Budgeting for the Blips

I am a personal finance junkie, but I have always left it to others to blog about. Today I thought I’d share my method of “cash flow budgeting” and see if I can compare techniques with you!

Balancing the ins and outs

Cash flow budgeting comes from the business world. Companies are always concerned about whether their inflows and outflows are timed right. Maybe they take out a start-up loan to manufacture a product, and need to recoup their costs through sales, but their loan is due before their clients pay up! The business could go belly up because of cash flow problems.

I can relate! My household hasn’t “crashed”, but there have been some tight times. Usually it’s when I tried to pay a large or annual expense “up front” to avoid finance charges. I then had a long dry spell before I could spend a cent outside of essentials. Worse yet, I might have to put a regular expense on credit! Then I beat myself up because I should have anticipated and planned for the bill.

The most common way to budget is to list your normal expenses for a month, and subtract the total from your monthly income. I’ll just call that the Standard Monthly Budget. Whatever is left over, you can save or spend. If you come up short, you cut back on a variable category like groceries. With this kind of budget, I found it was easy to spend the surplus and forget that the following month had a big one-time expense I should have saved for.

Most people think the ideal budget is one in which you save an equal amount every month to pay off major bills, so your costs are the same every month. I will call that the Equalization Budget.

About 3 years ago I started doing cash flow projections a year at a time, and aiming to break even monthly. It has solved most of my budgeting problems. I call this one the Neutral Cash Flow Budget.

For either Equalization or Neutral Cash Flow, there are 3 basic steps:

  • Set goals for the year, such as “pay car insurance in full when due” or “save $700 for canoe” or “don’t get into debt to buy holiday gifts”
  • Do a cash projection for the entire year, month by month or pay cheque by pay cheque, to see if your goals are possible within your income
  • If not, adjust goals – or adjust income!

There are lots of advantages to either one:

  • It takes into account one-time, irregular and annual expenses; and savings goals
  • You can start saving for them as early as possible
  • You always know how much is left for discretionary spending
  • You can choose to set aside equal monthly amounts for annual/irregular/one-time expenses, or you can schedule them for times when you receive lump sum payments (like when you get paid biweekly and have a 3 pay cheque month)
  • It takes into account the timing of pay cheques and other income
  • You always know what the rest of the year will look like and what new expenses you can take on

And only a couple of disadvantages:

  • It takes a few hours to set up
  • You need to do a new projection for the rest of the year every time your financial situation changes
  • It is difficult to make it through the first year of an equalization budget without a lump sum “float” from savings or from a windfall!

I think the last “disadvantage” is why I put off equalization budgeting for so long. My car insurance is due annually in November. Ideally, I would save monthly from December of one year to November of the next, and pay it in full. But then maybe I’d  tell myself, “I’ll start saving in February after the holiday bills are paid off,” so I would only have 10 months to save. It seems like there is never a good time to start saving for all those irregular expenses.

Forecasting eliminates this mentality by showing me what the rest of the year will look like, based on the choices I make today.

Here is an example for a whole year based on an annual take-home pay of $40,000 for a household of two adults, no kids. I put in expenses that a typical couple would have, with realistic costs for the area where I live. (I am not saying that Rom and I are a typical couple – our actual income and expenses are not identical to this.)

Regular monthly fixed expenses:

  • Mortgage and property tax 1500
  • Internet/Landline/Cable (introductory rate) 115 for 6 months, increasing to 155
  • Cheap cell phone 45 x 2 = 90

Variable monthly expenses (some discretionary):

  • Groceries, personal care & cleaning supplies 400
  • Gas for 1 small car 240
  • Misc house/yard maintenance 100
  • Meals out 43
  • Entertainment 43
  • Haircuts 43
  • Gifts and work expenses 43

Utilities:

  • Heat 275 x 9 times/year
  • Electricity 160 x 6 times/year
  • Water 150 x 4 times/year

Annual Expenses:

  • Home insurance 600
  • Car insurance 700
  • Holiday (gifts, decor, special meals) 500
  • Vacation travel 2000

This budget does not allow for clothes, gym memberships, dentist visits or eye glasses, furniture, car repairs…or children…or pets! The expenses add up to $39,999, so this couple theoretically could squeak through the year if they had no emergencies.

