How do you make a budget that reflects reality? I didn't care about budgeting until my wife and I joined our bank accounts. Before then, I just winged it. It took me a couple of iterations to get to a solution that was both useful and quick. Now it takes me between 5 and 20 minutes each month, and is well worth it. When I started my own business, I was able to determine how much my minimum salary requirements were which helped me see that it was actually feasible (I could have guessed, but that's a lot of risk and having the numbers to back it up is more responsible).
A simple example of a budget is the following: I need $500 for rent, $150 for bills, $100 for long-term expenses, and $300 for food. The problem with most budgets is that they don't reflect reality. How do you determine the numbers? How would you figure out what next month's bills are going to be? To guess the future, look to the past. Bills in November might be drastically different than bills in August (I'm in Texas where this is true), but bills this November will probably be similar to last November. Rent will probably be the same. But what about the expenses that are more variable, or self-directed. Your rent doesn't change each month, but what you eat probably does.
Accounting is the process of looking at what your income and expenses really add up to. Some people dread accounting, because they always spend more than they think they should. In other words they are unrealistic about how much they spend. The only healthy outlook on finances is reality. Accounting shows you that reality, and from that allows you to accurately budget.
Math Time
There isn't really any math in this section, but there are some numbers. If you get lost in the description, just look at the pictures.
I have 5 categories for my accounting and budget: Bills, Entertainment, Food, Gas, and Miscellaneous. Since my wife and I use our debit cards for pretty much everything, and since we have a joint account, I can open up my online bank statement and copy/paste all items for a month into a spreadsheet (I use Open Office which is free, but you can use MS Excel or any other spreadsheet application). Sheet 1 is a summary sheet, and sheet 2-7 contain 6 months of expenses (I create a new document every 6 months to avoid clutter and I also have a document which shows the summaries since I started for longer-term analysis). Below the summaries you can see the budgeting. It shows how much goes into each account, and it is based on averages derived from the accounting data.
When I copy/paste the entries into the spreadsheet, I go through and delete deposits. I also delete certain expenses that don't count as monthly living expenses (we have a separate savings account for human and vehicle repair bills for example). I delete the deposits column and the total column leaving me with Date, Description, and Amount, to which I append Type. I put one letter B, E, F, G, or M in the Type column for each expense.
Then comes the magic. I highlight the four columns and use the Subtotals functionality. Go to Data > Subtotals, then group by Type and calculate subtotals for Amount.
That's it. I copy the subtotal for each category and paste it into the summary sheet for comparison with other months. Now I have actual data which I can use to make predictions about the future.
Final Answers
My solution isn't the only one, but it's easy, free, and dead useful. It took about three months worth of accounting data for us to really understand what our budget should be, and we revise it every 6 months or when there is a major change like getting a new job or a significant raise.
Something I do to make this information more useful is to have multiple savings accounts and one checking account. Each savings account is for expenses that aren't related to living expenses during a month. I mentioned human and vehicle, but we have four others as well: Mortgage, Yearly expenses, Cookie Jar, and Nest Egg. Mortgage is obvious. Things like car insurance, property taxes, annual membership dues, and yearly vision care expenses come out of Yearly, and each month we put in 1/12 of what that all adds up to. Cookie Jar is where we put unexpected funds like holiday checks or extra money from a month when expenses were low. It also acts as a pressure valve if one month is too high or if we really need to take a vacation. Finally, Nest Egg is a savings account where we try to keep 6 months or so of our monthly budget on hand in case of emergency or no income (a bit of my mom's advice).
This data can be used to help answer questions like "how much do I need to save or take out in student loans so I can quit my job and go back to school?" or "how much can I save each month for that trip I want to take?"
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