How to budget for long term expenses

clajo04

I've set up my budget in Quicken - My budget is allocated over 50 expense categories. (I have not budgeted against my miscellaneous category - this is important later).

Some of these categories are "monthly spend" and as such the balances do not carry over into the next month. Unspent amounts in these categories can cover overages in other categories, or can contribute to my general savings.

Most of the budget categories are a mixture of "monthly spend" and "save" - so some percentage of my monthly budget is meant to be saved for an expense that will occur later. I'm having trouble figuring out how to account for those amounts.

What I've done to date is to create an "encumbrance" category under each of these budgeted categories. At the beginning of the month, I create a net zero entry in my checking account, encumbering the "savings" amount of each budget category into the appropriate encumbrance category, and balancing the transaction with an entry against my miscellaneous category. I then transfer the total amount of the encumbrances to my high yield savings account from my checking account. Doing this shows the "spend" of my "savings amount" in the budget display, giving me an accurate measure of how much of the budgeted category is left to be spent in the month. When the actual expense occurs in the future, I transfer the money back from my savings account to my checking account; I reverse the amount out of the encumbrance category using another net-zero transaction, and record the actual spend against the budget category.

The downsides of this approach are that: I have to enter net zero transactions in my checking account; it totally destroys my miscellaneous category for expense tracking; and I have to create a custom report of only those encumbrance categories to see my savings progress against each budgeted category.

It seems to me that Savings Goals should be the way that I account for these amounts - I would create a transaction at the beginning of each month that would contribute to the Savings Goal the "savings" portion of the monthly budget. I would then transfer the total amount contributed to the savings goals into my savings account. However, I run into a number of problems trying to implement this:
1) I can't contribute to, or withdraw from a savings goal in a "split" transaction - meaning that I have to create a separate savings goal transfer for each budgeted category that has a save component. This is more than 30 transactions. And transferring to the Savings Goal does not register as spend in my budget category, so I still have to enter a net-zero transaction in my checking account to get the savings contribution to register as "spend" in the budget category.
2) Once the amount is transferred from my checking account to the Savings Goal, I can't figure out how I am to record the transfer of money to my savings account. If I transfer from the Savings Goal, the balance in the goal goes down. The balance in my checking account has already been deducted for the contribution to the Savings Goal.

My question is - what is the appropriate way to track this component of my monthly budget? Am I misunderstanding something about Savings Goals that would allow me to have contributions and withdrawals register against budget categories? And how do I sweep the money that I have in a Savings Goal to a high-yield savings account?

Please let me know if my question isn't clearly explained, and thanks in advance for any advice,
-John

mshiggins

That sounds like a lot of work to maintain. Would you be open to suggestions for different approaches?

QWinUser

@clajo04 - have you looked into "zero based budgeting"? What you describe above is very similar to this concept. I have used it on Quicken for years. Even though Quicken doesn't officially have the capability for such a budget, I have been able to create it by having a reminder transaction for EVERY cash flow (income, expenses, transfers ) or budget item, that is posted out 12 months. My spending accounts are "zero balance" accounts. For checking and HSA, I maintain a balance between 250.00 to 275.00. For credit cards I maintain a zero balance. I use transfer or credit card payment transactions to maintain these balance amounts. For credit cards, I adjust the credit card payment amount so that the ending balance of the credit card account is always zero. For the checking account I transfer any excess to the savings account. If I need additional funding, I transfer from the savings account to the checking account. This way all funds are accounted for, and I know where everything is, and there are no surprises because everything is "projected" out 12 months.

clajo04

@mshiggins I would be open to suggestions, but I am comfortable with the approach as described and I like the insights and control it gives me over our spending. What are your suggestions?

clajo04

@QWinUser - agreed - it does sound like a lot of the characteristics are similar - I am setting up reminders for all of the repeating transactions, and I'm not carrying cred it card debt. I can't claim to cover EVERY cash flow. I guess the part of your approach I don't understand is the planning for large expenditures - for example, if you have a $12K expense that you know is going to happen each June, are you setting up a "savings reminder" for 1K each month? I'll research zero based budgeting, but you didn't mention Savings Goals at all - do you use these as part of your budgeting approach?

QWinUser

@clajo04 - I don't use savings goals. I never really had to. Any excess funds go to savings as a "reserve" and I know I would be able to cover a big expense because I post out 12 months of transactions, so I know well in advance that that big expenditure is coming. Zero Based Budgeting takes the guesswork out of budgeting. When you have it set up, it almost runs automatically, and it really doesn't matter if you have a monthly expenditure or a big annual one.

QWinUser

Oh and another thing I forgot to mention - if you use this method on Quicken, you need to post the transactions, and not just show reminders in your register because reminders are not editable. If I have an electric bill for 100.00 a month I initially post 12 monthly 100.00. But if it goes up to 110.00 or goes to 90.00, I need to adjust the remaining payments accordingly until the next change. For all of my utilities such as gas, electric, or water, I have them all set up with "budget helper" so that there aren't wild swings due to seasonal changes.