Retirement Savings: How Much Do You Need

Retirement Savings

Retiring is one of the riskiest financial decisions you will make. On the day you retire, you can calculate your net worth. You won’t know, however, how much retirement savings you need because you don’t know:

  • how much you will actually spend on day-to-day expenses
  • how much those expenses will be impacted by inflation
  • whether you’ll have significant medical or other expenses
  • how long you will live or
  • what returns you will earn on your investments.

I retired a little over a year ago and realized that, even though I have a lot of money saved, it wasn’t enough to give me confidence we wouldn’t run out.  I took on a large consulting project to help cover our expenses for the next year or two. Researching this post, though, added even more confidence as we have more than enough to meet some of the simple rules of thumb.   We will see what happens.

In this post, I’ll provide some insights about how to think about a target you might want to set for your retirement savings.  As a follow up, I’ll talk about how much you need to save to meet your retirement savings goal in this post.

4% Rule and Multiply by 25 Rule

As I checked to see what others were saying on this topic, I found a very common theme for determining how much you need to save for retirement.  In some places, it was called the 4% Rule and, in others, the Multiply by 25 Rule.  Being the math geek that I am, my first thought was that 4% = 1/25 so they are the same thing!  It turns out that, in the nitty gritty details, the Multiply by 25 Rule is intended to tell you how much you need to have available on the day you retire while the 4% Rule guides you in how much you can spend in your first year of retirement.  Nonetheless, as explained below, they both result in the same amount needed in savings on your retirement date.

4% Rule for Retirement Spending

The 4% rule is intended to tell you how much you can spend from your retirement savings each year.  Let’s say you have $1,000,000 in invested assets when you retire.  It says you can spend 4% of that amount or $40,000 (including all of your expenses and taxes) in your first year of retirement.  In each subsequent year of your retirement, you can spend $40,000 increased for the cumulative impact of inflation since you retired.   The 4% Rule assumes that you are invested 50% in stocks and 50% in bonds.

4% Rule Illustration

The graph below shows the amount you can spend each year (blue bars which use the left axis scale) and the amount you’ll have remaining at each age (red line which uses the right axis scale) if you retire at 65, inflation is 3% per year, bonds earn 2.5% and stocks earn 7% annually. These assumptions are similar to long-term average assumptions that are common these days.

As you can see, in this scenario, the amount you can spend increases from $40,000 when you are 65 to almost $100,000 a year when you are 95 solely due to inflation. In the first few years, your spending is less than your investment returns, so your savings increases.  After you turn 72, your savings exceeds your investment returns so your savings starts to decrease.

4% Rule Background

The 4% rule was developed by William Bengen and is presented in detail in a 1994 study published in the Journal of Financial Planning.  (If you like numbers and graphs, check out this paper. It is a surprisingly easy read.)

Using historical data from 1926 to 1991, Bengen found that there were no 50-year periods in which a retiree would run out of money if his or her initial withdrawal rate was 3.5% or lower.  With a 4% initial withdrawal rate, the shortest time period in which the savings ran out was 33 years.  In only 10% of the scenarios did the money last for less than 40 years.

If you turn this rule around and know how much you want to spend in your first year of retirement, say $60,000, you can calculate the amount you need to have saved by dividing that amount by 4% (=0.04).  In this example, you need $1,500,000 (=$60,000/0.04) in savings on the day you retire using this rule.

Multiply by 25 Rule for Retirement Savings

The Multiply by 25 Rule says that the amount you need in retirement savings is 25 times the amount you want to spend in the first year of retirement.  Using the example above in which you want to spend $60,000 in your first year of retirement, you would calculate that you need $1,500,000 (=25 x $60,000) in savings.  As I said, the math is the same for determining how much you need to save because multiplying by 25 is the same as dividing by 0.04.  It is just that the rules are stated from different perspectives (how much you can spend given the amount saved as opposed to how much you need to save giving how much you want to spend).

When do you need more or less?

As indicated, those rules make assumptions that might not be right for you. There are a number of personal factors that impact how much you need in retirement savings.

Your Risk Tolerance

The 4% Rule assumes that you invest half in bonds and half in stocks. Some people are willing to take more risk by investing more heavily in stocks. Other people can’t tolerate the ups and downs of the stock market, so invest more heavily in bonds. As shown in this chart below, taken from my post on diversification and investing, the higher percentage of stocks in your portfolio, the higher your average return (the blue lines) but the more likely you are to lose some of your principal (the portion of the whiskers that fall below 0).


If you plan to put more than 50% of your retirement assets in stocks, you can withdraw a bit more than 4% each year. Turning that around, it means you need a bit less than 25 times your estimated expenses in your first year of retirement. The table below was copied with permission from a March 19, 2019 article from Schwab found at this link.  It shows how your time horizon (see below) and investment risk impact the 4% Rule.

Life Expectancy and Retirement Age

The analysis underlying the 4% Rule focuses on a retirement period of 30 years.  If you retire in your mid-60s, it would imply that you would most likely have enough money to last through your mid-90s.  If you are in poor health or have a family history of dying early, you could consider spending a bit more than 4% (that is, multiply by less than 25 to determine how much you need to save).

On the other hand, if you plan to retire at 45 and want to have enough money to last until you are 95, you’ll need to save more.  The Schwab table above shows planning horizons up to 30 years.  Based on the numbers in the table, it looks like you could subtract about 0.1 percentage points from the numbers in the 30-year row for each year your planning horizon extends beyond 30 years to estimate how much you need to save.

For example, if you want to be highly confident (90% sure in this case) you will have enough money to last for 50 years, you would be looking at 20 years beyond the 30-year horizon.  Multiplying 20 years by 0.1 percentage point is 2.0%.  According to the table, you can spend 4.2% of your savings in the first year with a Moderately Conservative portfolio and 90% (highly) confident that you won’t run out of money in 30 years.  My approximation would subtract 2.0% from 4.2% to estimate that you could spend about 2.2% of your savings in the first year if you wanted to be 90% confident you won’t run out of money in 50 years.  You could then divide your estimated first year expenses by 2.2% or multiply by 45 to estimate how much you need to save.

Other Sources of Income

Some people’s employers provide defined benefit retirement plans.  These plans generally pay a flat amount every month starting at normal retirement age (as defined by the employer) until death.  In the US, people who have worked or whose spouses have worked are eligible for Social Security benefits, as discussed in this post.  Many other countries have similar programs.

When you are estimating how much you need to save for retirement, you can consider these sources of income.  If all of your other sources of income increase with inflation, it is a fairly straightforward adjustment.  You just need to subtract the income from these other sources from your first-year-of-retirement expenses before applying the 4% Rule (as adjusted for other considerations).

For example, if you plan to spend $100,000 a year in retirement and have $40,000 of Social Security and defined benefit plan benefits,  you would subtract $40,000 from $100,000 to get $60,000.  Using the Multiply by 25 Rule, you would multiply $60,000 by 25 to get $$1.5 million instead of multiplying the full $100,000 by 25 which would indicate you need $2.5 million in savings.  In this example, you need $1 million less in savings because you have other sources of income.

Unfortunately, most defined benefit plan benefits do not increase with inflation.  The math for adjusting the Multiply by 25 Rule is fairly complicated.  I’ve developed a simple approximation that you can use that will get you close to the correct percentage.  To approximate the adjustment to the amount you Multiply by 25, divide your defined benefit plan income by 2 before subtracting it from your first-year expenses.

