Budgeting For Mistakes
Published on - November 8th, 2010 (Modified on - November 10th, 2010) (by Sierra Black) This post is from staff writer Sierra Black. Sierra writes about frugality, sustainable living, and getting her kids to eat kale at Childwild.com.
How carefully do you budget? Do you account for every dime, or is there some wiggle room in your spending plan?
Since I got on the wagon with tracking my spending, there’s no miscellaneous category in my budget anymore. Every dime of my income is accounted for. I know how much I spent on parking meters last month ($2.75), as well as bigger ticket items like what my household utilities cost ($328).
That’s great for budgeting. I base my spending plans for the coming month on my actual spending from previous months. In theory, my household finances should be a well-oiled, debt-slaying machine.
In theory. In theory, there’s no difference between practice and theory. But in practice…
Too good to be true
In practice, I end every month feeling pinched, wondering where all my money went and why my grocery envelope is so thin this week. Yes, I can check my spending records to get answers to those questions. But I would have thought that by now I’d have solved the problem.
I haven’t for two reasons. One is that I’ve deliberately cut our daily operating budget very close to the edge. We lived for a long time on less than half our current household income. Our income has gone up, but we still have debts to pay off. As uncomfortable as it can be to shake the last cup of black beans out of the cupboard because I ran out of grocery money, I’d rather spend a few more years living on a tight budget in order to get out of debt faster.
In other words, I make myself feel broke on purpose.
Back in the day, I used to come up against the end-of-month bills in a panic, staring at a dwindling bank balance and no back-up plan. Now I have the same immediate problem of squeezing money for the electric bill out of the grocery budget. But instead of a wad of maxed-out credit cards, I have zero credit debt and a nice start on an emergency fund building in my online savings account. That’s a huge improvement.
I’d still like to think, though, that after two years of tracking every penny I spend, I could accurately predict how much money I’ll need each week.
I fail because every month there are some irregular expenses. Sometimes they’re big, like a surprise $600 vet bill for our cats. Sometimes they’re small, like spending $30 at the charity book fair at my kids’ school or buying a $100 part for my oven.
The point is just that every month it’s something — something I neglected to account for. The more I plan ahead, the fewer these things take me by surprise. Our annual homeowner’s insurance bill no longer catches me off guard, and I’ve budgeted months in advance to pay the excise tax on our car.
But I’ll probably never be 100% accurate with my spending plans. I’ve learned the basic skills of tracking my income and expenses, and plotting out what I’ll need to spend in the coming month. I’m pretty good. I get it right to within a few hundred dollars every month.
Living in the Real World
Given the complexity of our financial life and the reality of my ADHD brain, this is probably as good as it gets for me as a household financial manager.
If I can’t get better at predicting what I’ll spend, I need another strategy to solve my end-of-month budget crunch. While I love how our household income has gone up over the past two years, I know that more money is rarely the answer to a financial problem. I just need to manage what we have better.
Puzzling over this at the end of October, I realized the answer had been staring at me for months.
I need to budget for my mistakes.
When I wrote about travel budgeting in July, I quoted Ramit Sethi‘s rule of thumb: figure out what you think you’ll spend on housing, food and travel costs, and then add 20% for the unexpected stuff that comes up on any vacation.
That rule served me well during all my summer travel. I came in under budget, feeling great, and put the extra money back in savings for my next trip.
Clearly, I need to do something similar with my household budget. Given the scale of the numbers, 20% is probably excessive. But I need to rewrite my spending plan with a margin of error. Maybe 10% or even 5% will be enough.
This will be money I can safely spend on anything that comes up during the month:
- Dinner out with a college friend
- A trip to the emergency room
- A car repair
- And so on
This money is for all of the small costs that don’t merit dipping into our emergency fund, but weren’t accounted for in my spending projections at the beginning of the month.
If I use it up, fine. That’s what it was there for. If I don’t, I get a bonus prize: the chance to knock that much more money off my debt this month.
Nobody’s perfect
Not only does that ease the pressure to be perfect with my spending a bit, but it gives me a short-term incentive to be extra careful. I wrote last week about my flagging interest in my own finances. Having to protect a pool of bonus money that might or might not go towards an extra debt payment at the end of the month is the kind of money hack that will keep me more engaged day-to-day.
Since I’m just starting this, I’m curious to hear from GRS readers: Do you have room in your budget for mistakes? How much do you allow? Does it help you stay focused, or give you an excuse to get sloppy with your spending? What advice can you give me?
Photo by Rich Anderson.
This article is about Budgeting, Money Hacks, Real-Life
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All great stuff, but the budgeting “to make yourself feel broke on purpose’ has worked wonders for me.
Although I know its not true, as long as I continue to budget myself in this fashion, I know I’ll always have a little extra.