The following tables are available as a pdf: Budgeting for the Blips Tables

Here is what the year would look like if they used a Standard Monthly Budget:

  • Expenses vary each month, so does income = cash flow problems
  • Need “float” of $500 to cover shortfall Jan-Apr, and $125 extra in July
  • Break even by year end ($173 surplus)
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Annual
Mortgage 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 18,000
Heat 350 350 350 250 250 150 0 0 0 225 250 300 2475
Electricity 160  0 160  0 160  0 160  0 160  0 160  0 960
Water  0 150  0  0 150  0  0 150  0  0 150  0 600
Internet bundle 115 115 115 115 115 115 155 155 155 155 155 155 1620
2 cell phones 90 90 90 90 90 90 90 90 90 90 90 90 1080
Groceries 400 400 400 400 400 400 400 400 400 400 400 400 4800
Gas 240 240 240 240 240 240 240 240 240 240 240 240 2880
Meals Out 50 50 50 50 50 50 50 50 50 50 50 50 600
Entertain 50 50 50 50 50 50 50 50 50 50 50 50 600
Haircuts 50 50 50 50 50 50 50 50 50 50 50 50 600
Gifts/Work 50 50 50 50 50 50 50 50 50 50 50 50 600
Home maint. 100 100 100 100 100 100 100 100 100 100 100 100 1200
Home insurance  0  0  0  0  0  0  0  0  0  0 600  0 600
Car insurance  0  0  0  0  0  0  0  0  0  0 700  0 700
Holidays  0  0  0  0  0  0  0  0  0  0  0 500 500
Vacation travel  0  0  0  0  0  0 2000  0  0  0  0  0 2000
TOTAL 3155 3145 3155 2895 3205 2795 4845 2835 2845 2910 4545 3485 39815
INCOME 3076 3076 3076 3076 4614 3076 3076 3076 3076 3076 4614 3076 39988
CASH FLOW +/- -79 -69 -79 181 1409 281 -1769 241 231 166 69 -409 173
CASH FLOW,CUMULATIVE -79 -148 -227 -46 1363 1644 -125 116 347 513 582 173 173

And here’s what it would look like using Equalization Budgeting (Year 1 – “Transition Year”):

  • Allows all annual/irregular bills to be paid in full when due this year and start saving for next year’s annual/irregular bills
  • Requires additional up front cash of $ 1891 to pay this year’s bills and start saving for next year’s bills at the same time
  • Payments will be completely equalized starting Jan 1 of Year 2 (need to decrease spending by $7/month next year to break even)
  • No more fluctuations!
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Annual Year 2
Mortgage 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 18,000 1500
Heat 207 207 207 206 206 206 206 206 206 206 206 206 2475 206
Electricity 80 80 80 80 80 80 80 80 80 80 80 80 960 80
Water 50 50 50 50 50 50 50 50 50 50 50 50 600 50
Internet bundle 135 135 135 135 135 135 135 135 135 135 135 135 1620 155
2 cell phones 90 90 90 90 90 90 90 90 90 90 90 90 1080 90
Groceries 400 400 400 400 400 400 400 400 400 400 400 400 4800 400
Gas 240 240 240 240 240 240 240 240 240 240 240 240 2880 240
Meals Out 50 50 50 50 50 50 50 50 50 50 50 50 600 50
Entertain 50 50 50 50 50 50 50 50 50 50 50 50 600 50
Haircuts 50 50 50 50 50 50 50 50 50 50 50 50 600 50
Gifts/Work 50 50 50 50 50 50 50 50 50 50 50 50 600 50
Home maint. 100 100 100 100 100 100 100 100 100 100 100 100 1200 100
Home insurance 50 50 50 50 50 50 50 50 50 50 100 50 650 50
Car insurance 59 59 59 59 59 59 59 59 59 59 110 59 759 59
Holidays 42 42 42 42 42 42 42 42 41 41 41 41 500 42
Vacation travel 333 333 333 333 334 334 167 167 167 167 166 166 3000 167
TOTAL 3486 3486 3486 3485 3486 3486 3319 3319 3318 3318 3418 3317 40924 3339
INCOME 3076 3076 3076 3076 4614 3076 3076 3076 3076 3076 4614 3076 39988 40068
CASH FLOW +/- -410 -410 -410 -409 1128 -410 -243 -243 -242 -242 1196 -241 -936
CASH FLOW,CUMULATIVE -410 -820 -1230 -1639 -511 -921 -1164 -1407 -1649 -1891 -695 -936 -936