You Want to Leave Your Assets to your Beneficiaries

I remember being a teenager and having my father explain to me how much I needed to save for retirement.  The approach he proposed was that you could spend 2% of your assets which is equivalent to a Multiply by 50 Rule.  (No wonder I was nervous about my finances when I retired!)  His logic was as follows:

  • Invest in the stock market and get a 10% return.  (He did this analysis a long time ago, when stock market average returns, inflation and taxes were all considered to be a bit higher than they are today, but not by so much as to make the logic faulty.)
  • You will pay taxes of 40% of your returns, which makes your after-tax return 6%.
  • Inflation will be 4% per year.  Because he wanted his investment income in every year to cover his expenses without dipping into the principal, he had to re-invest 4 percentage points of his investment return so he would have 4% more investment income in each subsequent year.
  • Subtracting the 4% reinvestment from the 6% after-tax return leaves an amount equal to 2% of his investments that he could spend each year (excluding taxes because he separately considered them).

So, if you are like my father, you will want to save closer to 50 times your first-year retirement expenses, rather than 25 times.  It is important to remember that my father’s Multiply by 50 rule applies to your expenses excluding income taxes and the Multiply by 25 Rule applies to your expenses including income taxes, so they aren’t quite directly comparable.

Liquidity of your Assets

As indicated above, the 4% Rule assumes your assets are invested 50% in stocks and 50% in bonds. You may have other assets that contribute to your net worth, such as equity in your home, your personal property, a family farm and rental property, among others. These other assets are all consider illiquid – that is, you can’t convert them to cash easily. Further, some of them are assets that you never want to have to convert to cash to cover expenses, such as your home and personal property.

As you project how much you will have in retirement savings, you’ll want to exclude any equity in your house as it isn’t available to invest.  A portion of it may be available at some point if you plan to downsize, but you’ll want to be cautious about including it in your savings plan.  Other of these assets, such as rental property, could be liquidated to cover retirement expenses.  In your planning, though, you’ll need to make sure you consider the selling costs (e.g., real estate agent’s commission) and taxes you need to pay on capital gains and that they may not generate a return as high as underlies the 4% Rule.

Irregular Large Expenses

The analysis that supports the 4% Rule assumes that you have the same expenses every year and that they change due only to inflation. That’s not how life works! You may want to be like me and want to take an expensive vacation every three or four years in retirement, you’ll likely have to replace your car at least once in retirement or you could have major home repairs if you own your home.  In addition, end-of-life medical bills can be very expensive.

As you are determining your first-year retirement expenses, you’ll want to include amounts for any such expenses in your budget at their average annual cost.  For example, let’s say I want to take a vacation (in addition to my already budgeted travel expenses) every five years that has a total cost of $10,000.  I need to add $2,000 (= $10,000 per vacation divided by one vacation every 5 years) to my regular annual expenses for these big vacations.  Similarly, if I plan to buy a $25,000 car every 15 years, I need to add $1,667 (= $25,000/15) to my annual expenses.  In both cases, you would add these amounts to your budgeted expenses before you divided by 4%.

How to Set Your Personal Target

So, what can you do to estimate your personal retirement savings target? Follow the following steps.

Make a Budget for Today if You Don’t Already Have One

It is hard to estimate your expenses in retirement, but it is very helpful to understand what you are spending today.  If you don’t have a budget or haven’t tracked your expenses to see where your money is going, I suggest starting there.  Here is a link to a post I wrote with a spreadsheet to help you monitor your expenses.

Estimate Your Expenses in Your First Year of Retirement

Next, look at your current budget and/or spending and estimate how it would change if you were retired today.  On what types of things might you want to spend money in the future that you don’t spend now?  Might you want to buy special gifts for your grandchildren that are more extravagant than what you spend for your children’s gifts now?  Also think about expenses you have now that you won’t have in the future, such as commute expenses and possibly a separate wardrobe for work.

Be sure to think about Social Security (or equivalent) and income taxes. In addition to Federal income taxes, you may pay state or provincial and possibly local income taxes.  If you plan to live somewhere else in retirement, it might have a higher or lower tax rate.  In the US, Social Security taxes are 6.2% (12.4% I you are self-employed) of your wages up to the limit ($128,400 in 2019).  As you adjust your budget, you can eliminate Social Security taxes and will want to think about whether your state or provincial and local tax rate will be substantially different from their current rates.

Some people say that your expenses will decrease by 20% when you retire.  In my very short retirement, I find I’m spending more than I expected as I have more time to do things and many of them cost money.  This post from Financial Samurai provide some insights as to how retirement might impact your expenses.

Increase Your Retirement Expenses for Special Purchases

Do you want to travel? How often do you think you’ll need to buy replacement cars and how much do you think you’d spend if you bought one today? What other expenses might you have that aren’t in your budget? For each of these expenses, divide the amount by the time between them to estimate an average annual cost, as I illustrated earlier in this post.

Adjust Your Budget for Inflation

All of the amounts you’ve estimated so far are in today’s dollars.  That is, they reflect the current prices of every item.  You’ll want to increase these amounts for inflation between now and the time you retire.  Over long periods of time, annual inflation has averaged 3% to 3.5% though it has been a bit lower recently.  To adjust your budget for inflation, you’ll want to multiply it by 1.03n, where n is the number of years until you retire.  Don’t like exponents?  The table below provides approximate multipliers by number of years until you plan to retire.

Years 5 10 15 20 25 30 35 40 45
Factor 1.15 1.35 1.55 1.80 2.10 2.45 2.80 3.25 3.80

Subtract Other Sources of Income

If you think you’ll have a defined pension plan benefit or will receive social insurance (Social Security) benefit, you can subtract those amounts from your inflation-adjusted budget.  My post on Social Security provides insights on how to estimate your benefits for my US readers.

Figure Out your Risk Tolerance and Length of Retirement

If you want to be almost 100% confident you will have enough money to last for your full retirement, regardless of how long it is, and leave most or all of your principal to your heirs, multiply the difference between your inflated budget (excluding income taxes) and other sources of income by 50 to derive your retirement savings target.

If you plan to be retired for only 10 years, you can multiply by a number as low as 10, according to the chart from Schwab. Where between those two numbers you choose is up to you. The longer you expect to be retired, the more conservative your investments and the more confident you want to be that you won’t run out of money, the higher your multiplier.

 

 

How to Budget Step 9 – Monitoring your Budget

You may have thought you were done when you created and balanced your budget.  However, there is one very important step left in the budgeting process – making sure you are living within the guidelines set by your budget, i.e., monitoring your budget.  That is, are you earning as much income as you planned? Are you limiting your expenses to the amounts in your budget?  Did you put aside the savings you included in your budget, whether for expenses you pay infrequently, for retirement or something in between?

In this post, I’ll tell you how to use a new, budget-monitoring worksheet to compare your budget with your actual income and expenses.

Entering Your Budget

Since the purpose of the spreadsheet is to compare your actual expenses with your budget, the first thing to do is to enter your budget.  Most people find it easiest to monitor their budget on a monthly basis, even if they created an annual budget.  If you created an annual budget, you’ll want to divide all of the values in your budget by 12.

Once you have your monthly budget, you’ll enter it on the Budget Monitoring tab of the budget-monitoring spreadsheet at the link below.  Note that this spreadsheet is different from the one you used to track your expenses and create your budget, though many aspects of it will work the same as the budget creation spreadsheet (named Budget Template).

