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.
Author: Sierra Black
Sierra Black has spent most of her life broke, no matter how much or how little she earned. She started turning that around two years ago with some radical life changes like moving, shifting careers and committing to buying nothing new.
Sierra and her family live in the Boston area. Sustaining a family of five on one salary has led to some creative frugal maneuvers over the years, especially living in an expensive urban area. She’s learned how to make a $1 family meal, cut her heating bills in half and save thousands of dollars on travel, clothing and fun.
When Sierra isn’t working magic on her family’s finances, she writes about personal finance, sustainable living and parenting.
We have included a $100 cushion in our monthly budget for years. It relieves the stress of unexpected little expenses and keeps us from saying “we’ve already blown our budget, why not go further?”
I sympathize with the feeling of feeling pinched at the end of the month. My wife and I decided to stop using our credit cards and take control of our debt. We are making progress and I know that one day we will get there.
We also sometimes encounter unexpected expenses such as medical bills and the broken lawn mower. It can be rally frustrating.
Thank you for a great post.
I live in a Boston, where real estate is incredibly expensive. I work for a big multinational and my wife for a small nonprofit. When we started saving for a downpayment for a house, we budgeted to save more than what she makes. Over the last year, my company has conducted significant layoffs. I work in Human Resources and part of my job is informing these people. My company gives a decent severance package, but people are still living paycheck to paycheck (some of them on six figure plus annual salaries) and not prepared for when something happens. I’m fortunate… Read more »
I use envelope system for my budgeting, one of the categories in the budget is labelled Discretionary. (See Note #1) Each month, budget categories automatically gets their monthly budget added into the imaginary envelopes, if I don’t spend all of it then it rolls over to the next month, if I go over in any particular category I transfer some imginary cash from the Discretionary category into the overspent category to cover the shortfall if I feel it’s needed. The Discretionary category is currently set at just over £1000 (approximately 60% of the total monthly budget), but importantly, it is… Read more »
Budgeting for those unexpected items is a very important thing to do, especially if the budget is already paper thin. You don’t want that large unexpected expense to break you.
Saving is great but if you need more money now, saving will not help you.
As I make my budget more and more formal, I find the ‘oops’ item fairly essential. I’m very much the type that will say, “As long as I’ve blown it . . . ” I also discovered that I need a bit of a transition period to austerity. I pinch a LOT at home, but there’s a fine line for me. My hugest single waste item is making excuses to eat out, so in the short run I’ve increased my grocery budget a bit to make my kitchen at home the more enticing place to eat. So far, so good… Read more »
One thing I found helpful was a tip from Apartment Therapy to count on spending the equivalent of a month’s rent or mortgage on your house/apartment each year. I’ve found that to be a reasonable guideline for me. Note: that doesn’t include big projects like redoing the walls in the kitchen.That probably is high for an apartment after the first year, but I find it to be a good guideline for my house.
Even in grad school–living on $3000/yr–I left a cushion in EACH CATEGORY. At the end of the month, I usually had a bit left over, so I felt good, not pinched.
I continue this practice even now. The left-over provides a cushion for the next month, so you have a growing cushion in savings.
Well, until we are able to successfully predict the future, we will never be able to budget with 100 percent accuracy. Therefore, I don’t worry about it. My budget it quite loose because with 3 kids, I never know what is going to happen next. (For instance, a bone scan last month set me back 400 dollars. Didn’t plan on that expense, that is for sure.) I have a very flexible budget, and I try not to stress about it. If groceries were excessively high one week for whatever reason, I try and tone it down some the next week.… Read more »
Our unexpected expenses every month have gotten pretty predictable. It’s always a big surprise when we *don’t* get an unexpected expense (and usually it doubles up the next month).
Recently there’s been a bump up with excess gremlins in the house. Hopefully that will die down and we’ll get back to the predictable amount of unplanned/irregular expenses.
When I was creating my budget, I didn’t try to budget personal spending down to the penny–I suspect bc I have a good deal of experience working with project budgets. No production can ever predict all of their costs exactly as there’s always an unexpected expense, so good budgeters always include a contingency. Also, on a large production, you can’t waste brain power trying to budget line items for tiny things like each individual pencil, as you have no control whether workers are working efficiently or if they may struggle and blow through supplies. After I set the fixed line… Read more »
actual monthly spending – budgeted monthly spending = unexpected spending
Average the unexpected spending for about 6 months and add that amount to your budget. Unexpected spending will usually run high (sometimes extremely) for 3 or 4 months and then drop down for several months so it would be best to revisit this category every 3 to 6 months to see if it needs adjustment.