And finally, here is the one I use, Neutral Cash Flow Budgeting:

  • Rearrange monthly expenses to fit monthly pay
  • Pay all fixed costs/essentials and juggle all discretionary spending as needed to break even every month, no up-front cash needed for “smoothing”
  • Results in deprivation some months (e.g., entertainment) but satisfaction of bills paid on time and in full
  • Adds up to savings by year end that can be allocated to new expenses/increases, saved, or spent
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Annual
Mortgage 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 18,000
Heat 350 350 350 250 250 150 0 0 0 225 250 300 2475
Electricity 80 80 80 80 80 80 80 80 80 80 80 80 960
Water 50 50 50 50 50 50 50 50 50 50 50 50 600
Internet bundle 115 115 115 115 115 115 155 155 155 155 155 155 1620
2 cell phones 90 90 90 90 90 90 90 90 90 90 90 90 1080
Groceries 400 400 400 400 400 400 400 400 400 400 400 400 4800
Gas 240 240 240 240 240 240 240 240 240 240 240 240 2880
Meals Out  0  0  0 50  0  0  0 50  0 50 50 50 250
Entertain  0  0  0 50  0  0  0  0 50  0 50 50 200
Haircuts 42  0 42  0 50  0 50  0 50  0 50  0 284
Gifts/Work  0 42  0 42  0 42  0 50  0 50 50 50 326
Home maint. 100 100 100 100 100 100 100 100 100 100 100 100 1200
Home insurance 50 50 50 50 50 50 50 50 50 50 100  0 600
Car insurance 59 59 59 59 59 59 59 59 59 59 110  0 700
Holidays  0  0  0  0  0  0 132 252 116  0  0  0 500
Vacation travel  0  0  0  0 1630 200 170  0  0  0  0  0 2000
TOTAL 3076 3076 3076 3076 4614 3076 3076 3076 2940 3049 3275 3065 38475
INCOME 3076 3076 3076 3076 4614 3076 3076 3076 3076 3076 4614 3076 39988
CASH FLOW +/- 0 0 0 0 0 0 0 0 136 27 1339 11 1513
CASH FLOW,CUMULATIVE 0 0 0 0 0 0 0 0 136 163 1502 1513 1513

What works for you? Have you ever tried to switch budgets completely?

12 comments

  1. SarahN

    Wow, more love for you! I grapple with this with a colleague regularly! I got a little… lost/distracted at the end, but I got the gist! Of course I got caught up in the details – wow, $50 per month on haircuts? Why’s something billed 9 months out of 12?

    What I do (seeing you share, and I don’t have a blog to share back with!) Everything is weekly, as I’m paid weekly:
    – Put away $200 per week for bills (electricity, water, rates, strata fees (1250 per quarter))
    – Put away $20 (now $50 due to short term bonus savings with bank) for annual health insurance payment
    – Donate $20 automatically (a further $10 comes from my cash withdrawal)
    – Pay $600 on mortgage (this is above required, but not in the penalty range – as I have a fixed loan)
    – Withdraw $240 cash for groceries, eating out, train fares, cabs, weekly physio, phone plan ($30 p/m) etc. Clothing and shoes should come out of this, and usually does (average of a countless weeks of ‘normal’ spending (blips removed))
    – Save $50 for ‘cushion’/emergency fund (if I lost my job etc) – currently balance would cover about 4 months mortgage repayments only 😦
    – Anything leftover ($200-300) is either saving (for my annual holiday), or goes to blips – electrician, pool memberships, dentist – things I don’t see in ‘bills’ pile. Sometimes, this goes on my mortgage if I know it won’t cause a penalty.