Enter Your Category Names

To enter your budget, enter the names of the categories from your budget in Column A starting in Row 8. Here are three different ways you can input your category names:

  1. Type the names directly into Column A.
  2. Use Excel’s copy and paste features to copy them from your Budget Template spreadsheet.
    1. On the Budget tab in your Budget Template spreadsheet, highlight all of your category names by putting your cursor on cell A11, holding down the shift key and moving the down arrow until all of them are highlighted. Let go of the shift key.
    2. Hold down the Ctrl key while you hit C or hit the copy button if you have one.
    3. Go to the Budget Comparison tab of the monitoring spreadsheet.
    4. Put your cursor in A8.
    5. Hold down the Alt key while you hit E, S and V or hit the paste-values button if you have one. If you just use a regular paste button, you will get errors because the cells from which you are copying have formulas in them.
  3. Link your monitoring spreadsheet to your Budget Template spreadsheet.
    1. Put your cursor in A8 of the Budget Comparison tab of your Budget Monitoring spreadsheet.
    2. Hit the equal sign on your keyboard.
    3. Go to the Budget Template spreadsheet.
    4. Go to the Budget tab.
    5. Put your cursor in A11.
    6. Hit Enter.
    7. Excel should return you to cell A8 of your Budget Monitoring spreadsheet.
    8. Hit the F2 (edit) key.
    9. Hit the F4 key 3 times. Hit Enter. There should now be no $ in the cell reference.
    10. Copy the formula in A8 and paste it in as many cells in Column A as needed until all of your category names appear.

When you enter the category names, make sure that the row with the total amount of income is called “Total Income,” the row with the expense total is called “Total Expenses,” and the difference between those two values is called “Grand Total.”

Enter Your Budget Amounts

Next, enter the monthly budget amounts in Column B next to each of the category names in Column A. You can use any of the three approaches described above for the category names. If you have an annual budget, you’ll need to divided the values by 12 before copying them if you use the second approach or add “/12” (without the quotes) in step (i) before you hit enter if you use the third approach.

Entering Your Actual Income and Expenses

You can enter your actual income and expenses using the same instructions as were used for entering them in the Budget Template spreadsheet.  See my posts on tracking expenses and paychecks and income for more details or review the instructions at the top of each tab.  Be sure to use the same category names as you used in your budget so all of your income and expenses will be included in the Actual column on the Budget Comparison tab.

For monitoring your actual income and expenses, you don’t need to enter the number of times per year you receive each type of income or pay each bill since your goal is compare what you actually received and paid with your budget.

Options for Expenses You Don’t Pay Monthly

Here are three different ways to monitor expenses that you don’t pay monthly:

  1. Enter them in the Monitoring Spreadsheet as you pay them and keep them in mind as known variances from your budget each month. This approach is the easiest to implement but also the least helpful for comparing your actual expenses to your budget.
  2. Adjust the budget amounts to reflect the amount of those expenses you expect to pay in each month. For example, if you pay your car insurance bill four times a year in March, June, September and December, you would
    • take your budget amount
    • adjust it to a full year if you budgeted on a monthly basis by multiplying by 12
    • divide the annual amount by 4
    • include the result in your budget for March, June, September and December
    • put 0 in your budget column in all other months

This approach is a little more complicated to implement, but will make comparing actual expenses with your budget much easier.

  1. Add an expense transaction every month equal to 1/12thof your annual expense on the Bank Transactions, Cash Transactions or Credit Card Transactions tab. In the months in which you actually make the payment, you’ll enter 1/12th of your actual annual expense.  If the total of the amounts you set aside in previous months differs from the amount you actually pay, you’ll need to include this difference in the actual payment amount in the month you make the payment. This approach is equivalent to moving money from your checking account to your savings account in every month you don’t have this expense and moving it back to your checking account in the month in which you pay the expense.

You can also use any one of the above approaches for income you don’t receive monthly.  If you use the third approach, you’ll put 1/12th of your actual annual income on the Income tab.

Monitoring Your Budget – What Happens When Your Actual Isn’t as Good as Your Budget

There are many reasons why your actual income and expenses might look worse than your budget.  You may have been planning to work overtime or get a second job to increase your income.  Those lifestyle changes can be challenging, so you might not have done them.

More likely, you spent more than you budgeted, either due to an emergency, an impulse purchase or difficulty in breaking long-standing habits.  Emergencies happen to everyone.  If possible, you’ll want to include building or re-building your emergency savings (see this post for more on that topic) in your budget. While overspending your budget can be problematic, especially if you do it continuously, don’t be too hard on yourself. Changing your spending habits is really hard.

A Few More Words about Budget

Congratulations!  You made it through the entire budgeting process. As I said in my first post on budgeting, staying on a budget is like being on a diet.  Just as every calorie counts, so does every dollar spent.  Sticking to your budget will increase the likelihood you will meet your financial goals, so do your best!

Download Budgeting Monitoring Spreadsheet Here

How to Budget Step 8 – Refining your Budget

Very few people have a balanced budget on the first try.  This week, I’ll talk about how to refine your preliminary budget if it isn’t in balance.  I have been very fortunate in that it has been a long time since I found it challenging to meet my financial goals.  Also, I don’t know the specifics of any of your budgets, life-styles or financial goals. So, in this post, I will identify the changes you can make to refine your budget at a high level and provide links to articles by other financial literacy bloggers that provide a whole host of ideas on the specifics.  I hope that one or more of those articles will provide you with the ideas you need to successfully balance your budget.

The Bottom Line

The number on which you’ll want to focus is the Grand Total on the Budget tab.  If it is close to zero (i.e., within a percent or two of your total income) and you have incorporated all of your financial goals, you are done.  Otherwise, you’ll want to look at the section below that reflects your situation, i.e., whether the Grand Total is positive or negative, to learn how to refine your budget.

Your Budget Shows a Large Positive Balance

Congratulations!  If the value in the Grand Total line of the Budget tab shows a large positive number, you have more income than you are spending and saving.  You are among the fortunate few.

Before spending your excess income, you might want to review your financial goals.   Questions you could ask yourself include:

  • Do I have emergency savings of three to six months of expenses?
  • Are there other large purchases I’d like to make in the future?
  • Do I have enough savings to take maternity/paternity leave?
  • If you have children, am I saving for their education?
  • Have I studied the full costs of retirement and am I saving enough?
  • Have I contributed the maximum amounts to all of my tax-advantaged retirement savings accounts (IRAs and 401(k)s in the US, RRSPs and TFSAs in Canada)?
  • Do I want to retire sooner (which would require more savings now)?

If you still have a positive balance after your review, you can consider increasing your discretionary expenses (possibly a newer car or a nice vacation or the addition of a regular treat).  Of course, there is never any harm in increasing your savings.

Your Budget Shows a Large Negative Balance

A large negative balance is much more common than a large positive balance.  I wish I could give you a magic answer to resolve this situation, but there are really only three options.

  • Increase your income.
  • Decrease your expenses.
  • Borrow money either from a third party or by drawing down your savings.

Unless absolutely necessary, I suggest avoiding the third option.  If your expenses exceed your income and you make up the difference by borrowing either from your savings or a third party, you are likely to have a worse problem next year.  Unless either your income or expenses change, it can lead to a downward spiral.

Increase Your Income

Increasing your income can be a more effective way to balance your budget.  However, it has its own challenges and often requires a significant investment of your time and/or money.   Examples of ways to increase your income include:

  • Get a part time job, but make sure it won’t jeopardize your primary job.
  • Work overtime if you are eligible.
  • Make sure you are earning a competitive wage by looking at relevant salary surveys. If you aren’t, ask your boss for a raise, such as described in this post, or look for another job in your field that pays more or offers more benefits.
  • Consider getting more education that will provide you with the opportunity to make more money in the future. Some employers will pay for some or all of your tuition if the additional education is related to your job.  This choice is likely to cause more pain in the short term, but can produce large benefits.  As an example, check out this post.
  • Sell things that you don’t need. Here is a  post on this topic.
  • Start your own business. This option is one that I suggest you pursue only very cautiously if you already have a tight budget.  Starting a business can be very expensive, which of course will put further pressure on your budget.  Also, a large percentage of new businesses fail which means the owners lose money. According to Investopedia, 30% of business fail within two years of opening and 50% fail within five years.  Of those that survive, one source indicates that many business don’t make money until the third year.  If you want to start a side business, turning a hobby into a business is one of the most fun ways to do so.  Here is an article with some suggestions on how to do so.
  • There are hundreds of articles about “side hustles.” I’ve provided a few examples. There are lots of pitfalls with side hustles, including many that might end up costing you money rather than making it. So, as with starting your own business, I suggest exercising caution if you decide to proceed with one or more of them.