I create a skeletal budget each pay period, using MS Excel; it only includes those things that have to be done. I leave approximately $200 -$400 unaccounted for, we rely on that for variable expenses, like gas for the truck, take out. If the next pay period approaches and that cushion still looks a little too hefty, I siphon money and put it into savings or whatever our present debt goal is. I am the family’s financial manager, and when I first stepped into that role, my budget was too rigid and inflexible not allowing for the slightest contingency which… Read more »
We probably leave a little too much room in our budget for the unexpected. We’re trying to combat what for us has been a problem (i.e. too much cushion in the budget) and are now up to 3 different saving accounts as well as a monthly cushion in checking to help keep our budget lean. The first (and smallest) savings account is connected to our checking account at the same bank and is really just overdraft protection for us. The second account is our 6 to 8 month emergency fund. Our new, third account is an ING savings account to… Read more »
In your piece- everything but dinner out with friends is in the emergency budget. We keep $1000 there just for those things. The dinner out would come out of my allowance. The dogs have their own budget ($100 a month) which seems to work. I must have more envelopes (and savings categories) than you.
We don’t often find our envelopes empty anymore- but this time of year they are definitely running month to month:>)
We do fairly well on my budget system. I leave £100 over in the bank each month for any mishaps (it is always used up by the end of the month) plus I have a ‘misc’ account that I make sure to top up with £50 pounds every now and again – used for unexpected expenses. After a £7000+ vet bill some years ago, I now won’t go anywhere without comprehensive pet insurance. In addition to all of this I have several accounts: holiday, car expenses, emergency (for big things like job loss), long term savings, clothes, studies. My budgets… Read more »
I do build in some miscellaneous expenses.
When I made up my budget, I ran the expenditures for the 2 previous years to identify what our actual spending had been. That gave me a target figure for some irregular expenses, such as the vet trips and miscellaneous school-related fees. I also included one small line item for unclassified miscellaneous items. I now set this money aside so I have a financial cushion when an irregular expense is incurred.
Why are you so against having a miscellaneous line in your budget? For most people, that is where the cushion is! Whenever I add something into the misc line I add a comment in excel so I cal remember what it was for. If it is something constant (food, an insurance bill) then I’ll plan for it out of the misc line next month. If not (emergency room) then I know to budget the proper amount into misc.
My budget’s “wiggle room” is $50/month set aside for my daily lunch at the company cafeteria.
If something comes up, I use the $50 to pay for it and make up the difference by bringing lunch from home for the rest of the month.
I keep $500 in my checking account above and beyond my budget in case anything crazy happens. Also, for every category that isn’t fixed, I either take the highest amount it’s been in the last 12 months or the average and add either 50 or 5 and then round to the nearest 100 or 10. That way, I’m always overbudgeting. Whatever amounts are left over at the end of the month get sent to savings! For example, I just bought a car and the funds that are left over (which there will be) will go into savings.
Sierra’s post shows how budgeting evolves over time. Budgeting is trial and error. If we can set aside frustration and continue to adjust the budget, we will get progressively better results. And we will recognize the need for such things as leaving wiggle room in the budget. Several comments have mentioned a cushion account, we use one, as well. It’s about 10% of our budget. We also anticipate car repairs, medical emergencies, house and appliance repairs, by setting aside money for these on a monthly basis. It’s really just a form of dedicated savings, but the money is there when… Read more »
Yes I do the same, but for unexpected things like the car breaking down I just go into my emergency fund. That’s what it’s there for, emergencies. I don’t consider shopping for anything an emergency, even if it’s doing it for a good cause like your kids’ book fair. That’s something you knew would come up, gotta budget for it. As I also track every penny, including cash, over time you will get an idea of what you spend specifically even for emergencies. We are all creatures of habit, I’m afraid and our emergencies reflect that. Three years ago you… Read more »
Gail Vax-Oxlade posted on this topic recently and rather than “mistakes,” calls these unplanned for events “curve balls”. I’ve resolved to start a “curve balls” category in my budget!
http://gailvazoxlade.com/blog/archives/2257
My wife and I look at the yearly total of those irregular expenses and divide that by 52. We put that much away automatically in an ING account each week. This is separate from our emergency fund. The weekly funding of this account makes it less likely that we will use the money for something else.