Plus, it prevents a lot of impulse purchases in my life. Which is even more importnat…
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I use MoneyWell to manage my money, which is essentially envelope budgeting software. I have an incidentals bucket that amounts for about ~5% of my income. This bucket is supposed to be for non-recurring, unaccounted for expenditures.
A problem I’ve had with it is that it becomes very easy to start throwing things that should actually be recurring expenditures (e.g. personal property taxes, gifts for friends, health care, etc) into the black hole that the category entails.
I’ve gotten much better about identifying these cases and creating budget categories for them, then moving the money into the new category. In this way, my spending is tracked more accurately over time and my budget will organically evolve to meet these items, but it is still flexible enough to deal with unforeseen circumstances that periodically arise.
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Since we use YNAB and are spending from last month’s income, if we go over (and there is always one category we always go over – groceries), it gives us wiggle room because we start over with a clean slate. I love it! Living off your previous month’s income is so transformative – I recommend YNAB to everyone.
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We have a similar category in our budget, but I don’t agree that the items in that category qualify as “mistakes.” We instead call ours “Household Expenses.” Minor repairs around the house fall into this category (new lightbulbs, cleaning supplies, laundry detergent, garbage bags, etc.).
These were the things that I found were killing my budget early on, so instead, we just created a category specifically for these types of expenses and funded it adequately ($200/month). Some months it’s less than that, some months it’s more. But it averages out. We revisit the numbers each year and make any necessary adjustments. But they’re not really “mistakes,” they’re just inevitable random expenses associated with living.
As for the car repairs, well that’s neither a “Household Expense,” nor an “Emergency.” We have a monthly amount set aside to eventually replace our car when the time comes, so any major car repairs come out of that money. Minor repairs come out of the monthly “Transportation” budget, that includes gas, oil changes, parking fees, bus passes, windshield wiper blades, headlights, whatever else. If a major repair comes along that requires us to tap our “Car Replacement Budget,” we have to consider whether it’s worth draining the fund to fix the car, or using the money to just replace the car altogether.
Charitable donations fall under our “Gifts” envelope. If a kid comes to the door selling cookies for his boy scout pack, that’s a “Gift” in our budget (and means whoever has a birthday that month will be getting a gift $5 cheaper than they otherwise would have).
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Thank you Sierra!! I use a zero based budgeting system (You Need a Budget) and I’ve gotten so frustrated lately robbing $100 here, $100 there out of the money I have budgeted for savings each month. I’m going to take your advice and start allocating some money to a flex category each month and use it where I need it. I’ll feel good putting a set amount in savings and sticking to it. The new flex category can absorb those random monthly overages that always come up. Even better, if I don’t spend all my flex money, I can put it in savings and feel like I’m doing extra that month.
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Rather than tracking every penny, I put aside the yearly maximum cost of each bill. For example, during the summer months my electric bill peaks at $125, but during the winter it’s only $50. I simply budget for $125 and split the remainder between myself and savings at the end of the month.
As for margin of error – I keep 5 savings accounts. One for house insurance/taxes/repairs, health insurance/medical costs, car insurance/ repairs, travel, and miscellaneous. I put $50 into each one every week so that if I all of a sudden need a car repair I just dig into my respective savings account rather than pinching pennies for that month.
Obviously, the amount you’re able to put away every week is dependent on your income, but, yes, I feel it’s very important to have “personal insurance.”
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I don’t use a set budget either. DH handles certain expenses and I handle others.
Each paycheck, three savings contributions (401k, HSA, and liquid savings) are drafted out automatically with the first two being pretax. Then I pay all bills due during that pay period.
What’s left over is for food, coaching, home improvement, and entertainment. And I stop spending once my balance is under $300, I just like having that cushion.
“Emergencies” like car repairs go on my credit card, which is now close to zero balance and once it is I will be able to pay it off every pay period. For the past two years I have deliberately NOT used the credit card for anything I could not pay off all at once during a pay period and still make a balance payment during the second pay period each month.
With a funded HSA, there are no health expenses that have to come out of monthly income.
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Funny this should come up, when we were just discussing this on the way to the mountains on Friday. We had three unexpected household expenses in one month, and then I found out I needed two new tires. It’s frustrating because I know that you should somehow budget for these things, but it seems like every month there are unexpected expenses. I’ve decided to go over the last three months of expenses and see if I can get a handle on “miscellaneous.” Also, starting in the new year, I’m going to try to track all our expenses. It just drives me crazy to not have a handle on why we are going over our budget every month.