Decrease Your Expenses

To be blunt, it is hard to decrease your expenses.  Here are some tips on things to consider:

  • Separate your discretionary expenses from your required expenses. Required expenses include the cost of basic housing, a basic car, gas, groceries, medical care, insurance and the like.  Discretionary expenses are things you could live without, even if you don’t want to.  Here are several posts I’ve seen that provide ideas on how to cut back on discretionary expenses.
  • Review the amount you pay for your necessities to see if you can reduce any of these costs. Here are several posts that provide some ideas.
    • 40 Smart Ways to Reduce Your Monthly Bills
    • 5 Ways To Save $532.30 On A Tight Budget
    • This post focuses specifically on your cell phone bill.
    • This post discusses your energy costs.
    • I really like this post as it covers one of my biggest areas of savings – cooking at home instead of in restaurants. Here is another variation on the same theme.
    • Figure out how much you are spending to pay off your debts, particularly if you have a lot of credit card debt. Research ways to re-finance your debt to reduce interest rate or, if necessary, lengthen time to payment.  For example, if you have something you can use as collateral, a collateralized loan will have a much lower interest rate than your credit cards. See my post on loans to understand the factors that affect the interest rate on a loan and the sensitivity of your monthly payments to changes in interest rates and term.  This post has a lot of great information on re-paying student loans. I also like this post which talks about refinancing student loans – are you ready for it and some options.
    • There are dozens (hunderds?) of blogs on FIRE (Financial Independence, Retire Early). These bloggers tend to post their personal stories about how they are living very frugally so they can retire very early.  Although many of their approaches seem almost draconian, reading one of more of their posts might give you some ideas how you can cut back on your expenses.

There are a few other expenses you can adjust to balance your budget, but I suggest you do them only after you have fine-tuned your budget and looked into re-financing your debt.

  • Reduce the amount you set aside for savings. Clearly, covering the basics, such as food and shelter, take priority over meeting your longer-term financial goals.   Once you have covered those expenses, you’ll need to balance your short-term wants with your long-term goals.  For example, you’ll need to decide whether you want to spend more today on entertainment or put more into your savings so you can have the retirement you desire. The idea of foregoing things today to the benefit of something you will get in the future is called delay of gratification.  It is a difficult concept to implement in practice but is often a key to long-term financial success.
  • Avoid taking on too much more risk. For example, one way to save money on insurance (cars, homeowners/renters or health) is to increase your deductible, lower your limit of liability or, in the case of car insurance, not purchase physical damage coverage.  As I discussed in my post on making financial decisions, these choices reduce your upfront cost, but can have serious consequences in an adverse situation.  If your budget is tight, you may not be able to afford to pay your full share of costs in the case of a serious accident, damage to your home or serious illness.

Closing Thoughts

Working to refine your budget to bring it in balance can be a real challenge. If you can’t do it on the second or third try, be patient with yourself. Learning to be financially responsible is often a long, challenging process.

How to Budget Step 7 – Create your Budget

You made it!  This week your only task will be to create a first draft of your budget.  

Budgeting can be challenging as you try to balance your long-term goals with your short-term needs and wants.  As such, I suggest creating it in two steps. This week I’ll provide guidance on creating the first draft of your budget.  Next week’s post will talk about how to refine it.

Practical Steps

To create your budget, you will enter values in Column D of the Budget tab of your spreadsheet.  As long as you don’t enter values in Column D of any of the “Total” rows, the formulas will automatically calculate those values.

While the spreadsheet was built to be fairly flexible, one of its weaknesses is that it is not easy to add or delete income or expense categories once you have started entering your budget amounts.  So, before you get started, I suggest making a final review of the line items on the Budget tab. If you need to make changes, you can look back at last week’s post for the instructions.

If you find you need to add or delete a line after you have entered budget amounts, here’s what you’ll need to do:

  1. Make a note of the budgeted amounts of all of the line items you’ve entered.  
  2. Add or delete the line item name according the instructions in the last week’s post.
  3. Copy the formula from cell D110 to all of the cells into which you previously typed values.  You can copy a formula by:
    1. Going to cell D110.
    2. Holding down the Ctrl key and hitting C.
    3. Moving your cursor to cell D11.
    4. Holding down the shift key and then hitting the down arrow until all of the cells into which you entered values are highlighted.
    5. Holding down the Ctrl key and hitting V.
  4. Re-enter the budget amounts that you noted.

If you don’t take this approach, some or all of your category names in Column A will change rows, but your budgeted amounts in Column D will stay in the same rows.  You’ll end up with a mismatch between category names and budget amounts.

Budget Amounts

For each line item in your budget, you’ll need to select a budget amount.  These selections will require your informed judgment. Things to consider in making your selection include:

  • How much you’ve recorded in each category over the past several weeks, as shown in Column B.
  • Any changes in your income or expenses you anticipate in the next several months.  
    • Some of these changes might result from life changes – a new job, moving, getting a roommate, getting married, having children or the like.
    • Other changes might result from intentional changes in your habits – fewer meals in restaurants, hiring a cleaning service, newly carpooling, among others.
    • You’ll also have changes from prior expenses if you change your spending or income to better align with your financial goals.
  • If you’ve used the tax approximation, the amounts in Column C for Federal and State/Provincial income taxes.
  • The goals you set as described in my post on setting financial goals.  You might want to increase one or more of your emergency savings, savings for a designated purchase (vacation, house, new car) or long-term or retirement savings.

Final Steps for This Week

Once you have completed your first draft, take a look at the value in Column D of the Grand Total row.  If that value is positive, it means you have more income than expenses and additions to savings. If it is negative, your expenses and savings goals are higher than your income.  In this href=”https://financialiqbysusieq.com/how-to-budget-step-8/”>post, I’ll talk about things you can do so the value is close to zero.

 

Review the Expenses for your Budget

You’re almost there!  Only one more week until I describe how to create your budget.  Before you can do that, you’ll want to make sure that the income and expenses you’ve entered don’t have too many mistakes.  In this post, I’ll talk hot to review the expenses and income you’ve entered in the spreadsheet to make sure you have an accurate starting point for your budget.

Before getting to that topic, here are your budgeting tasks for this week:

  1. Continue using and refining your expense tracking system.
  2. Continue to enter your income and expenses into the spreadsheet.
  3. Make sure to update the number of months you have been entering information on the Basic Inputs tab.
  4. Review the first two columns of the Budget tab, as described in the rest of this post.

Make Sure Categories are Right

Over the past several weeks, you’ve been entering the category name with each income and expense line item.  Mistakes I’ve made include using more than one variation on some of my category names, such as household expense and household supplies.  I also sometimes misspell one or more of category names.

If you’ve made similar mistakes, you’ll want to correct these mistakes so you have exactly one line in your budget for each type of income and expense.  Here are the steps to find and correct these mistakes:

  1. Go to the Budget tab.
  2. Review the category names to see if there is more than one row in Column A that corresponds to the same category.
  3. If there is, figure out which category name you want to use.
  4. Make note of all of the incorrect names.
  5. Go to each of the Bank Transactions, Cash Transactions, Credit Card Transactions, Less-Than-Monthly Expenses, and Income tabs.
  6. Hold down the Alt Key and hit E.
  7. Hold down the Alt Key and hit F.
  8. Enter one of the incorrect names in the box next to “Find What.”
  9. Hit the Find Next button.
  10. Any time Excel finds the incorrect category name, replace it with the correct name.
  11. Repeat steps 9 and 10 on each of the tabs listed in Step 5 until the incorrect label no longer appears on the Budget tab.
  12. Then repeat steps 6 through 11 for any other incorrect names.