We allocate only 95% of our take home pay toward our budget categories. That leaves roughly $250/month available for whatever comes up. Normally it ends up being a flight to visit family, but since we have a lot of our budget going toward savings and student loan repayment, and very little toward our “fun fund”, we don’t mind using some of that leftover money for a fun day trip or date night.
Great tips! For ideas on how you can take charge of your own health care costs, check out Whatstherealcost.org.
after a post-college period of financial irresponsibility, i’m finally getting on track with my finances. setting up my budget on mint has been a great tool as I can pretty easily see where my money is going. setting up a budget was a key part to it but I knew that I couldn’t live with such a tight noose of planning for every penny. I’m fortunate enough to live with family so my rent is not a huge portion, but I do pay something. in terms of those unexpected expenses, I’ve decided the best way for me to handle that… Read more »
In addition to your current expenditure budget, you can give yourself a cash allowance each week. This can be 5% of your budget or whatever number you are comfortable with. Put the cash in an envelop and you can use it for anything you want – extra dinner out. Assuming you don’t spend it all every week, this cash will accumulate and you can use it to pay for surprises like a vet bill. Add it to your budget and see if it works out.
We don’t have a set budget per se. We roughly know our utility/food/gas expenses each month and have about some of our income left over to put towards our credit card. Our credit card covers unexpected issues(car troubles,airfare for weddings/funerals, etc). Any cash left over after paying off the CC goes into savings.
Excellent article. We have a built in cushion in our budget, of about 10% that comes in very handy. Usually we dont need it and it just accumulates in our savings, but the times we do need it, like when our water heater broke last winter, its a relief to not have to worry about where the money comes from.
Thanks for this one, Sienna. I think I do need to add a mini-emergency line of 5-10% to my budget.
I’m totally the type to say, well, it’s already blown for the month so …
And every month it is something…
I budget for those expenses that don’t generally occur every month. At the beginning of the month I transfer a lump sum into a separate account that is interest paying. This is “Not the Emergency Account”. I maintain a spreadsheet with imaginary envelopes for each component of the budgeted transfer. It is actually quite a long list and covers everything from the annual newspaper subscription to gifts, charitable contributions, travel, church dues, real estate taxes and annual insurance bills. You get the picture. I also budget for a medical and dental and prescription category for copays and deductibles. The remaining… Read more »
i just wiped my proper emergency fund quite clean for surgery for my pet. completely necessary, cancerous growths, etc, flash forward a few months and he’s doing GREAT. i was rebuilding my emergency fund and lo and behold, he starts eating weird stuff & puking and needs to go back to the vet… $550 for some pepto bismol and a good squeeze to make sure it wasn’t anything terrible. unfortunately my emergency fund wasn’t built up enough to cover the vets. so my well-planned emergency fund half worked 🙂 i just got a little roughed up on the second vet… Read more »
I love this article! We too make ourselves feel “broke on purpose” to help us stay gazelle intense with paying off our debt snowball. But not having any wiggle room in our budget is extremely stressful each month. We’ve been struggling to find a way to balance the two: accounting for every dollar and having a slush fund for unexpected expenses that don’t rise to the Emergency Fund catagory.
Thanks for the unexpected fund idea and for helping us realize that sometimes we need to loosen up and know that perfection in a budget is impossible! Life happens!
Dh and I are currently debt free. We budget for fixed expenses, saving,and discuss monthly the budget for the next month (food, entertainment, clothes, gifts, gas, haircuts, ect). We have money left after all of those that often ends up being towards a unexpected expense (most often car or home maintainace.) If we don’t end up needing it for several months it gets transfered to savings, but many, many months have something unexpected, unfun mini-emergency. If we didn’t have the money to spend out of cash flow for these sort of things we would take it out of the emergency… Read more »
We have a separate savings account (an ING orange account with a debit card) from our emergency fund that we use for the unexpected. I put $400-$500 in this account at the beginning of the month, and treat it as a bill. When we have major car repairs, gifts to purchase, household repairs, etc. we pay for them out of this account.
Maybe your own idea of putting aside 5% – 10% extra each month for accidents will help get you excited again about keeping a close tab on your money.
For example, when you don’t spend that money put aside, you can either allocate it to your emergency fund or to savings for something else…something fun, if that fits within your budget.
I have a “slush fund” account that I put money in every month (about $275 each month). Now, I do plan to use the money for future spending, (car registration, vacations, Christmas) but if something comes up in the mean time like having to replace tires on the car or an unexpected medical bill, then I just take from that instead of dipping into the emergency fund. It works really well.
