Next month my mortgage payment is going up by $200 thanks to an adjustment in the escrow account for city taxes I mentioned back in August. So I’m re-budgeting for the remainder of the year and thought I’d explain my budgeting system while I’m at it.
Why the mortgage payment increased
Typically on a mortgage payment, some of the money goes to the principal and interest, and some of the money goes towards home insurance and property taxes which are generally paid yearly. There are regulations (of course) about the minimum amount of money that can be kept in the escrow account, and in Michigan at least, it must be greater than 2 monthly payments.
I pay my insurance premium myself so it’s not included in my mortgage payment – I pay it via my credit card to get additional reward points and I earn interest in my bank account whereas the escrow account doesn’t pay any.
To cut a long and unexciting story short; my escrow payment has increased by $110.53 and I’m paying an additional shortfall of $112.91, so my new mortgage payment for the next year is $1,716.71 vs. the $1,500 it used to be.
I have one bank account solely reserved for all bill payments, and this account is where I keep my budget funds. I aim to keep around 3 months worth in this account, so it’s like an emergency fund in that respect, although I have a separate emergency fund for bigger emergencies such as being laid off.
I treat all expenses as either ‘Mandatory’ or ‘Discretionary’. Mandatory are things needed for living (food, utilities, house, etc) and Discretionary are things that I don’t need to spend money on but choose to.
I further divide all expenses into categories and keep a balance for each category that rolls over from month to month. Because of the 3 month buffer in this account, I’m able to “borrow” money in one category and let it go negative, this typically happens with expenses that are paid annually e.g. home insurance.
My new monthly budget
In the following table, I’ve listed my budget categories and the old / new amounts. I’ve also included the amount of money allocated to each category, as well as the target minimum balance I’m tracking for that category.
Green shaded entries indicate a decrease in the budget amount, red indicates an increase.
For the balance column, red indicates a negative amount and for the Minimum column, red means that the category is below its target.
|House: Property Tax||0||0||0||0|
Changes in my monthly budget
I decided to decrease the overall budget from $3,975 to $3,960 overall and I’ve compensated for the increased mortgage payment by reducing spend in some categories.
We’ve been in our house for just over a year now so I’m still getting a feel for the average amount. I paid $763 in the last 12 months which included one of the coldest winters in recent times, or about $63 a month. I could reduce my new allocation of $85 further, but I’m letting it ride for now to see how the winter bills go.
However, for the time being, I’ve chosen not to budget for the additional escrow portion of the new mortgage payment, so I’ll be over-spending this category by $100 a month. I’m waiting to see if further adjustments are needed based on any under-estimation of the winter taxes and I can cover the additional escrow payment from the spare funds in this account.
A $3 saving! The actual home monitoring fee is $49.99 a month and I’m locked in for one more year then I may be shopping around as I’ve developed quite an interest in home automation and security of late.
My gasoline spend is reduced from $10 to $5. I’ve driven 5,800 miles in my Chevy Volt and spent a total of $30 in gasoline when I topped up the tank in March so that’s 623 miles per gallon! I think I’m all set for the rest of the year, but just in case I budgeted for an additional refill. I love the feel and quietness of my electric car and will never go back to gasoline only. My charging costs are about $20 a month.
I’m reducing allocation to this which is for anything else. I don’t want to get in the habit of using this category since it means the expense isn’t planned.
I’ve cut this category entirely – I’m using Home: Repair for essential repairs / small improvements and I’m putting some of my Savings towards larger home improvement projects.
A mixture of electronic purchases and software; I’ve cut this allocation so I won’t be getting a new laptop for a while (not that I need a new one at the moment).
My category for side income related expenses. I don’t have regular expenses here so I’ve cut the amount.
My total balance across all categories is $14,603. My minimum target amount is $9,853 so I have about $5K as a buffer and I can afford to loan money to needed categories and let them run a negative balance.
In the Mandatory categories, the total is $10,977 with a minimum balance of $9,738 so here I only have $1,238 spare. But I can always re-allocate money from the discretionary categories if I really needed to.
This category is currently negative at $-370 as I’m still paying off the annual premium from earlier this summer. I’ll be positive by the end of the year.
Same story for the auto insurance though I’ll be back in the black next month for this category.
I’m still paying for the Xbox One that I bought last year as well as some other accessories / software for my PC. Will be above water in this category next month.
This category is for presents / charity etc. I’m still recovering from last Christmas!
Most of this is from 5 year payments on domain names and hosting. I’m paying this back slowly but I don’t have many new expenses in this category to interfere with the repayments.
Reducing my monthly budget has a number of good implications since a number of my goals and target amounts are based on this number: my yearly dividend goal decreases; the size of my emergency fund decreases. It brings financial independence even earlier and is generally an easier thing to do than to earn more money; however it’s a game of diminishing returns since finding savings becomes more and more difficult. I’m going to wait and what the winter brings; both for taxes and utility costs and will re-evaluate then.
Quote of the day
It’s clearly a budget. It’s got a lot of numbers in it.