You’ll know you are done when each category name appears exactly once on the Budget tab.

Make Sure Amounts Look Reasonable

Once all of the category names appear only once and have the names you want, you’ll want to make sure that the values in Column B look reasonable.  These values are the totals of the values you entered on the various tabs, adjusted to either an annual or monthly basis depending on the choice you made in Cell B5 on the Basic Inputs tab.  Two reasons these amounts could look wrong are (1) you entered the wrong amount for a transaction or (2) you entered an incorrect value in the “How Many Times a Year” column.

If a number looks too high or too low, you can use the following steps to help find the problematic input:

  1. Identify the category name in Column A of any value in Column B that looks too high or too low.
  2. Go to each of the Bank Transactions, Cash Transactions, Credit Card Transactions, Less-Than-Monthly Expenses, and Income tabs.
  3. Hold down the Alt Key and hit E.
  4. Hold down the Alt Key and hit F.
  5. Enter a category name that has an unexpected value in the box next to “Find What.”
  6. Hit the Find Next button.
  7. Look in the Amount column of any row in which Excel finds your category name.
  8. Does the amount look right? Common entry errors are to transpose digits (i.e., enter them in the wrong order) and put the decimal point in the wrong place.
  9. Fix any errors in the amount.
  10. Look in the “How Many Times a Year” column.
  11. This column can be blank for any row that contains an expense you pay every month.
  12. For payments made less than once a month, the entries in this column should be the numbers of times per year you make payments of the amount shown. For example, if you pay your auto insurance bill twice a year, the semi-annual amount should be in the Amount column and 2 should be in the “How Many Times a Year” column.
  13. Repeat steps 7 through 12 on each of the tabs listed in Step 2 until the amount on the Budget tab for this category looks reasonable.

Next Steps

Next week, I will talk about how you can create your budget using the income and expense information you have tabulated so far and corrected.

Download Budgeting Spreadsheet Here

How to Budget Step 5 – Paychecks and Income

Your budget includes your income in addition to money you spend.  In my previous posts on the budgeting process, I talked about setting your goals and tracking and recording your expenses.  This week, I’ll focus on your paycheck and other sources of income.

Before getting to that topic, here are your budgeting tasks for this week:

  1. Continue using and refining your expense tracking system.
  2. Continue to enter your expenses into the spreadsheet.
  3. Record the details from your pay stubs and any other sources of income.

Pay Checks

Your pay stubs include both your wages and some expenses and taxes that are deducted by your employer.  This information can be entered on the Income tab.  You’ll need your pay stub as it lists all of the items that flow into and out of your paycheck to get the net amount of your check or automatic deposit. Put information from each line on your pay stub in a different row on the Income tab of the spreadsheet.

The date of each paycheck goes in Column A.

Record the amount of each line item in Column B.  Your income, such as your wages, should be entered with positive numbers. Deductions, such as taxes, your share of employee benefit charges and retirement savings, should be entered using negative numbers.  Use one row in the spreadsheet for your wages and another for each of your deductions.

You can record the category for each line in Column C.  If you want to use the tax approximation included in the spreadsheet, you’ll need use the labels “Wages”, “Retirement Savings” “Federal Income Taxes” and “State Income Taxes” for each of those categories.  Otherwise, you can use whatever labels you want.

If you get paid less often than once a month, enter the number of paychecks you get each year in Column D of each row.  Otherwise, leave this column blank.

Other Sources of Income

If you have other sources of income you receive on a regular basis, such as returns on investments, disability income or support from your parents, you’ll want to include those in your budget.  Unless you are on a leave from work or retired, you might leave any investment returns in your savings and not use them for spending. It is important to be aware of all sources of income in your budget including increases in your savings, so I suggest including them in your budget explicitly.

Interest, dividends and appreciation are the three most common types of returns from investments. If you have any such returns, enter their amounts in Column A, their category in Column B and how often you receive the amount from Column A in Column C.  The three types of returns are taxed differently in the US.  If you live outside the US or don’t want to use the very rough tax approximation in the spreadsheet, you can enter a single line item for total investment returns and call it whatever you would like.  Otherwise, enter “Interest” in Column B for interest payments, “Dividends” for dividends received and “Appreciation” for changes in the market value of your investments.  Appreciation can be either positive (market value has gone up) or negative (market value has gone down).

For any other sources of income, enter the amount, category (with a name of your choosing) and how often you receive that amount in Columns A through C, respectively.  Sources of income other than investment returns and wages will be ignored in the income tax approximation.

Download Budgeting Spreadsheet Here

How to Budget – Expenses Not Paid Monthly

Your budget won’t be complete unless you include all your expenses, including those that you don’t pay every month.  In the past three weeks, I talked about creating systems for tracking and recording your expenses and setting your goals.  This week, I’ll focus on expenses you pay less often than monthly.

Before getting to that topic, here are your budgeting tasks for this week:

  1. Continue using and refining your expense tracking system.
  2. Continue to enter your expenses into the spreadsheet.
  3. Identify and record expenses that you pay less frequently than monthly into the spreadsheet using the instructions below.

Less-Than-Monthly Expenses

Many people have expenses they pay every year, but don’t necessarily pay every month.  Examples of these expenses include car and home/renters insurance, property taxes (if you own your home), car maintenance and registration, contributions to your retirement savings other than those that are withheld by your employer, and holiday and birthday presents.

Even though you don’t pay these expenses every month, you’ll need to include them in your budget so you have the money when you need it.  In practice, I suggest transferring the total budgeted amount for all of these expenses to a separate account, possibly a savings account at the same bank as your checking account, every month or every time you get paid.  You can then transfer the money back to your checking account to pay the expenses when they are due.  You’ll need to remember that the money in that account is designated for specific purposes and shouldn’t be used for emergencies and particularly not for discretionary purposes.

Identifying Your Less-Than-Monthly Expenses

The first step in recording these expenses is to identify them by:

  • Looking at the examples I’ve listed above.
  • Thinking about these types of expenses.
  • Looking through at least one year of bank and credit card statements.

Determining the Amount of Less-Than-Monthly Expenses

The next step is to estimate how much these expenses cost you each time you pay them and how many times a year they are paid.  It is likely that you have not paid one or more of these types of expenses during the time period you are tracking and recording your expenses.  For others, you may not have paid an amount corresponding to roughly one-twelfth of your annual costs.   For example, if you pay your property tax bill twice a year and have recorded two months of expenses, you’ve probably paid either no property taxes or a half year’s worth.  Neither of these amounts corresponds to the average amount you would pay in the two-month time period you’ve been recording your expenses in my example.

You’ll know the annual amount of some expenses fairly closely.  Examples of these are insurance and property taxes. For these expenses, this process will be fairly straightforward.  For other expenses, such as presents and car maintenance, you’ll have to use a lot of judgment to estimate how much you tend to spend.  Again, a review of your bank and credit card statements for the past year will be informative.

Adjust for Expenses Already Recorded

Once you have created your list of these expenses, review the transactions you have entered so far on the other tabs to eliminate any that you have already included.  If you have already recorded a small amount for this type of expense but it is not as much as you would expect on average, you can adjust the payments on the list you just made downward for the transactions you’ve already recorded.  This adjustment is a bit complicated.

  • Total the amount of expenses you have recorded in this category.
  • Divide the total by the number of months of transactions you have entered.
  • Multiply the amount by the ratio of 12 divided by the number of times per year you expect to pay this expense.
  • Calculate the total annual amount you expect to pay from the list you have made.
  • Subtract that result from the amount on your list of expenses to get the amount you will record.
  • Divide that difference by the number of times per year you make that payment.

Recording Less-Than-Monthly Expenses

You can now enter the information from your list, after adjustment for transactions you’ve already recorded, on the Less-Than-Monthly Expenses tab.

