as a guide.

This is because your examination must take into account not only the amount of cash you actually spend but also the amount you should be putting aside (whether you actually have it or not) to pay inevitable future expenses. Otherwise, you will seriously underestimate the true cost of living, which is affected by three other types of cost:

  1. Future liabilities. That is, things which you're not paying for now, but which you will be asked, or legally compelled, to pay for at a later date. These include not only obvious things such as credit card purchases and loans, but also utilities, telephone line-even the future university fees of your children!
  2. "Hidden" costs. These are the result of a subtle, natural process: wear-and-tear. With the passing of time, everything-clothes, central heating boilers, fridge-freezers, etc.-deteriorates until it finally breaks down or wears out, at which time there has to be enough money in the pot to repair or replace it. Otherwise, your quality of life will suffer.
  3. Sudden illnesses, lightning strikes, flooding, and so on. It is highly unrealistic to expect to live an entire lifetime without the occasional emergency. Insurance doesn't always provide the cover it seems to promise, so it's vitally important always to have a Contingency Fund.

Unless you ring-fence part of your income for all the above, there will be nothing in the budget to cover them when they eventually materialise as bills or demands. You can't always rely on luck to get you through. If that doesn't work, you may have to take out an expensive loan just to pay the bills! Therefore, these three factors must be taken into account when reckoning up your expenditure.

Have You Got What it Takes?

When most people begin a budget, they set it up to run from month to month rather than weekly. The implication of this is that only the monthly-paid-typically, "salaried young professionals"-should ever have to budget, which is simply false. By contrast, I have been running a weekly budget successfully for 19 years so far, and would strongly recommend it, even for someone paid monthly.

Why? A person's financial status could change unexpectedly on many separate occasions in the course of a month. Because a weekly budget enables the user to respond sooner to changes, it reflects altered circumstances more accurately and enables much tighter control over them.

Weekly budgeting may sound like a massive workload and, by now, you may be wondering whether you've been tricked into believing that budgeting is simple. Well, the basics are simple! Setting up is the most time-consuming part of budgeting and requires the most effort. On the other hand, running a well set-up budget is relatively easy and takes only a few minutes each week to update (as mine does).

Sticking to the budget once it is running can be tough, especially in the case of long-term money troubles when difficult choices have to be made. What might persuade even the most reluctant of people to take up the challenge of budgeting is its potential benefits. When you're always up to speed on financial matters, money comes under your control, not the other way round. As the saying goes: knowledge is power!

Too Rich to Budget?

Having established minimum financial requirements for a budget to work (enough income to cover basic needs, plus a surplus of any size), is there a point to budgeting if you are obviously earning far above your cost of living? There are several reasons why it's still a good idea.

Setting Up the Budget

Financial management is all about prediction. If you can predict future demands on your finances, you can organise now in preparation to meet them when they arise. There is nothing paranormal about this. It involves using past records of income and costs to establish patterns of money flow which can be projected into the future as a rough guide to how things will continue.

Any records are better than none. Ideally, they should extend back from the present in an unbroken sequence as far as possible-but only over a period of relative stability. Major upheavals, such as getting or losing a job or the arrival of a new baby, change your earning or spending patterns in a unique way which doesn't apply to other periods in your life. Without actual records, however, the process is, at best, intuitive, at worst, guesswork.

Because the setup involves a number of stages, the "present" mentioned above will not be the same at the launch-date of the budget. This has to be decided in advance, depending on completing all the steps on time. It should not be too distant since, naturally, your financial situation will change in the interval. If you delay the launch too long, it may change so much that the records go out-of-date!

The day of the week on which the launch occurs will become your Budget Day when the budget is running. That's the day when it's updated to reflect any income or expenditure from the previous seven days. If you're on a weekly wage, the day after payday is best for this, so the budget launch should be arranged to coincide with that day of the week.

