We've talked a bit about padding in previous posts, but I thought I'd create a post just to explain how padding your budget works.

In the last post, I mentioned rounding down income and rounding up expenses.  This creates padding.

For instance in Step 2 of my budget, though I get a bi-weekly paycheck of $268, I rounded it down to $250.  That creates $18 worth of padding per check or $36 worth per month.  That $36 does disappear from my budget, but I haven't lost the money.  The money still comes in with my paycheck.  

Inversely, I've budgetted $63.70 for my electric bill (based on my share of the highest one we've had).  This month however my third of the bill is only $40.23.  So this month I have $23.47 in padding from that.

Just from those two items alone, my padding has added up to $59.47.

Padding is useful for all those minor emergencies, for instance your printer runs out of ink or your electric bill was unexpectedly higher than you had budgetted for.  It's kind of a safety net for unexpected trip ups.  Hopefully you're building up an emergency fund too for those major catrasophes, but you don't want to dip into that unless it's a true emergency.

If you keep your padding in your wallet, you're likely to spend it all, so generally you want to stick it in your checking account where it's still accessible but not too easily so.  I have direct deposit, so it's a little easier, but if you get a physical check, you should deposit the entire thing, minus your spending allowance and cash you need to pull out for known necessities instead of only depositing the amount you want to save.  Limiting the cash you have on hand (and not relying on cards) is one of the best ways to get your day to day spending under control.

Since it's not in your budget, it's easy to forget about the padding, and that's a good thing.  It's kinda fun to watch your account grow faster than you had predicted and a great relief when you do have an unexpected expense pop up.

In the book, we divide income into two categories Expected (or Predictable) Income is the money you can regularly expect every month.  Unexpected Income is the money that comes in less frequently.

For our monthly budget we use our Expected Monthly Income (rounded down) and use that to cover our monthly bills (which we round up). 

As someone recently pointed out, if you have a weekly or bi-weekly pay check, some months you will receive an extra check.  This extra check would fall under what we call Unexpected Income.  Yes, you knew you were getting it, but it's not expected every month.  Unexpected income may also come in the form of a gift, an inheritance, a Christmas bonus, a tax refund, or any number of bizarre places.

The first thing you should do is find out if this unexpect income will be taxed and set that money aside in a savings account where it will collect interest for you til tax time.  Then you make a plan for the money, kind of a mini-budget.  The less money, the simpler the plan.  We suggest keeping these priorities in mind as you plan:

Priority 1: Needs

Priority 2: Small Debts (Anything that can be paid off in a single payment)

Priority 3: Emergency Fund (Easily accessible savings account with 6 months living expenses.)

Priority 4: Large Debts (Anything that requires multiple payments, the regular payment falls under your regular bills)
Priority 5: Big Dreams and Entertainment (Big Dreams = Short and Long Term Savings)

My $188 tax refund arrived yesterday.  Thankfully, our monthly budget is handling our needs pretty well.  And I don't currently have any debts.  My emergency fund isn't quite up to where I would like it to be, and my original plan had been to put the money in there.  

My monetary situation has changed, so I thought it would be a good idea to re-evaluate my budget.  To show the process, I will, very briefly, touch on the steps of our budget model, which can be found in full here.

1) How much money do I have, and where?

I have $40 in my wallet, $400 in a savings account, and less than $10 in my checking account.  I've gone to a cash only system, so my Checking account tends to be rather low.

2) What is my regular income?

This hasn't essentially changed from the first budgeting post, so I will paste the numbers from before:

I make $350 a week in my job delivering papers, however since I'm considered an independent contractor, I have to take out work related expenses before seeing what his true income is.  My main work expense is my car payment $350/month and gas about $60 a week (or $240 a month).

$350 x 4 (weeks in a month)= $1400 pre-tax income
$350 (car payment) + $240 (gas)= $590 work expenses
$1400 - $590 = $810 actual, taxable income

So I make $810 a month.

3) What are my regular bills?

I live with 2 other people, and recently one has decided to contribute a full share of rent, so my rent + utilities bill has dropped from $433 per month to $367 per month.  Other than that, my car insurance bill, internet, and grocery bill remains the same.

$367 (rent & utilities) + $10 (Internet) + $112 (Car insurance) + $80 (Groceries) = $569 in regular bills

4) What other expenses do I have?

As I included gas in my business expenses, all I have left is the irregular electric bill.  Last time I estimated $30 for this, but experience has taught me that three people living together use a little more energy, so I am estimating $50 at this point.

5) How much should I save?

So, now I subtract all my bills from my monthly income to see what is left:

My income (after work expenses) is $810
My regular expenses are $568 and I estimated $50 for other expenses.

$569 + $50 = $619 total monthly expenses

$810 - $619 = $191 left over

Since I have more breathing room with this budget, I have decided to save $100 per month, and use the remaining $91 as my entertainment, or spending, budget.

6) Do the numbers add up?

Doing a quick backwards check, I simply add everything up to make sure the math is right.

$91 (Entertainment) + $100 (Savings) + $50 (Electric) + $367 (rent & utilities) + $10 (Internet) + $112 (Car insurance) + $80 (Groceries) + $240 (Gas) + $350 (Car Payment) = $1400 Monthly Income

All neat and tidy:)  I hope this edit clears up any confusion I may have engendered with the earlier version.