Rows 1 through 6 briefly summarize these instructions.

You’ll enter the information about your cash transactions starting in Row 11.  I’ve highlighted the cells for inputs in light green.  Enter the amount of each payment in Column A and the corresponding category in Column B.

If you make contributions to a retirement savings plan other than through a payroll deduction (i.e., Roth or Traditional IRA or individual RRSP or TFSA) and want to use the built-in tax approximation, enter “Retirement Savings” in Column B.

If you make estimated tax payments to the Federal or state/provincial government and plan to use the built-in tax approximation, enter “Federal Income Taxes” or “State Income Taxes”, as appropriate, in Column B.

In Column C, you’ll record how many times a year you make a payment of this amount.  For example, if you pay your car insurance twice a year, enter the semi-annual payment in Column A and 2 in Column C.

New Categories

As you start preparing your budget, you might find that there are new categories of income, expenses or savings that you want to include going forward.   You can add these categories on this tab with $0 in the amount column.  These categories will then appear as line items in your budget which I’ll discuss in a couple of weeks.

Download Budgeting Spreadsheet Here

 

How to Budget Step 3 – Setting Goals

Setting one to three realistic financial goals is critical to financial success.  In Steps 1 and 2 of this series, I talked about creating systems for tracking and recording your expenses.  This week, I’ll finally focus on the first step I take in budgeting (as described in my very first post), setting goals.

This Week’s Budgeting To Do List

Before getting to the discussion of setting goals, here are your budgeting tasks for this week:

  1. Continue using and refining your expense tracking system.
  2. Continue to enter your expenses into the spreadsheet.
  3. Set three-to-five-year goals.
  4. Convert the goals to short-term, specific action items.

Set Three-to-Five-Year Goals

My first step in the budgeting process is to identify my financial goals.  These goals are statements of what I want to accomplish with stated time frames.  Here are some examples of different goals you might have, depending on your age and your current financial situation:

  1. If you have a lot of student loans, credit card debt, car loans and/or other loans: I want to be debt-free, other than my mortgage, in five years.
  2. For people who can’t quite make ends meet: I want to create a budget and spend less than I make.
  3. If you don’t have any credit card debt and can cover their expenses, including any loan payments, I want to be able to::

a. Buy SOMETHING I WANT or take a vacation to SOMEPLACE I WANT TO GO within three years.

b. Buy a $250,000 house with a 10% down payment within two years.

c. Take maternity/paternity leave and support SOME NUMBER of children starting next year.

d. Start saving as much as possible for retirement.

e. Save enough so I can retire at AGE with SOME AMOUNT of money (before inflation) available every year.

Pick no more than three goals, preferably only one or two, to target over the next few years.  Make sure they are realistic.  For example, if your student loans and credit card debt are a substantial portion of your income, it might be unrealistic to set a goal of paying them off in one year (unless you want to take the FIRE concept to an extreme).  Or, if you are 50 and have no retirement savings, a goal of retiring at 55 is likely unrealistic unless you have another source of income.

Turning Goals into Actions

Now that you know where you want to go, you need to identify what you need to do this year that will allow you to achieve your goals.  The list below gives some ideas for the sample goals above.

  1. Goal: I want to be debt-free, other than my mortgage, in five years. This year’s action items:  Adopt one of the student loan pre-payment strategies in this post. Pay all current charges on my credit card every month and not take out any other loans.
  2. I want to spend less than I make. This year’s action items: Create a budget to see where I can cut expenses.  Find an additional source of income that will cover the expenses that exceed my current income.
  3. For people who don’t have any credit card debt and can cover their expenses, including any loan payments:

a. I want to be able to buy SOMETHING I WANT or take a vacation to SOMEPLACE I WANT TO GO within three years. This year’s action items: Set aside designated savings equal to one thirty-sixth of the cost of my purchase every month.

b. I want to be able to buy a $250,000 house with a 10% down payment within two years. This year’s action items:  Research the costs of home ownership, including property taxes, maintenance, insurance and mortgage payments.  Set aside designated savings equal to $1,041 ($250,000 x 0.10 / 24 months) every month.  If the total monthly cost of home ownership is more than the $1,041 a month I am saving for the down payment, make sure there is room in my budget to cover those expenses once I buy the house.

c. I want to be able to take maternity/paternity leave and support SOME NUMBER of children starting next year. This year’s action items:  Research the costs of having children, both the medical costs associated with child birth and the costs of supporting them when they are young.  Learn about how much, if anything, my employer will provide for salary replacement for maternity/paternity leave.  Set aside designated savings equal to one twelfth of the difference between my normal wages and what my employer will pay during my maternity/paternity leave.  Make sure I can adjust my budget for next year so it covers the costs of having children.

d. If you are under 40: I want to start saving as much as possible for retirement. This year’s action items:  Put retirement savings in my budget.  Read Susie Q’s post about various retirement savings vehicles (Roth or Traditional IRAs and 401(k)s in the US or group or individual RRSPs or TFSAs in Canada) to figure out which best suits me.  Make contributions as budgeted.

e. If you are over 40: I want to save enough so I can retire at AGE with SOME AMOUNT of money (before inflation) available every year.  This year’s action items:  Figure out how much money I need to save every year to meet my goals, including reading Susie Q’s posts on how much that is.  (See the last section of Susie Q’s post on Young and the Invested and check back for future posts.)  Put that amount of retirement savings in my budget.  Read Susie Q’s post about various retirement savings vehicles (Roth or Traditional IRAs and 401(k)s in the US or group or individual RRSPs or TFSAs in Canada) to figure out which best suits me. Make contributions as budgeted.

One Last Tip

It is good to revisit your financial goals every year or two.  In some cases, you won’t have made progress towards them and you’ll want to figure out why and fix the problem or revise the goals.  In other cases, you’ll have made significant progress or attained your goals and can set new goals.

Download Budgeting Spreadsheet Here

 

Step 2 – Tracking Expenses for Budgeting

Now that you’ve found a system for tracking expenses for budgeting, it is time to start recording them in your spreadsheet.  In Getting Started with Budgeting, I talked about how to track your expenses.  This week, I’ll focus on the following steps from my very first post (as numbered in that post):

  1. Enter all of the checks and cash transactions from my checkbook into the spreadsheet and identify the type of expense.
  2. Enter all of the transactions on my credit cards into the same spreadsheet, identifying the type of expense.

When I track my expenses, I start with my checkbook and enter all of the transactions from my check register, including line items for cash and payment of credit card bills.  I then enter the cash transactions I’ve tracked. I’m not very good at tracking cash expenditures and my husband is even worse, so unaccounted-for cash is a big line item in our budget.  If your budget it is at all tight, tracking your cash expenses will be very important in setting priorities and meeting your goals so I encourage you to do better than I do.

The rest of this post will outline how to do these steps using the spreadsheet I created for you (that you hopefully downloaded last week, but I’ve attached it to this week’s post in case you didn’t get a chance to do so).

This Week’s Budgeting To Do List

Here are your tasks for this week:

  1. Continue using and refining the expense tracking system you developed last week. You’ll want to do this task for at least one month, so keep at it!
  2. Think about the categories you want to use for budgeting.
  3. Enter your expenses into the spreadsheet.
  4. Enter your cash transactions into the spreadsheet.
  5. Enter your credit card transactions into the spreadsheet.

Spreadsheet

The spreadsheet I created is flexible, so you can either follow my approach of tracking one or both of cash and credit card expenses separately or you can enter them all in the same place. The benefit of my approach is that you’ll know the amount of your untracked expenses.  The disadvantage is that you have to enter data on three different tabs and will have a couple more entries related to credit card transactions. I suggest using whatever approach is easiest for you, as the end product is the most important part, not how you get there.