Records

On the income side, you need evidence of regular payments such as wage-slips, or, if unemployed or retired, stamped pages in a benefits or pension book. These are used to calculate your "Primary Income". That's the figure which, reduced to a weekly average, becomes the budget allocation-the fixed ceiling above which your routine weekly costs must not go. The calculation for this is different for different pay structures, as follows:

  1. You receive a guaranteed, fixed basic with no overtime or bonuses or with fixed overtime or bonuses every payday. The whole of your pay can be treated as Primary Income. As the amount never varies-or by no more than a few pounds-only one pay-slip is needed to confirm it
  2. You are paid a guaranteed, fixed basic with only very occasional overtime or bonuses. The basic part of your pay can be treated as Primary Income. Again, as this is a fixed sum, only one pay-slip should be needed to confirm the amount. Any overtime or bonuses are treated as Secondary Income (see below for what this means).
  3. Frequent but variable overtime or bonuses on top of a fixed basic. The whole of your pay can be processed as Primary Income, but, being variable, the weekly average is worked out from a broad, consecutive sample of your pay-slips.
  4. Paid regularly but in variable amounts, depending on productivity or hours worked. Process the whole amount as Primary Income in the same manner as 3) above, but from a larger sample of pay records.
  5. Paid on an "all or nothing" basis, as in "commission only" sales. Providing your payday occurs at regular intervals, whatever you receive can still be treated as Primary Income, but the weekly average must be calculated from pay records over an even longer period to give a useful result. Even so, once the budget is running, the figure may have to be adjusted up or down, depending on whether it was pessimistic or optimistic.

All variable, irregular income, such as payments for casual work, lottery winnings, inheritances and gifts of money, is known as "Secondary Income". No records of Secondary Income are needed for the setup, because it's not included in the routine weekly allocation. Instead, you allocate it yourself every week, as and when you receive it.

On the costs side, there are two types of record. One shows that a cost has been incurred but not necessarily paid, such as a bill, the other is evidence of a payment, such as a cheque stub or shop receipt.

Cash withdrawal advice slips don't count by the way: what's important is how much of the cash you spend and the receipts for what it was spent on. Any not spent that week should be stored securely at home, but treated just as if it were still in the bank (i.e. entered into the budget as expenditure, but only when you use it).

Taken together, these income and expense records can be seen as a snapshot of your own or your family's cost of living-literally, how much it costs you to live-and also your solvency and quality of life.

Setting Up Budget Pots

Looking at your records of costs, you will notice that they fall into certain categories: utilities, groceries, transport, holidays, and so on. In the budget, each category is known as a Pot. This is a virtual location where money can be stored. Each Pot has a weekly allocation, which is the amount paid into it every week to cover payments taken out.

Pots are either cumulative or non-cumulative. For example, your Mortgage Pot would be cumulative: it would receive 100.00 per week to pay a monthly direct debit of 430.00. Your Car Fuel Pot would be non-cumulative: its allocation of 30.00 would be paid out the same week to fill up the family car.

You should now be in a position to make a list of titles for your Budget Pots. The list should be comprehensive-but that doesn't mean either a huge quantity of subtly different headings or a few highly generalised ones. There are problems with both extremes, and a balance must be struck between them.

For instance, lumping the gas, electricity and water bills together under the title "Utilities Pot" could create problems. Because the cost of each utility accumulates at a different rate, it would become difficult, as the total built up, to keep track of how much of the Pot "belonged" to each utility. Therefore, an unexpectedly high electricity bill, for example, could empty the Pot of money reserved for the other utilities.

On the other hand, low-cost sundries such as soap and shampoo could safely be included with groceries under the title "Housekeeping Pot". In fact they should be, otherwise you would be saddled with the weekly chore of examining supermarket receipts to add up food and sundry items separately. More expensive, less frequent purchases made while grocery shopping can have their own Pot, though-vitamins and cough medicine under "Health & Medical", for instance.

Now divide up your available records between the different Pots, and make a note of how many you have for each. Depending on the type of expense, you may have more records than necessary for some, less than you need for others.

For fixed, regular payments such as direct debits, you should only need a single bank statement to verify the amount. However, the more irregular and variable the expense, the more records you'll need in order to get a useful result.

Naturally, the less frequent a particular kind of transaction, the longer it will take to accumulate enough records, if you've only just stopped throwing them away. For instance, four weekly grocery receipts cover four weeks, but four quarterly utility bills span a full year.

