Money Mommy

Stuff your mom should have taught you, but didn't…


Personal Budgets A Top Down Approach

We’ve all heard it.  You need a budget! What’s your budget? Did you budget for that?

Ugh.  How to get started.

Budgets are simply  a framework for  handling your money. They are as fluid, detailed and structured as you want them to be. At the very least, you should know whether you have enough money for your expenditures.

Your first budget is a first pass. Just a guess. Know that it will change over time and that’s OK! That really is what it is about.

Marie bought her first house on a whim.  Tired of renting, she went  house hunting, found a little place that the realtor said she could afford, and made an offer.  Imagine her delight when it was accepted!  She moved her studio apartment into a 3-bedroom bungalow and that’s when reality set in.  Mortgage, insurance, taxes, repairs, new fridge and stove, furniture, car loans.  She called me in a panic when she received her first property tax bill.  “Mom, they made a mistake!  I paid all the taxes when I bought the house!  They just sent me another bill!?”  Somehow, her dad and I neglected to tell her that property taxes come due every year.  We all got a chuckle out of her naivety. Luckily, she still had enough in her checking account, but it was clear she would need a budget to handle her funds.

Although I am a bookkeeper by trade, I do not want to track every penny.  Neither does my daughter.  And especially neither does my husband! We opted for a Top Down Approach for her budget.  We divided  her expenses into tiers: fixed, necessary, discretionary, savings and emergency.

In the fixed tier we placed her mortgage, car and property insurance and property taxes.  We totaled these expenses for the year, and then divided that number by 26  since she received a pay check every other week.  (If you receive a monthly pay check divide by 12; if you receive a weekly pay check divide by 52.) This amount was put in a separate checking account every pay period.  Every month, her mortgage was paid from this account.  And every year, when property taxes and insurance come due, there will be enough in this account to cover them also.  Marie also added her installment payments to this account – $40 for her fridge; $30 for her student loans – and increased her biweekly deposits to cover those expenses.  She then set up automatic payments, so she would never be late, and she was building excellent credit.

Next we turned our attention to the necessary expenses – utilities, food, gas, phone bill, etc.  A portion of her check was placed in a second account to cover these costs.  Since these payments would fluctuate, she would need to monitor this account a little more closely. She could control these costs to some extent and she could adjust the amount of her paycheck that was allocated to this second account.  There are oodles of sites for conserving electricity – another word for sayings – and making succulent cheap meals to save.

Finally we have the discretionary tier.  Anything you don’t need to live as a functioning adult, but would like to have. New clothes, morning coffee shop, movies, sports events, gifts, eating out, vacations, apps for your phone, the list is endless.  Once you have the fixed tier and the necessary tier properly funded, the remainder of your pay check can go here. This tier can be further sub-divided to fit your personality. Do you need/want a category for gift giving, charitable donations, the hair dresser etc.  You may decide that some of these items are not discretionary, but necessary. Allocate your paycheck accordingly.

Notice that I did not include a tier for savings and emergency funds.  That is because these are the over-arching tiers that you must have, and yet are the first things that are omitted to balance a budget. As we created her tiers, we allocated a healthy 15% to savings and apportioned funds to create a six month emergency fund,  Unfortunately, this meant there would not be enough to cover even the second tier of necessary expenses.  It became necessary to decrease the percentage of savings and slow down the accumulation of emergency funds.  These will be increased over time as pay raises happen and fixed debt (ie car loans) are paid off.

So there you have it.  A Top Down Approach.  Emergency funds and saving first.  Then determine what your fixed expenditures are and allocate appropriate funds there.  Next, place funds in a second account to pay all necessary living expenses.  A final account will hold your totally discretionary funds. Any of these accounts can be subdivided if you want to save for something specific. IF necessary, you can tinker with the Emergency and Savings tier to meet fixed and necessary  expenses.  But DO NOT give up your future security for current short term enjoyment. You can always move your discretionary funds into fixed or necessary accounts.  But NEVER pull money out of your fixed account to pay discretionary items.  This is a sure sign that you are living beyond your means.

Remember, you are in charge!

1 thought on “Personal Budgets A Top Down Approach

  1. Marie here, I knew taxes came every year, what I didn’t realize was they come twice a year! Property tax and school tax come at different times during the year, and if you don’t do a typical bank mortgage and have your taxes rolled into the mortgage (something I opted not to do) you have to remember to pay your taxes on time (early if you want the discount!) each year!

    Thanks again for all your advice Mommy!

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