I tend to pad each category a little beyond where I think it will be. For Groceries, Eating Out, and Allowance budgets I add an extra 5-10% beyond what my monthly averages are. For each Utility budget item (gas, electricity, etc) I pick an amount halfway between my average spend per month and the highest bill of the year. When my regular budget items cost more in some months it’s ok, i’ve got wiggle room; when I have an unexpected expense, I generally have enough to cover it from the padding in the other categories. And if there are no… Read more »
I’m so glad you included dinner out with a college friend in the “misc emergencies” type area. It’s one thing if a friend contacts you out of the blue at the beginning of the month and you can easily, say, not go out a planned time during the month. But at the end of the month? Good to have that little cushion. Because nothing is worse than getting out of debt than having to feel like you can’t actually live your life. I have no debt other than recent student loans (and since I went back to school for another… Read more »
Even though we’ve built up our emergency fund to a point that it doesn’t need to be funded any further, we allocate money into go into our emergency fund each month. This helps pay for unexpected expenses each month w/o causing the emergency fund to dwindle over time. I think that this is the same thing as budgeting for surprises, but for us this is a convenient way to do it. I plan to use any extra emergency funds to do some year-end investment rebalancing.
The only thing I budget for is savings. Every paycheck has certain amounts automatically moved to various savings vehicles, and everything that’s left over is discretionary. I always meet my savings goals, and never stress about what category every purchase is supposed to fit in. If I drop my phone and need to buy a new one, that just comes out of the post savings general fund, same as groceries, rent, utilities and everything else. Lots of categorization has never actually helped me with anything, it’s just created extra work.
I have a ‘Splurge Fund’ in ING where I send $50 every month and that is to take care of the random times when I want something that is out of my regular budget. I also send $400 a month to the miscellaneous fund and that takes care of any unexpected things like new tires/vet bill/ etc. I have a separate Emergency fund but those two little separate funds are part of the monthly budget…but I don’t have to worry about spending out of them.
I absolutely think that you have to account for mistakes. It’s not realistic to think that one can predict every expense. There are all kinds of oddball things that can come up, and those can be the ones that trip people up if they keep a tight, controlled budget. Expect that some unexpected things will happen.
I don’t like budgeting every possible category to the penny. But I have been tracking our expenses for the past 2, 3 years. At the end of the year I summarize what we spent on the “unexpected” or nonroutine. This helps us get better numbers for the categories we do track (for example medical may need to go higher), and allows us to see how much money we should somehow accomodate in the budget to capture all those unanticipated expenses. I have also learned the unexpected is really the norm.
We have standing “slush fund” for all those unexpected (but not infrequent) expenses. We keep 5 K in the fund so it also serves as a mini-emergency fund.
I don’t categorize these expenditures as living expenses. They go into a seperate tracking category so I can see how much we spend on unplanned stuff. So far this year it’s been a new top for the car, replacement of a 20 year-old fridge, 2 (ouch!) root canals, and multiple home repairs.
I understand the desire to perfectly budget every cent…and it worked great when I was single and in grad school. Now though, we do “rough” budgeting… We have an account for bills (which I put in the max any bill has been for the year at the start of each month), an account for groceries/joint fun (if that runs out, tough, we have a pantry for a reason), and we have our own accounts for things like “lunch with a college friend”. Anything else gets divided into savings accounts – Emergency, School Fees, Debt, House, Car, etc… and if something… Read more »
I think you’re talking about 3 different things, and many of the comments are addressing at least 1 of these 3 things. 1st: Regular, but non-monthly expenses: The ones that come to mind in my own budget are our water/sewer bill, auto maintenance, and vet check-up bills. The water/sewer is billed quarterly, the auto maintenance is for whenever we need an oil change, new tires, and so on, and our vet bill is once a year (our cat needs testing at his check-up once a year for chronic health problems, we know it will cost around $300 so we budget… Read more »
I keep going back and forth on the topic of budgeting in general. To me, budgets are like counting calories, great in theory but not so great in practice. As long as I know I’m not spending on things I don’t need (and as long as I check my finances once a month to make sure they’re headed in the right direction) then I’m pretty sure I’m doing fine.
Of course, opinions vary so budgets work for you, by all means. 🙂
Great post! I’m sure lots of people encounter the same difficulty and we all just have to find a way to handle it that works for our budgets. Thanks for the great ideas and to the commenters for some great ideas too.