It might not be realistic to collect enough evidence of very infrequent costs, such as re-decorating the house-but even figures based on only a couple of records could be used, then adjusted later when you had more information.

Assuming you did have enough records for each Pot, use them to work out its weekly average cost then add all the averages together, and you'll have a figure which roughly represents your weekly cost of living. As long as your circumstances remain fairly stable, this figure can also be used to predict your future cost of living.

Now, do you have enough income to meet the weekly demands of all your Pots-preferably with something left over for the all-important Contingency Pot? Basically, are you solvent or insolvent?

How's Your Arithmetic?

If you've been reading attentively, and particularly with the added sensitivity of knowing yourself to be weak in arithmetic, you may already realise by now how problems with numbers can affect financial success. If not, just do the logic.

Being financially successful depends on clever and competent budgeting. That involves calculations, which require proficiency in basic arithmetic-the ability to manipulate numbers. Even if you don't budget, the most basic operation you do with money involves arithmetic: counting it!

It is not within the scope of this article to attempt a remedy for educational failures in numeracy, even if it could be done that way. It's very tempting to go into great detail on the mathematics of averaging out various different types of income and cost, but that would serve no useful purpose either. It would be too much information for you if you've already convinced yourself that you couldn't possibly do it, and actually too little if you're determined and able to set up and run a budget.

There is hope, however! If you have a personal computer at home, then you already have the equivalent of a mathematical genius at your fingertips. Although a budget can be worked out on paper, it makes more sense to use a computer to do the calculations for you. A computer can also be programmed, for instance, to make weekly allocations to Pots automatically with each update.

That way, everyone wins: budgeting becomes possible for those who can't do the maths, easier and quicker for those who can.

Priorities

Meanwhile, let's assume all the calculations have been done, and you now know your average weekly income and weekly costs. Comparing the two not only answers to the question whether you're solvent or insolvent, but also by how much either way. If the news is bad, you'll need to either increase your Primary Income or bring your costs down to an affordable level.

Your budget will then function, because you'll have an income surplus which you can use to plan for the future. Raising more income may be a more desirable solution but it's not always possible within a realistic time-frame. Cutting costs is a more painful process but usually successful with a little mental effort and, importantly, it can be done quickly. But which costs to cut?

Here is where another important principle of budgeting comes into play: prioritisation of expenditure. Of course, the idea isn't new. Anyone should be able to tell you, without even thinking about it, which expense should be given higher priority: food or fashion accessories.

What is new is a table of Priorities ranging from 1 to 4, set out below with a description for each level. From the outset, it must be said they are for guidance only. Most people can agree on most priorities, but the fact is that one person's fancy can be another's necessity, and vice versa.

Wildly unconventional priorities, however, may mask a serious personal problem. For example, someone who gave the same priority to hard drink as to food would almost certainly be alcoholic. On the other hand, the habit of smoking is still common enough that if a smoker rated tobacco as Priority 1 for them personally, it would not seem outrageous to most people.

Priority 1-Essentials

This level covers anything without which a human being would be seriously at risk of death. In general, that means sustenance and protection, encompassing food, non-alcoholic drinks, basic clothing, shelter, and temperature control (i.e. heating in cold environments). Also, anything essential for the wage-earner to continue earning, such as commuting expenses.

Priority 2A-Contractual Obligations

These are costs for which payment can be legally enforced. Usually they are agreed by formal contract in advance, and often involve goods and services supplied on credit. Being backed up by the ultimate threat of legal action is what gives them such high priority.

Priority 2B-Moral Obligations

On the same level, however, is another type of obligation: the financial commitments which we make privately to others, in writing or verbal only, which are not legally enforceable. You may disagree with giving such high priority to personal, informal agreements, but that is the rating which I've found works best for the system as a whole. Old, unpaid debts, written off by creditors and with no legal threat attached, can also be added into the budget at this level.

Priority 3-Future Provision

In this category can be found any Pots intended to guarantee a person's current quality of life and spending power in the future, especially Priority 1 and 2 spending. It includes the all-important Contingency Pot. Car Maintenance, House Maintenance, Home Security and Home Improvements are also rated Priority 3.