    • You sound shockingly responsible, Sarah! Funny you should mention about haircuts. I used to spend $50 a month for a colour and cut, which was the cheapest rate available anywhere. Since going “natural,” I now spend $15 a month on a cut because my hair grows so fast. Rom cuts his own (with clippers). I put a higher amount in the budget because most people I know spend a lot more than $15 a month and I thought it would sound more realistic, LOL!

      Oh, BTW, my house uses heating oil both for heat and for heating hot water. The oil company delivers fuel 9 months a year and none is needed in July/Aug/Sept because the heat is turned off in the hot summer months. There is enough oil left in the tank for heating the hot water. Some oil companies let you average out your heating oil costs over 12 months (basically extending you credit) but mine doesn’t.

      • SarahN

        Weird how ‘shockingly responsible’ feels like such a compliment!

        I have mid length hair (almost always tied up), so the cuts only come when it gets too knotty from split ends. The last cut was $15 and a DISASTER (still need bobby pins to keep stray short bits ‘up’). You did say your budget wasn’t exactly yours, but thanks for the insight. And the heating information! In Australia, we have electric or gas heating (if you don’t have wood fired something or other). Luckily, I barely use the electric air con (which can heat) cause I’m ‘shockingly responsible’ and therefore just snuggle up under a rug to watch TV. Cooking makes me warm too… My electric + gas (for hot water) was $3/day over winter!

      • Yes, I hoped you would know it was a compliment, Sarah! I have a “TV blanket” too.

  2. My budget is a bit more fluid. Our insurance comes out as a monthly payment – it’s just easier for us that way. So, monthly we pay our hydro, phone/Internet, satellite, home insurance, life insurance (x3), business insurance, car insurance, mortgage. I budget $600 for groceries/household/clothing and $400 for gas for two cars. Everything else goes into savings and we use that to add to our TFSA, pay taxes, hockey fees, etc. all extra pay checks in a year go in there too. It’s a simple budget, but it works for us. The savings account becomes our slush fund. I also buy savings bonds through work and cash them in at Christmas for my Christmas budget.

    • Good system – it sounds like not spending those extra pay cheques is the key. Lots of smart choices there! Having a business and paying your own taxes must be complicated. Our insurance company now offers monthly direct debits – with a 3% credit charge!

  3. As you might imagine our budget is a little more complex than space allows me to go into here so maybe I will look at doing a post about it soon. When I have my Healthy Eating Challenge in full swing I shall be turning my full attention to our finances – we do need to tighten up. All I can say is that we have been a one income household for longer than a two income and have weathered 3 recessions with 3 pay cuts each time for the main earner and even though at times money has been in short supply we have still managed to buy and run our beach cottage in Scotland – so the system I devised many years ago seems to have served us well.

  4. Yes that would be similar to our projected expenses because 9 times out of 10 that is what kicks people in the arse. You will see by my numbers in the post I just did that we will save over $16k in projected expenses for 2013… so if one doesn’t budget this money in, Where is it coming from? Line of credit? Credit Cards? Emergency savings (if any). We need to get a grip on our financial health and start saving. A budget is what allowed us to be debt free and mortgage free by age 36! Dream Big! Thanks for dropping in… Mr.CBB
    Here is my latest budget 2013 goals post with our numbers if anyone wants to be nosey 😉
    http://canadianbudgetbinder.com/2013/01/01/finances-in-the-new-year-new-budget-success-formula/

  5. Pingback: Living Pay to Pay | An Exacting Life

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