You ought to re-examine your budget every six months or after every major change.  We had a major change this last month as we all moved out of our parents houses and into an apartment, and Kay had the additional major change of buying her own car.

We're promoting a six step method for creating budgets.  In the interest of practicing what we preach, here's how we created our new budgets.

Step 1: How much money do I have, and where is it?

Kay has exactly $2553.24 in the bank, a $50 savings bond in the filing cabinet, about $14 in her wallet, and about $18 in her coin bank.  For the purposes of creating a budget though, you can ignore any small stashes below $50.

PJ has $50 in his new bank account, and another $50 in his wallet.

(This step is to help you get in the mindset and start thinking about your goals.  The numbers can be kept to the side, but they're important to know.)

Step 2: What is my regular income? 

What we're looking for in this step is not salary but take home income.  To simplify our numbers, we always round income down.

For instance, Kay makes a regular $257.80 every two weeks from her library job, and makes about $400 from her childcare job at church (this number varies, it was $388.40 for October when she out sick a lot, but it was $425.50 in September which is more normal for a healthy month).  To simplify numbers, she rounded the $257.80 down to $250, and with an average of 2 checks per month counts this as $500 in monthly income.  (Occasionally, Kay picks up extra from babysitting jobs, but since that's not regular, she won't use it in her budget.)

So all together Kay makes about $900 a month.

P.J. makes about $350 a week in his job delivering papers, however since he's considered an independent contractor, he had to take out work related expenses before seeing what his true income is.  His main work expense is his car payment $350/month and gas about $60 a week (or $240 a month).

$350 x 4 (weeks in a month)= $1400 pre-tax income
$350 (car payment) + $240 (gas)= $590 work expenses
$1400 - $590 = $810 actual, taxable income

So PJ makes just over $800 a month.

[Yes, we know months have more days than 4 weeks account for, but as most pay checks come weekly, bi-weekly, or monthly, the 4 weeks works for number crunching.]

Step 3: What are my regular bills? 

Kay pays $433 in Rent (this includes water, trash, and cable, which we pay through our complex), $9.41 for internet (a 3-way split with roommates), $20 for phone (her contribution to a family plan), and contributes $20 a week ($80 a month) into a grocery fund with her roommates.  Every six months, she also has a car insurance payment of $423.10 (which dividedly into monthly is $70.52)

$433 + $9.41 + $20 + $80 + $70.52 = $612.93 in regular monthly bills

Kay rounded that up to $613 to simplify her numbers.

PJ also pays per month $433 for Rent, $10 for internet (he went ahead and rounded his up), $80 for groceries, and  $112 car insurance (which he'd have to pay despite his work, so it's iffy as a proper work expense).

$433 + $10 + $80 + $112 = $635 in regular monthly bills

Step 4: What other expenses do I have?

Other expenses would be things that vary like gas, electric, food (if you don't have a regular roomate food fund like we do), and other consumables.

Kay spends about $20 in gas per week (or $80 a month).  We haven't gotten our first electric bill yet, but our upstairs neighbor says his ranges between $60 and $80...we think $90 is a safe guess for us....so Kay estimated $30 for her share of the electric bill.  (Normally you should estimate based on your highest bill.)

So Kay's estimating $110 for other expenses.

PJ already put his gas under work expenses, so he only has electric left for his irregular bills.  He also estimates $30 for electric.

Note: There are other items like toilet paper and cleaning supplies to consider.  At the moment since our cost are low in this area, we've just let them lump in with groceries (stuff for everyone in the apartment) or in our spending/entertainment fund (personal stuff).  After we've been on our own for a little while, we may find we need to give this it's own category.

Step 5: How much should I save?

This is where we see what's left over and divide it between spending/entertainment and savings.  How much you save depends on your personal goals. The important part of this step is actually limiting your spending.

Kay's income is $900 per month
Her regular expenses are $613 and she estimates $110 for other expenses.

$613 + $110 = $723 total monthly expenses

$900 - $723 = $177 left over

~~~~~~~~~~~~~~

PJ's income (after work expenses) is $810
His regular expenses are $635 and he estimates $30 for other expenses.

$635 + $30 = $665 total monthly expenses

$800 - $665 = $135 left over

~~~~~~~~~~~~~~

Kay has decided to split her $177 into $80 for spending (which she'll withdraw in $20 per week chunks) and $97 in savings.

PJ is splitting his remaining $135 into $75 for spending and $60 for savings.

Step 6: Do the numbers add up?

Always go back and double check your numbers.  We both went into a short panic the other night, because we had each forgot to carry a 1 and had come up a hundred dollars short.  After that was sorted out, our numbers came out okay.

The numbers do not have to balance perfectly.  As long as your expenses are lower than your income, you should be okay.

If your numbers don't come out okay, double check each category to see if you forgot something or if you're overestimating somewhere.  If they still don't workout, the first place you should cut is savings/entertainment.  If that still doesn't work, you're going to have to make a more dramatic change in your life, either take on a second job or cut back somewhere.


P.S.  Feel free to reply with questions.