Each time you open the spreadsheet, you may need to click the “Enable Editing” button at the top of the screen and then the “Enable Content” button.   By clicking these buttons, you’ll be able to enter your data, save the spreadsheet and use the macros.

Budgeting Categories

When you create your budget, you’ll want to look at your expenses in various categories.  Examples of categories are utilities, groceries, restaurants, treats (coffee, Dairy Queen, a fun purchase, whatever you buy that you don’t really need), insurance, car maintenance, rent or mortgage payments, retirement savings, emergency savings and so on.  You can create whatever categories you want!  As you are creating them, you’ll want to keep the following in mind:

  • Your categories should separate discretionary purchases from necessary ones. For example, you could create a category for food that includes all of your groceries and restaurant purchases. Unfortunately, eating at restaurants is usually much more expensive than cooking at home.  If you need to cut back on your expenses to meet your financial goals, knowing how much you spend at restaurants is important as you could cook at home more often and save some money.
  • You don’t want too many categories. My budget has about 30 categories in it.  While I find that number to be a lot when trying to figure out my future expenses, I find I need that many to understand where my money is going.  If you live a very simple life, you may need only 10 or 15 categories, but beware of the previous point if you end up with only a very few categories.  If you try to use too many categories, you’ll find yourself forgetting the category names and will find the creation of the budget itself more challenging.
  • Category names should be meaningful. When you enter each transaction, you are going to also enter its category.  These category names will appear on the summary that you will use to inform your budget.  Because you’ll want your budget line items to be useful, you’ll want to start by creating meaningful category names.
  • Category names should be short enough that you don’t mind typing them. You’ll also want to be able to remember them from one day to the next.  If you misspell a category name or create more than one variation, for example household goods and house stuff, you’ll have the chance to change them later, but that can be tedious.

Bank Transactions

What to Enter

On the Bank Transactions tab, you’ll record the expenses you pay from your bank account.  These payments will include everything you pay with a check along with any payments you make directly from your bank account such as automatic payments, on-line bill payments and the like.

If you are going to track your cash purchases separately, you’ll put the amount of cash you withdraw from the bank or are given as income on this tab and put the actual cash purchases on the Cash Transactions tab.  Otherwise, you can your actual cash purchases directly on this tab.  More details are provided below.

If you are going to track your credit card purchases separately, you’ll put the total amount of each credit card bill on this tab and put the actual transactions on the Credit Card Transactions tab.  Otherwise, you’ll put your actual credit card purchases directly on this tab. For credit card transactions, regardless of whether they are entered on this tab or the separate Credit Card Transactions tab, you’ll want to use the charges on each credit card bill, not the amount you paid.  If you enter just the amount you pay, you’ll could be either over- or under-stating your current expenses, depending on whether you have been increasing or decreasing your spending over time.  More details are provided below.

Data to Enter

Rows 1 through 6 of the Bank Transactions tab briefly summarize these instructions.

You’ll enter your information starting in Row 10.  I’ve highlighted the cells for inputs in light green.  For each transaction, you can enter the purchase date in Column A and where you made the purchase in Column B.  These columns are not used elsewhere by the spreadsheet, but can be very helpful when you look at your total expenses and wonder where and when you made purchases in various categories.  When I create the financial statements for our farm (a process very similar to this part of the budgeting process), my husband often questions the totals in some categories.  Being able to tell him where and when the purchase was made increases the credibility of the calculations.

Enter the amounts of your purchases in Column C and the corresponding category in Column D.  If the things that you bought in one purchase fall into more than one category, you’ll want to have one row on this tab for each category with the corresponding amounts.

The last entry for each purchase (Column E) lets the spreadsheet know if this row has a purchase you make less often than once a month.  For example, you might buy holiday gifts once a year and you may make significant birthday gift purchases a few times a year.  On the other hand, you probably pay your utility bills and buy groceries every month.  For purchases you make every month, you can either leave this column blank or you can enter 12 (for 12 months a year).  For purchases you make less often, enter the number of times per year you make these purchases.  Continuing the previous examples, you’ll probably want to enter 1 for holiday gifts and a number between 1 and 12 for birthday gifts (e.g., 3 if you give significant gifts for each of your parents and your significant other = 3 people).

If you choose to enter cash transactions on the separate tab, you’ll need to identify all cash withdrawals and cash you are given on this tab as well.  Put the word “Cash” in both Columns B and D.

If you choose to enter credit card transactions on the separate tab, put the word “Credit Card” in Column D of this tab.  In Column B of this tab, enter “Credit Card” followed by one space and then a number. For the first bill, use the number 1. Increase the number for each subsequent bill, so the second one will say “Credit Card 2” in Column B, the third will say “Credit Card 3” and so on.

Cash Transactions

If you choose to enter your cash transactions separately (which I highly recommend), you’ll want to go to the Cash Transactions tab of the spreadsheet.

What’s on this Tab

Rows 1 through 6 briefly summarize these instructions.  Rows 9 through 12 show you how much cash you have tracked on this tab as compared to how much cash you have withdrawn from your bank account.  The value in Cell C12 is the amount of cash you have withdrawn from the bank, but not tracked.  You’ll want to keep this number as small as possible.

Data to Enter

You can input the information about your cash transactions starting in Row 16.  I’ve highlighted the cells for inputs in light green.  For each transaction, you can enter the purchase date in Column A and where you made the purchase in Column B.  These columns are not used elsewhere by the spreadsheet, but can be very helpful when you look at your total expenses and wonder where and when you made purchases in various categories.

Enter the amounts of your purchases in Column C and the corresponding categories in Column D.  If the things that you bought in one purchase fall into more than one category, you’ll want to have one row on this tab for each category with the corresponding amounts.

The last entry for each purchase (Column E) is an indicator of whether it is a purchase you make less often than once a month.  See the discussion above for details on how to complete this column.

Credit Card Transactions

If you choose to enter your cash transactions separately (which I think is much less important than your cash transactions as your credit card bill will list all of your purchases), you’ll want to go to the Credit Card Transactions tab of the spreadsheet.

What’s on this Tab

Rows 1 through 6 briefly summarize these instructions.

Rows 9 through 30 compares the total charges on each bill, as recorded on the Bank Transactions tab, with the transactions you have tracked on this tab as discussed below.  The values in Column C of this section are the total amounts on each bill.  The values in Column D show the total charges recorded on this tab for each bill.  Column E shows the charges on your bill that you didn’t track.  You’ll want to keep the numbers in Column E as small as possible.

Data to Enter

You’ll enter the information about your credit card transactions starting in Row 34.  I’ve highlighted the cells for inputs in light green.  For each transaction, you can enter the purchase date in Column A and where you made the purchase in Column B.  These columns are not used elsewhere by the spreadsheet, but can be very helpful when you look at your total expenses and wonder where and when you made purchases in various categories.

Enter the credit card bill number on which these charges appear in Column C.  This number will be the same number you used on the Bank Transactions tab when you created the line item for the credit card bill whose transactions you are entering.

Enter the amounts of your purchases in Column D and the corresponding category in Column E.  If the things that you bought in one purchase fall into more than one category, you’ll want to have one row on this tab for each category with the corresponding amounts.

The last entry for each purchase (Column F) is an indicator of whether it is a purchase you make less often than once a month.  See the discussion above for details on how to complete this column.

Need more Rows?

On one or more of the tabs, you might need more rows for entering your expenses.  The instructions for how to add more rows depend on whether you are using Windows, an Apple or Google Sheets.  The instructions are provided below and on the Instructions tab of the spreadsheet.

Windows or Apple

  1. Put your cursor in any cell in the row above where you want to insert rows. This row must be above the one with the note in Column L that says “Don’t go below this row.”
  2. Click on the “Insert 10 Rows” button on that tab.