Priority 4-Life Enhancements

Pots at this level cover what we usually think of as luxuries: goods and services which are desirable but not essential to survival. Leisure pursuits, eating out, alcohol, parties, holidays, and so on. If you're already annoyed at the low priority given to one or these items, that just demonstrates how subjective "necessity" is! Actually, a little luxury in life can be viewed as necessary-if life is to be more than just a raw struggle for existence. However, the Priority levels must be strictly defined for the system to work, and it remains true that survival is possible without luxuries.

Savings

This budget is fundamentally about practical, domestic money handling rather than credit card balance transfers, consolidation loans or any other financial jiggery-pokery. For that reason, the user should need only two types of bank or building society account, current and instant-access savings-but should have at least one of each type.

Nothing in this system prevents the use of fixed-term savings accounts, or any other type. However, the system does not encompass purchases of stocks and shares: these would be treated as expenditure and monitored in other ways. Any profit from share-dealing would enter the budget as Secondary Income.

Current account funds are represented in the budget by Pots grouped in one section entitled "Current". Funds in saving accounts are held in a separate section called "Savings". Because the system allows funds in the current account to be reserved indefinitely in a specific Current Pot, the sole advantage of transferring them to a Savings Pot with the same name is to earn interest from them.

The Budget Pots in Savings are ranked on the same Priority levels as those in Current. Although any Pot in Current could be assigned to the Savings section, it would not be worthwhile keeping them all there, only those that accumulated sufficient funds between withdrawals to make some interest. A good rule is, if the interval between payments out of a Pot is greater than one month, the Pot can be re-assigned to Savings and the corresponding funds banked in a savings account.

Each week, a lump sum is allocated to a Savings Transfer Pot in Current (Priority 3), then the transfer actually made online. Internet banking complements this budget system and is highly recommended for transferring money at short notice between accounts and making rapid, direct bill payments. When transferred, the next budgeting action is to distribute that sum amongst the various Savings Pots, according to their requirements.

For example, the funds corresponding to allocations into utilities Pots (Priority 2A), which are usually billed quarterly, can be banked in a savings account. The same applies to the Holiday Pot (Priority 4), as most people withdraw from it only once or twice a year. You could even have a small Contingency Pot (Priority 3) in Current for minor incidents, and a large one in Savings for more serious-but less frequent-emergencies.

Cutting Costs

The Priorities system answers the question where to cut costs if your weekly income is less than your weekly expenditure: begin with low-priority Pots and move up, trimming the allocation to each Pot as you go. Do each Priority level first in Savings, then in Current. In the course of this exercise, you will come across Pots for goods and services where you can't make cost reductions except by "shopping around". This can be a worthwhile action, but there are a few points to be aware of.

In short, shopping around for the best deals is a good policy in general-but not in itself it a total solution to the threat of insolvency. When searching the market, the shopper should first aim to find a product that is adequate for its purpose. They should then ensure that they pay no more than necessary for it, either by being overcharged, or by being sold extras or "special features" which they have no use for.

What do we mean by "adequate for purpose?" Well, acquiring any product, including services, is always about fulfilling a purpose-ideally, the buyer's own purpose which pre-dates the acquisition. The purpose of the product should be to facilitate the prior purpose of its user. When there is no prior purpose, the acquisition itself, or the ownership of the product, or the product's own purpose, becomes the buyer's purpose. Result: clutter!

So, here's a rule: before shopping, always establish prior purpose. While shopping, keep it in mind and look for products whose purpose aligns with yours-otherwise, don't shop! "Adequate for purpose" is the main yardstick but, if you found more than one item equally suitable, less important criteria-design, colour, etc.-would come into the equation, up to the limit of your budget.

Shopping without prior purpose may indicate a lack of purpose for living in general. In that case, telling someone to "find prior purpose for your shopping" is like saying "get a life!" For some purchases though, there is always a prior purpose, and it's obvious, especially at high Priority levels.

In order to survive (own purpose) we buy food which sustains our bodies (product purpose). To get treatment for a toothache (own purpose) we hire a taxi to take us to the dentist (service purpose). At lower Priority levels, prior purpose is less clear. So, what were you saying about upgrading your 5-gigabyte memory stick to a 6-gigabyte one?