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I have a very simple running budget – there’s the rent payment and other bills that absolutely have to be met out of each month’s paycheck (which can be a bit tricky, since bills in the UK are usually quarterly instead of monthly and we get paid once a calendar month on a floating schedule. . .so payday is different every month!) which goes in one account, then the regular savings goals (15% of my net income) which go in a different account the day I get paid. The rest goes into a third account which can be spent freely (on groceries, fun, non-essentials like phone and internet, etc). The leftover cash not spent from this account at the end of the month goes into savings the day before I get paid.
In addition to the monthly spending fast (the day before payday, on which I have ‘no money’ for that broke feeling), the motivation to keep my monthly spending under control is that once a year, I give myself 10% of the leftover funds to spend on shoes. . .the more leftovers I’ve got, the more shoes I can have. Works flawlessly. . .except that I keep having to add more shelves to my shoe cabinet.
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Very practical post. there are so many people that do not budget for an emergency fund nevertheless save for one. They say you should save 6 months worth of expenses, i advocate a year.
Imagine how much most people would be financially if they had a real savings of a whole year of living expenses saved as the proverbial “just in case”?
Dwight Anthony
Financially Elite Blog dot Com
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I have a $500.00 “slush” fund that is completely separate from my emergency fund. If something comes up out of the ordinary that is above and beyond my monthy budget then I tap the slush fund. It doesn’t happen very often but it feels good to know that it there if I need it. Once the slush fund has been tapped I replenish it to the original $500.00 mark.
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I wouldn’t call a trip to the emergency room, a car repair, or dinner with a friend “mistakes.” The first two, I think, can justifiably come out of your emergency fund if you haven’t budgeted for them. What I try to do for irregular expenses is estimate the total annual cost and then budget 1/12 of that for each month. Most months, I will go under budget on those categories, but I will have the excess saved up for the once or twice a year that I have a larger expense. I also like to have a cushion in each category, but if you do that, you have to be careful that you don’t get in the mindset that you can go ahead and spend more just because you have money left in the budget.
As for dinner out with a friend, I am surprised that you have a parking meter category in your budget but not a dining out category. Or a discretionary spending category. I don’t understand what you have against a miscellaneous category — you’d have to have a ridiculous number of categories to account for every possible expenditure. A budget with every dime set in stone is very difficult to follow and, for many people, will result in them giving up on budgeting altogether.
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We tracked everything for a long time and it didn’t work for us.
For the last almost-year, we’ve allotted ourselves a certain amount of cash each week (that, interestingly, has dropped $10 here and there, until now we’re $50/week below where we started) and that’s what we have to spend on weekly expenses (groceries, gas, eating out, going out, etc.) plus anything else that costs under $50 (meds, copays, oil changes).
As soon as something is put on the credit card, I log in to my bank and send my credit card a payment for whatever we just charged. If I know another charge is coming, I’ll send that, too (which is why I use the bank and not the cc company – the bank will let me overpay). This way, the money is actually spent *and* we have no surprise credit card bills.
Our checks are direct-deposited into savings and we transfer to checking what we need to pay bills.
Other things — vet bill, car maintenance, insurance, etc. — is just paid out of savings.
We were able to pay off my husband’s car several years early with what we saved by using this system for only 6 months. (Payments were $300/month.)
This school year, I have gone from full-time teaching to half-time teaching so I could open a business, and we’re not budget-crunched (we’re just not saving as much as we could be … or paying off my student loan early).
(The business is actually on the cusp of being able to pay us; the plan is to put that money straight into savings, since our other salaries are already paying the bills.)
It has worked really, really well for us. Perhaps it would for you, too.
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I may be odd in that I’ve been tracking my spending for so long that my spend g plan really is more of a plan in the sense of “here’s what I intend to spend money on this month”. I don’t allot $200 to eating out and $200 to groceries, but I know that’s what I’ll likely spend. It’s usually pretty accurate, so I don’t really worry about it. The only category I really watch is eating out, and that’s because I’m aiming to eat out less.
For unexpected expenses, I have various funds that I just add to monthly. So that $900+ vet bill we had last week came out of a fund that we add $100-$200 to each month.
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Thank you so much for this article!! Every month I beat myself up because I can’t come up with the “perfect” budget. However, over the past year I have completely turned my financial life around. What an encouraging article. I’m going to stop worrying about the constant shifting that I do to get through the month…and just be glad that I’m not spending more than I make!! (And actually saving some!) Thank you!!!
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I find this topic to be somewhat humorous, but not in a funny sort of way. I’m a graduate student on a student stipend and I get paid once a month. I have yet to run out of money. In fact, as I wrote in my personal story that got posted here a few weeks ago, I have more in savings now than ever before. First, I pay my bills. The ones that actually get sent in monthly get paid. But for the ones that come every six months? I put that money aside in a long term savings account so that I can’t touch it until I have to pay the bill. Then I pay my other expenses, I put aside money for food, the cats and other regular expenditures. Then I set aside my actual savings: emergency, retirement, taxes, long term wants, etc. Then I’m left with spending money. Any money I don’t spend by the end of the month? I consider that an extra payment for my student loans.