Google Sheets

  1. Put your cursor in any cell in the first row where you want the new rows inserted.This row must be above the one with the note in Column L that says “Don’t go below this row.”
  2. Hold the shift key and move the cursor down until the number of highlighted cells equals the number of rows you want to add.
  3. From the menu at the top, select Insert and then Row Below.
  4. Find the instruction at the top of the tab that tells you which columns need to be copied.
  5. Go to the last row above the ones you inserted.
  6. Put your cursor in the leftmost column of the ones that need to be copied in that row.
  7. Hold down the shift key and use the right arrow to highlight the cells in all of the columns that need to be copied. Let go of the shift key.
  8. Hold down the Ctrl key while you hit C. Let go of the Ctrl key.
  9. Move your cursor so it is in the leftmost column of the ones that need to be copied in the first inserted row.
  10. Hold down the shift key and use the down arrow to highlight the cells in all of the rows that you inserted plus the first row below the ones you inserted. Let go of the Shift key.
  11. Hold down the Ctrl key while you hit V.

If you make a mistake at any time, you can always undo what you’ve done but holding down the Ctrl key and hitting Z.  You can do this several times to undo several steps.

One Last Tip

As with tracking expenses for budgeting, you’ll want to find a process for recording them that works for you. Some of you may find it easiest to record your expenses in your spreadsheet every day or even right after you make each purchase.  Others of you may find it easier to record them once a week.  When you record them isn’t as important as getting them into the spreadsheet, so find an approach that works for you and stick with it!

Download Budgeting Spreadsheet Here

Getting Started with Budgeting

I’m so excited you want to create a budget!  In my very first post, I outlined the steps I use to do my budgeting.  They are:

  1. Identify my financial goals.
  2. Determine the length of the period I’m going to include in my budget – a month and a year are most common.
  3. Figure out how much income I’m going to earn during my budgeting period.
  4. Create a spreadsheet for tracking my expenses.
  5. Enter all of the checks and cash transactions from my checkbook into the spreadsheet and identify the type of expense.
  6. Enter all of the transactions on my credit cards into the same spreadsheet, identifying the type of expense.
  7. Add up all of the expenses in (5) and (6) by type of expense.
  8. Make a first pass at the expense part of my budget by looking at how much I’ve spent and whether any of my expenses are going to change.
  9. Compare my expense budget to my income.
  10. Make sure that I am not overspending my budget.

Although I start with setting goals, collecting information about how much I’m currently earning and spending takes some time so I’m going to cover those topics first.  I’ll talk about setting goals in a couple of weeks.

This Week’s Budgeting To Do List

Here are your tasks for this week:

  1. Download the spreadsheet and put it some place you can find easily.
  2. Fill in the Basic Inputs tab of the spreadsheet.
  3. Develop a system that will help you remember everything you’ve spent.
  4. Use your system this week.

Spreadsheet

I’ve already created the spreadsheet for Step 4 of my planning process (the first numbered list above) for you!  It is attached to this post. I note that it is a practical spreadsheet and is not intended to be high-tech or foolproof.  Nonetheless, I think it will be a very helpful tool for getting started. Also, you’ll need Excel (for Windows or an Apple) or access to Google Sheets (part of Google Docs) to use this spreadsheet. We’ve tested it on those platforms and it seems to work, though it seemed a bit slow when re-calculating in Google Sheets. It does not work on Apple Numbers.

Each time you open the spreadsheet, you may need to click one or both of the “Enable Editing” or the “Enable Content” buttons at the top of the screen. By clicking these buttons, you’ll be able to enter your data, save the spreadsheet and use the macros.

The first time you open the spreadsheet from the web site, you’ll need to save it some place you can access – a drive on your computer, an external drive, or the cloud, for example. You can accomplish this task by selecting File from the menu at the top and then selecting Save As. You can the decide where to put it and what to name it. In the future, you can open the spreadsheet with your data from wherever you saved it.

Basic Inputs tab

There are four questions on the Basic Inputs tab.

  1. How many months of transactions have you entered?  I can’t imagine trying to create a budget without looking at a minimum of one month’s expenses.  It is usually best to look at three to six months, if not a full year. For now, you’ll probably want to enter 1 in cell B4, but can change that value as you enter more transactions.  The formulas in the spreadsheet will all work with fractional values, so you can put 1.5 in cell B4 if you’ve been tracking expenses for 6 weeks.
  2. Do you want to create your budget on a monthly or annual basis?  I prefer to look at income and expenses on an annual basis, but suspect that most younger readers still focus on each month one at a time so have offered both options.  There is a drop-down box in cell B5 to let you choose.
  3. Country for Federal Income taxes.  Because your budget income and retirement savings may not be the same as the transactions you’ve entered, I’ve added extremely simplified calculations of US and Canadian federal income taxes.  These calculations assume that you file your tax return as a single person, take the standard deduction and have no income other than wages and investment returns. Select the country that applies to you from the drop-down box in cell B6.  If you don’t want these calculations to be performed or don’t pay taxes in either of those countries, select “Other.”
  4. Enter your approximate state (provincial) and local income tax rate.  As with the Federal taxes, I’ve added an extremely simplified calculation of state/local income taxes.  It will take the approximated Federal taxable income and multiply it by the rate you enter in Cell B7 to estimate state/provincial and local income taxes.  If you don’t want these calculations to be performed, enter 0.

Remembering What You’ve Spent

One of the hardest parts about budgeting is figuring out where your money currently is going.  You’ll need to devise a system that will allow you to remember how and on what you spend money so you can track it in the spreadsheet.  Here are a few ideas:

  • Keep a log right inside your front door.  I have a friend who made it a habit to write down everything she bought as soon as she walked in her door.
  • Keep receipts for everything you buy and put them in an envelope.  If you take this approach, you’ll have very detailed accurate records.  You have to ask for receipts for everything you buy, even small expenditures such as candy or coffee.
  • Use the note-keeping app on your phone.  Because most of you have your phone with you at all times, you could make a note on your phone indicating what you bought and how much it cost.
  • Find an app that will allow you that will track the information for you.  Someone told me there is one called Mint, but I don’t know anything about it.  If you find one you like (or even one you don’t like), feel free to post a comment so other readers can learn from your experience.

You can use any combination of the above approaches or another one, as long as you make sure you are tracking all of your expenses.  Another option is to track only the expenses that won’t be obvious when you look at your transactions on line, in your check book or on your credit card bills.  For example, you don’t really need to make a note of the purpose or amount of your utility bills, as you can identify those transactions easily.

Most Important Expenses to Track

The transactions that are most important to track are:

  1. things you buy with cash.  These transactions are so important that I’ve included a feature in the spreadsheet that will tell you how much cash you spent that you haven’t tracked!
  2. things you buy at places that sell a wide variety of items.  Examples of places that fall in this category are Walmart, Target and Costco.   When you record those expenses, you’ll want to split the amounts into major categories, such as groceries, electronics, housewares, gifts and the like.

Use Your System

Whatever system(s) you choose, get started with it!  If it isn’t working well, figure out how to change it so it will work for you.  Over the next few weeks, I’ll talk about how to complete the other tabs in your spreadsheet.

One Last Tip

If you share expenses with someone else (e.g., your spouse or significant other), your budgeting process will be much more successful if you agree to do it together before you start.  While a budget one person creates for both of you is better than no budget at all, it will be much better if it is a joint venture. One of you can do all of the spreadsheet work, but it will be very helpful if you both have systems for tracking expenses and, most importantly, agree on your final budget.  One of my biggest budgeting mistakes was doing all the work to create and live within a budget by myself. When I told my husband he had a budget, he just laughed! I actually thought it was quite generous, but that wasn’t the point.

 

Download Budgeting Spreadsheet Here

Acknowledgements

Many thanks to my friends, Marko, Billy, Natalie and Jingyi, and my sister, Ev, for testing the spreadsheet. A special thanks to Jingyi for writing the macros.