Returning to the budget. Once you've applied the cost-cutting process to all your Pots and made every possible reduction, if you still don't have enough income to cover Priority levels 1 and 2, then you really have got problems. Your only option is to find extra income, and fast!

Targets

If you know your weekly cost of living and can allocate that amount in full every week, then you can be confident of covering all your basic needs and meeting all your financial commitments. But what if some unexpected event like illness kept the wage-earner off work and you lost a large chunk of income for a week or month? Clearly, you wouldn't be able to make the full allocation for that period.

In that case, the routine procedure is similar to the process for cutting costs above, but doesn't involve altering the weekly Pot allocations. Instead, funds already held in low-priority Pots are transferred to higher-level ones. The Contingency Pot exists precisely for this purpose, but it should be reserved for topping up Priority 1 and 2 Pots only. So, how would you know which Pots needed a top-up, and how much for each?

The answer is targets. Every Pot has a Running Target, representing the amount that ought to be in the Pot, when updated with the weekly allocation, so as to meet any and all payments expected from it at that time. Running Targets are everyday points of reference.

In a functioning, computerised budget, the software would update all Running Targets by automatically adding the full weekly allocation figure to each, regardless of whether enough funds were available to match the Target in reality. If the full allocation could not be made because there wasn't enough income, the shortfall would show up immediately as the difference between the actual contents of the Pot and its Running Target.

The higher a Pot's Priority rating, the more important it is to match its Running Target with actual funds. At levels 1 and 2, which are vital for survival, there is no leeway on meeting the Running Target of a Pot. Targets downward from level 2 are increasingly flexible.

Setting Up the Target Balance

The Target Balance-all Running Targets added together-must be estimated as accurately as possible. First, calculate the initial Running Target for each Pot. For cumulative Pots, this equals the total of unpaid bills or payments missed, plus the total that would have been allocated to the Pot in weekly amounts since the last billing date, if the budget had been running.

Examples:

  1. You have an unpaid quarterly electricity bill for 143 dated 1 June, based on a meter-reading dated 25 May, and the date is now 11 June. The weekly average cost of electricity for your household works out at 11 (143 divided by 13 weeks in a quarter) and today's date is within the third week after the latest reading, so the Running Target for that Pot is 143 plus 11 x 3: 176.
  2. "Basic Clothing" is a Priority 1 Pot which, for most people, involves spending variable amounts at irregular intervals. However, by this stage, you should already have estimated its average weekly cost. This figure, multiplied by the number of weeks since your last store receipt for basic clothing, equals the initial Running Target for the Pot.

In the case of non-cumulative Pots such as Housekeeping and Car Fuel, the Running Target always equals the weekly allocation.

Setting Up the True Balance

The budget's initial True Balance is calculated as follows: the total of all your funds in bank or building society accounts, plus any cash you're storing at home (i.e. not for immediate spending), plus any income and minus any expenditure not yet shown in your statements. This has to be worked out just before the launch-date of the budget, so as to be accurate.

The initial contents of your Budget Pots is decided by distributing the True Balance amongst them from Priority 1 down, matching their initial Running Targets wherever possible. Since non-cumulative Pots do not store any money longer than a week, the initial amount in each of these is equal to its weekly allocation which, as mentioned above, is also the same as its Running Target.

If you're paid monthly, there is one special type of Pot which must be dealt with first. The "Allocation Reserve" exists to hold back income already received to cover the allocations for those weeks between the current date and your next payday. This is calculated by multiplying the weekly allocation figure by the number of intervening weeks.

If you find you're running out of funds to allocate, providing you're dealing with Pots at Priority level 3 or 4, you can reduce their Running Targets in line with the amount available.

 

Routine Budgeting

From here on, let's assume that the budget, now fully set up, is to be run on computer using software designed for that purpose. On your designated Budget Day, the budget is updated to cover the following seven days. Income, expenditure and setup changes can be input into the system any day of the week. However, income entered one week cannot be allocated (let alone spent!), until the next update, when Primary Income will be allocated automatically.