I think the biggest reason why this works for me is that I get the money out of my checking account as soon as possible, and I don’t pull my credit card out to make regular purchases.
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I find that most “unexpected” expenses aren’t all that unexpected if you’ve paid attention or kept records.
You don’t know for sure that the fridge is going to die, that you’re going to break a window, and that you’re going to have to replace part of the gutter on the back of the house, but you can know with reasonable certainty that you’re going to have to spend $X per year on home maintenance. Or for the car – you don’t know if it’ll be the clutch going out, a bad tie rod, or picking up a big nail in a tire but you should know that you’re probably going to spend $Y over the year on car expenses.
Pet emergencies – you can’t know that your cat is going to eat a plastic bread tie and require surgery, and maybe if you only have one pet you don’t have to budget for emergencies but I can tell you that if you have 3 cats, 4 dogs and 4 horses, SOMEBODY is going to need a emergency vet visit at some point in the year, and you budget for that. If two of those dogs are geriatric and one of the horses is dumb as a post, you figure on more like one emergency visit every other month. My “Pets:Veterinary” category would horrify most GRS readers.
Go out with a friend, or spend $30 at a book fair? That’s what I use my “entertainment” category for. I allocate myself a certain amount each month for “entertainment”. If I choose to use it for buying books then I don’t have it for going out. Any leftover gets rolled to the next month. If a friend drops in from out of town and doesn’t want to come over here for drinks and dinner, sometimes I borrow from next month’s allotment. More often I try to keep a minimum level in that virtual envelope just for those sorts of things.
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We do not budget for certain things because we have it already incorporated into the plan. There are some months where we do go over, but try to make up for it in the next month. It sounds like you are moving in the right direction. If your debt is paid off and you are working towards putting the money in a positive direction, then you’re doing great!
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I have a excel budget (which I look at daily) plotted out for the next 12 months, with all the bills and known expenses all set at ‘worst case scenario.’ Just to see ‘roughly’ when we will pay off all our credit card debts and then what we will potenially save.
With the current month I put the exact amounts of bills etc and what ever is left over i put in the savings cell, but never actually move the money anywhere. If an unexpected expense comes up i just put the amount of it in another cell and deduct from the savings cell, whatever is left in the savings cell then literally goes into the savings account.
I think its important to note what money is spent where, even if its just as loose as, ‘day at the beach: $50′ then you get to know where your money is going and for what reason.
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We’ve been doing the envelope system for about six months now, and just created a ‘miscellaneous’ envelope. It wouldn’t have worked in the beginning, because we would have blown it on frivolous things, but I think now that we’re down to a routine, it works. I like to call it the “this is silly” envelope. As in, “this is silly to wait a week to buy laundry soap when I have no clean clothes but the grocery money is gone”. Yes, it signifies lack of perfect budgeting, but there is always something, and that something is not always frivolous.
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I budget.. but i like to wiggle!
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I have my budget down to a science. I averaged irregular expenses, like electrity, and in those months that I don’t spend the budgeted amount, it “rolls forward” to the time it is needed.
Sometimes, I get an increase in an item like the Sewer bill, which hardly ever changes. I have a fund of $60 per month to handle those sorts of things. That $60 also covers things like stamps, which I buy 6 times a year.
Every other item is budgeted in some category. It’s simple, if I haven’t accounted for it, then I DON’T SPEND for it! There is no emergency called “Eating Out With Friends”. Eating out is NOT an EMERGENCY.
If something terrible happens to the house, and I don’t have the money built up yet to fix, I simply patch it the best I can, fix it myself, and find some way to MAKE it work out. Or I live with it, even if it is no hot water in winter, and yes, I have done that, and guess what? I didn’t die and no one in my house became disabled…
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For me the question you pose breaks down as two separate issues. Do I have room to make mistakes in my budget–NO. BUT I also think there’s a likely chance many budgeters, including myself, will probably make mistakes in one form or another with the budget.
I’d recommend being as specific as possible with categories and subcategories. This can give more focus to the budget and our financial goals. We originally created a more general budget for ourselves in Excel. More recently, we have used this Money Management template http://www.vertex42.com/ExcelTemplates/money-management-template.html and have really found it effective and useful. This has helped us limit our mistakes and be more specific about where the budgeted money is going.
Thanks for your article!
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I just put an extra $1000 in my checking and forget about it, so if I go overlimit in my checkbook or have an unexpected expense I’m covered.
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Great post, Sierra. Simple idea, but easily overlooked (he says, guiltily).
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