Forget Other complex Types of Budgeting and keep it simple

I mentioned on Facebook, that I would put together a post on my Multi-pot Budgeting approach, so here it is.

This approach is one of the cornerstones of the budgeting system I have put in place for myself, my family and others over the last 7-8 years.  It requires a some thought, some discipline and is how I ensure I have money for when non-monthly bills hit.

Some groundwork

Budgeting 1-0-1

Budgeting is pretty standard and straight forward right ?  It’s a well known approach.

  1. Know what you have (see my post on Improving Your Financial Health – Step 1)
  2. Know what you need
  3. Allocate a weekly/monthly amount for those category,
  4. Either save it until you need it, or spend it if its in the “living expenses” budget
  5. Stick to your budget!

piggy-bank-Types of budgetingI like to split budgeting into 2 different types.

The first budget type, is the standard monthly “living expenses”, stuff that you KNOW you will spend every month. Gas, Groceries, Utility Bills, Snacks, Drinks, Eating out etc.   This takes up a large chunk of most incomes.

The second budget type, my “budget pots” are the items you need to budget for on a 2 to 12 month or longer basis.  Categories that don’t come up each month.  Some will have known dates/intervals, others will occur randomly depending on other factors, but you know they will happen.  For example, car maintenance, household repairs/maintenance, education etc.

The latter, is the area that you can more easily implement the multi-pot approach.  It’s the budget type that I will focus on here for my examples.  It can be applied to “living expenses” but not as easily.

Lets get started….

We’ll use an example to take us through the key principles.  We’ll just use 3 budget categories for illustration…

  1. Car Maintenance
  2. Household Maintenance
  3. Birthdays/Gifts

I will also use easy numbers for the budget, so the actual values are unlikely to be realistic for your budgetary needs.

We’ll begin by looking at each category, how much we need for a year, and how much we need to put into the pots each month to achieve that goal.

Annual Budget
Multipot-1-Types of budgeting

For our purposes, lets say that we have an account that has a Zero balance to begin with.

On month 1, we deposit our monthly budget amount of $225.00, the same on month 2, 3 etc

That money builds up, and after month 3 we have a total in our account of $675 and it keeps going up (provided we don’t need to spend it).

Rolling Budget Totals
Multipot-2 copy-Types of budgeting
Nothing new about that, so what am going on about ?

My big focus on budgeting is reducing stress, for better health.  Having money allocated, knowing what its for is all part of reducing that stress, as is how to spend it and the mentality around doing that.

Time for some expense

Types of budgetingWhat happens when you need to spend money on one of the categories… back to our example.

We get to month 2 (we have $450 in our account), and we have a leak in the bathroom.  Plumbers are expensive, but it’s got to be fixed.

  • Plumber comes and goes, leak fixed but we had a $300 bill.
  • Good news, we have a household maintenance budget.
  • Bad news, the home maintenance budget pot only has $150 in it
  • Good new, overall we have $450 in the budget account, so at least we can pay the plumber

Now we have paid the plumber, lets take a look at our budget “sheet”…

Post Plumbing Payment Budget Sheet
Multipot-3 copy-Types of budgeting

In the table above, our household maintenance, shows as $150 over budget. Overall the total of our budget pots is still $150 to the positive.  For many people this image is where we feel we have failed, we are over budget, even in just one pot, often it makes us feel like giving up.  But not for me, not when you change your thinking.

If we look at the overall Annual Budget in the image below.

Annual Budget Sheet
Multipot-4 copy-Types of budgeting

The annual budget for Household spend showing $600 still available.  When we are looking at our budget “pots”, we need to consider what we have available in our account now, and, this is IMPORTANT, our annual budget.

There is the issue that if everything hits at once, you may not have enough in the budget pot to cover off the immediate bill, but once you have been running the system for around 6 months, it will start to really come into its own.

I want to fast forward 6 months, and add some expenses to the pot so you can see the overall effect.

Multipot-5 copy-Types of budgeting

 

In Summary

8 Months in and the budget pot is performing as planned (no surprise for an example right), we have paid the expenses that we have needed and have some left over.  We see a scary moment in month 4, where our budget pot was wiped out, and that can be stressful.  Although I have a secret weapon for that kind of situation, but that’s the subject of another blog post to come.

You can see that pots effectively “borrow” from the overall budget if they need to, as its unlikely that all your budget pots will have a major expense at the same time.  The more budget pots you have, and the larger the amount you save each month, the less the chance of you getting to the month 4 situation.

There are times, as is shown in month four, where we had a spend of $600 in one month, which wiped out the budget account.  Ultimately the overall budget WAS able to cope.  In his post about our programs (link to Joe’s post) and his take on them, as my son says his experience when starting up the budget pots was pretty difficult.  For the 1st 3 months, every time Joe put some money into his account, he would have something crop up that would wipe it out.  He does say that at least he could pay for the expenses he had.  Wa are 12 months in, and Joe has a VERY healthy budget account, that can now afford almost anything that could hit him.  He’s 18 and has an exceptional financial start.

Some notes on the example, its much more simplified that the full budget approach I have in place, but the principle is the same.
Just for reference, we now have built up to around 60 “budget pots”, this gives incredible flexibility, but starting with around 10-15 is a good beginning, you can add as you have more money available for allocating.

I can’t wait to hear your thoughts/comments on this approach, and would be happy to answer any questions you have on it and other areas, so please drop me a comment in the section below

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