Under normal circumstances, the update involves:

  1. Any income received the previous week is integrating into the budget;
  2. All Running Targets are updated by adding their full weekly allocation figure;
  3. All Pots receive their weekly allocation, in full if possible, to create a new True Balance and,
  4. In the case of a monthly salary received the week before, the surplus is placed in the Allocation Reserve to cover the remaining weeks of the month.
  5. You now have the choice where to allocate any Secondary Income from the previous week.
  6. Any necessary changes can now be made to the contents and Running Targets of specific Pots, including transfers from Current to Current or Savings to Savings Pots. Also, any transfer between the Current and Savings sections, which must be mirrored by an actual transfer of funds between accounts.
  7. Any direct debits due the following week are automatically included in the updated budget. Like any expenditure, this is deducted from the relevant Pots as well as their Running Targets.
  8. Not all your spending for the week to come will be known to you on Budget Day, but you should now enter any that is. This especially applies to withdrawals from non-cumulative Pots for spending the same week-this also must be mirrored by an actual cash withdrawal.
  9. Finally, the updated budget is saved to file and a summary may be printed out.

A question arises from 5) above: what to do with Secondary Income? As a general guide, there are certain uses in particular that it should be put to, more or less in the following order of importance:

  1. to make up any shortfall in allocations to Priority 1 and 2 Pots in the event of an unexpected drop in Primary Income (resulting from sickness, for example);
  2. to pay off overdue debts, especially ones where legal action is threatened (although you should, anyhow!);
  3. to make extra payments on loans and other credit arrangements (those that permit it) such as credit cards, the mortgage or car loan;
  4. to boost your Contingency Pot, or
  5. grow your savings;
  6. to fund large purchases that will increase the value of your assets, such as a new kitchen or house extension or, lastly,
  7. pay for luxuries such as holidays or celebrations.

During the following seven days, you must ensure that any fresh income or expenditure is entered into the budget. All the actions involved in maintaining and updating it form a week-long cycle, which can be repeated for as long as you wish-and, if you see benefits from budgeting, you'll want to continue indefinitely. But beware! Missing a Budget Day, even once, has serious consequences. If you want to pick it up again later, you may have to start again from scratch.

Reconciliation

Although the budget setup might last a week or more, updating it shouldn't take more than a few minutes per week, unless there are financial complications to deal with. However, the Budget Reconciliation may take longer. This is the process of checking the True Balance against your total funds, ideally once a month, to ensure no errors have crept into the system.

If you bank your income in person using a deposit slip; if you make heavy use of cheques as a means of payment; if you receive printed bank statements by post, reconciliation will be an arduous business. This is because your budget's True Balance reflects instantly each transaction you enter, but your bank balance only reflects those that reach the bank by the closing date on the statement-which may itself take several weeks to reach you. Many transactions could occur in the meantime!

One advantage of Internet banking is that it greatly simplifies the reconciliation, because your bank statements can be viewed on screen or downloaded instantly. You can make it even simpler by having your income banked direct and by paying bills online. With all these mechanisms in place, only very recent cash income, cheque payments and funds stored at home would affect the True Balance, but might not appear in your account.

There is one downside to making all transactions electronically. Deposit slips and cheques have counterfoils where you can note details of transactions as they occur. This gives you independent records which you can use to identify unexpected credits or debits on the statement. If you know you have a separate record of each valid transaction, those for which you have nothing are immediately suspect. They may be bank errors or even fraudulent.

This is also the main problem with direct debits. Because you're not made aware of them each time they occur-and because they continue unless stopped-they may remain active long after you've ceased to receive whatever they used to pay for. That's why I've always avoided direct debits where possible, and now use online payments instead. That way, debits don't happen unless they're made to happen, and the ideal budget software would remind you when a payment was due.

The solution to a lack of permanent evidence for electronic transactions is to ensure that there is some, of one kind or another. For instance, if, when you make an online payment, the payee supplies an email receipt, make sure you save it and, preferably, print it out and file it safely. If you're settling a printed bill online, such as for utilities, the least you can do is write on it "paid online", with the date, and file it away.

In this electronic world, there is some comfort in knowing that there is still a use for good, old-fashioned paperwork to verify your statements.

Truth and Transparency

"Truth" has a particular meaning in accountancy. It means that the financial records of a business for a certain period are complete and accurate, down to the last penny. By contrast, the budget does not require the same level of accuracy, because its purpose is to act as a private financial planning guide, not demonstrate the user's financial integrity to outsiders.

In my own budget, for example, I ignore pennies, rounding all income down and expenditure up to the nearest pound. As a result, after a budget reconciliation, there is usually a small, natural surplus in the bank balance compared with the budget's True Balance.

Here's an example: I receive and bank 20.50, then withdraw and spend 10.50, leaving 10.00 in the bank. In the budget, however, I enter 20.00 income and 11.00 expenditure, leaving 9.00 in the True Balance, which is of course 1.00 less than I actually have.

Even so, a degree of accountancy "truth" also applies to the budget. A modest surplus in favour of the bank is acceptable, but a large one should be double-checked for errors on both sides. If, however, the bank balance falls short of the budget's True Balance, this should always be investigated.

What this system always requires from the user is:

1 ~ Honesty and consistency

That means entering all income from any source and all spending of any kind, every week. Otherwise, the budget ceases to reflect the true financial situation and becomes ineffective as a forecasting tool.

2 ~ Openness

It is a principle of this system that the information which the budget provides should be restricted to the household which runs it but equally accessible to any household member, and shared with outsiders only with the agreement of the whole household. Ideally, budget updates should be done with everyone present, or at least with a summary printed out afterwards and shared with the absentees.

The requirement for transparency in the budget is only bad news to anyone who feels they must keep their financial affairs secret from others in the household-but someone with that attitude is unlikely to want to budget in the first place.

3 ~ Providence

Even more than honesty, reliability and openness, this is the quality which best equips a person for budgeting, the desire to make provision for the future. In return, budgeting complements and supports that quality. The reason for providence is to reduce the risk of future loss and suffering while increasing the chances of pleasure and happiness-perhaps the most that anyone can do in life.

Specials

This has nothing to do with either the police force or takeaway menus. It is the solution I came up with to a budgeting problem which only arose after I got married. In fact, this problem never applies to single budget users but would probably affect, sooner or later, most families and groups whose members shared a budget.

According to the principle of openness mentioned above, financial decisions affecting a shared budget should only be made with the consent of everyone involved. However, there is a good case for each family or group member having a small weekly allocation-their "Special Pot"-which they can save up or spend without having to consult with, or report back to, anyone else.

The importance of "Specials" is most clearly illustrated on occasions such as birthdays, when one family member receives gifts from the others. The givers usually require secrecy for, not only the presents they bought, but also how much they paid for them! This is simply not possible in a totally open and consent-based budget.

With Specials, however, the procedure is that each person intending to buy a gift withdraws the full contents of their personal Pot, makes their purchase, and keeps the remainder (if any) in a secure, private place such as a lockable cash-box. That way, since the amount of change is known only to the giver, the exact price of the gift remains a secret.

In our family budget, each of us, including our young daughter, receives the same weekly Special. The allocation per person is modest: just over one percent of average weekly income. My own and my wife's Pots are in the Current section of the budget; our daughter's is kept in Savings, where it will remain until she is knowledgeable enough to budget with it herself.

The Meagre Blessings of Advancing Age

When taking my first hesitant steps towards running a budget, those many years ago, I didn't know if a ready-made system existed which would answer all my financial planning needs. In fact, that was a step too far. First, I had to decide what those needs were.

I eventually established that my ideal budget was one which could be updated weekly. It would show me how much money I had in reserve to cover specific costs. I would also tell me how much I ought to have and predict, as accurately as possible, all my future costs in detail. With this in mind I decided, rightly or not, to develop one myself rather than investigate those already available. Only that way, I reasoned, could I be sure of getting what I wanted.

On of the very few advantages of growing older is that you pick up ideas here and there, and retain them in the belief that, like old screws and bolts in a jar, they may come in useful one day. In 1990, I was in my late 30s and already had a stock of loose ideas on finance rattling around in my head.

Courses in business administration that I did once were the source of some of this. For example, the procedure of setting money aside from income each week to cover a variety of costs on the basis that, when set aside, it could be considered "spent" and therefore no longer available to be misspent.

A weekly budgeting system based on this routine did already exist-but it didn't seem to answer the problem of tracking how much there should be in those setasides, in the event there wasn't enough income one week to make the full allocation. In other words, no targeting. What's more, that budget wasn't computerised, so had to be written up afresh every week.

I had also, many years ago, done a little work preparing company accounts, and was familiar with spreadsheets. At that time, spreadsheets were large sheets of paper on which rows and columns of figures were laboriously entered in pencil. From that work, I learned how to show changes in a company's bank balances from one month to the next. To cut a long story short, this procedure became the basis of my budget's update mechanism.

From Paper to Screen

Crucially, however, I once took on the job of creating a sales tracking system for a famous furniture company, and they lent me one of their PCs to do it on, using the Lotus 1-2-3 spreadsheet software. That job taught me how to write macros, which are short programs designed to automate routine tasks at the press of a key. Later, these played a major role in the automation of my budget when I transferred it to my own PC.

So, that is how a disjointed series of experiences collectively provided the tools which I used to develop and computerise my own budget. Instead of Lotus 1-2-3, I decided to save money by using a shareware clone called As-Easy-As. The eventual result was the first version of my financial planning spreadsheet. With occasional modifications and refinements, I've used this system continually ever since, updating it every week for the past 19 years.

I'm well aware that there are other money management software products on the market but, because my system was developed without reference to anyone else's and worked as intended, I never saw any point in testing out its "competitors" and comparing them with it. And because it still provides for all my budgeting needs, I still don't!

A Happy Ending?

Having a budget customised to my own requirements and shown to work-by my criteria at least-over 19 years of continual use, may sound like a satisfactory outcome, but it's not quite the happy ending this tale should have.

The current version of the budget spreadsheet is sophisticated compared to my first effort, and brilliant compared to anything that could be done on paper, but lacks the "muscle" to make its own way in the world. It still needs me, or someone with similar skills and experience, to be its "working partner". For instance, all the setup calculations have to be done manually. Any direct debits have to be entered manually, even though they are fixed amounts on fixed dates and could be automated.

These limitations are due partly to the software, but mainly to my shortcomings as a programmer. I only taught myself enough to make the budget as good as I needed it to be, without regard to others' needs. Since my own maths, reliability for entering data on time, etc. are good enough, I didn't need the PC to do those tasks for me. Most other people wishing to use the system would need specific training, virtually an apprenticeship, in order to succeed.

As for the software, the version of As-Easy-As that I use is over 19 years old. I haven't upgraded it because later versions are put together differently and would not run my macros. It runs under the old PC operating system, MS-DOS (Microsoft Disc Operating System) and, although I have got it to run under versions of Windows as recent as 2000, I cannot guarantee it would work under XP or Vista. So the spreadsheet looks its age and requires systems to run it that anyone under 25 years of age would probably dismiss as obsolete.

But I have my budget that works for me, so why should I care? The truth is, I want to get this system "out there", where anyone with money problems could see it, try it and, most importantly, use it to straighten out their finances.

My ideal now would be a new version of the budget software with all the strengths of the old but none of its drawbacks. It would be written either on the back of an existing, modern PC spreadsheet or from scratch, look good, and run on any version of Windows from 95 upwards.

Using a Wizard, it would lead the user through the setup, then later the budgeting routine and reconciliation, entering direct credits and debits automatically and doing all the mathematical donkey-work along the way.

So, what is all this leading up to? Well, I'm looking for a good programmer to work in partnership with me, with the aim of turning my existing, crude system into a polished commercial product, in exchange for a fifty-fifty split of the profit from future sales. Is there anyone out there interested in writing a happy ending to this story?

 

 

Copyright (c) Charles Moran 2009






If you've found this article interesting, then take a look at the update, uploaded Summer 2011:

Update to Budgeting for Everyone. What to do about the present-day economic squeeze on all of us?




Also, please check out my other written work:


Education, Motivation & ADHD. This piece concerns the problem of getting education to impinge on students who have disassociated themselves from it.

Clutter! This article suggests a practical solution to the problem of a disorganised household.

Peace, Politicians, PR & Promises. The relationship of promises to confidence, and of politicians to war.




This page revised on: 28th July 2011
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