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.
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 to still have a job, but maintaining a budget well below our income has taught us that if something happens (good or bad), we can find a way to afford it.
I know not everyone has the luxury to do that on the scale we’re doing it, but keeping a small cushion in you monthly budget (along with an emergency fund) is a smart, smart thing to do.
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 the only category that doesn’t get a monthly budget assigned to it. I have to manually place money into the Discretionary category and hence I can’t just spend money in the Discretionary fund without having to look closely why that money has been spent. The intention is that the Discretionary fund lasts a year without being touched.
The total value of the budget, including the Discretionary fund is kept my current account ready to be spent at anytime. Unfortunately that means keeping a fairly large wad of cash in low interest paying accounts but the system works for me.
Note #1: Actually reading it back Discretionary is probably a bad label because it sounds like a category I use for my own otherwise uncategorised spending which it isn’t, think of it more like an emergency category.
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 — I haven’t spent money on any “unauthorized” budget items like eating out since then. We shall see!
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. I try to balance it all out. However, I don’t think I can even remember a month going by that some expense didn’t jump up and bite me. I think allocating an extra percent is a great idea.
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 items (rent, child care, etc), and the fairly predictable costs (utilities — budget for ‘worst cast’ month, gas — budget for average driving with 1/2 tank contingency), I lumped the rest of my spending as “petty cash”. I spent time tinkering with the amount until I found a figure that allowed me to cover my average expenditures and still be able to handle the occasional surprise expense. On the weeks I don’t spend the whole amount, it’s held in the budget to cover larger expenses. I don’t sweat my individual purchases unless I start nearing the upper end of my range.
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 always happened. We felt strapped for cash and stressed out. This way works a lot better for us.
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 prevent us from spending the checking account cushion when that cushion rolls into the next month. The remainder of the cushion will now be deposited into the ING each month. Even one month of cushion rolling over in the checking starts us feeling rich and then we head out to dinner, order in pizza, buy a new piece of furniture, or do some other unnecessary and on a whim spending.
We’ve finally identified our problem of spending our budget cushion, so we’ll see if the new ING account helps us out.
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 span several months in advance and I tweak weekly. So if I find that I tend to spend a little more on groceries than budgeted I add a few more £’s to each monthly budget.
It works well, we are seldom faced with an unexpected situation that will cause a problem because there is always money available somewhere to fall back on.
With this strategy we’ve managed to pay off over £15000 of debt in 18 months and still maintain savings!
That being said, if I over spend on groceries one week, we live on the basics another week. If there is no money left in out monthly entertainment fund, we don’t go out.
Good thing I enjoy the budgeting eh! ;-)
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 these unpredictable expenses come up.
Most emergencies are really just unpredictable expenses. We know they will occur, we just don’t know when. We budget and save for them in advance, then they’re not emergencies for us.
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 wouldn’t have caught me dead saying any of this, but now I’m a believer is forewarned is forearmed, especially when it comes to money. There’s a great expression I heard about money. Money is for managing first, then spending. For some reason that sticks in my mind every time I get tired of my spreadsheet…LOL.
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 is to simply not budget every penny. After I’ve set aside the money I want to save and all my normal fixed expenses, I wind up with about 10% left over. This gives me some breathing room and while I’m still building up my emergency fund, it’s working for me.
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 money in my checking account is for regular monthly expenditures, such as food, dining out, and utilities. At the end of the month any money left over in checking goes into the money market account into a miscellaneous column. I also make a transfer back into my checking account to cover any expenditures that were irregular. It is always a game with me to see how much extra money I have left over (there is always some money left over-it just varies from month to month. So I don’t have to stress about running out of money for those unforeseen expenses. And I also don’t stress for any irregular expenses when the bills come in because I have already budgeted for them. I have been using this system for over 5 years and it has worked very well. I am not tempted to spend the extra money in the checking account during the month because I’m always so interested in seeing how much extra I can transfer at the end of the month.
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 bill, back to 0 again.
i hope he behaves for a while!
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 fund and then work to build it back up.
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 surprises, I have a surplus that can cover larger expenses in other months.
I just keep the surplus in the checking account, my emergency fund is elsewhere, and I use it for emergencies, not for irregular expenses.
I don’t think of my budget as “I get to spend dollars on this” instead I think of it as “I have to spend less than this amount”, and I try to minimize spending on things I don’t care about.
Monthly I check for errors, make sure no budget items are getting out of control, and that savings goals are being met.
In accounting for irregular expenses rocking the boat, I mainly look at my net checking account balance, if my balance goes up at the end of the month, I stayed within my budget and irregular expenses didn’t harm me financially. If the net balance went down, it means the expense was large and my monthly padding didn’t cover it. I then look to see if there’s a problem in my budgeting/planning/spending, etc.
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 degree, this is new), and part of how I do it is to have some slush where I plan for things like dinner out, or new windshield wipers, or even just a new cat toy when my cat unexpectedly decimates hers.
I love the idea people have of calling it the “not emergency account” — it’s that extra slush that you CAN spend if you really want to dip in without having to head to that true emergency account.
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 comes up, it will come out of one of those. At the same time, if we have money left at the end of the month, it goes into one of those…that way we save at the start of the month and at the end and doing this we haven’t had any problems with covering, for example, the $75 “oh shoot we locked ourselves out of the house” bill or the “extra” $300 I had to pay for my car maintenance recently….it just came out of the respective “savings” accounts.
I found that trying to budget for the penny got a little too stressful and this way, as long as I fund the accounts, I’m fine with what comes up – and we also have large credit lines on our CC for anything we couldn’t cover. (Not that I would use them unless it was life or death but those situations can occur!)
One trick to all this – realize that you have large sums of $$ earning low amounts, for me, that extra sleep I get not worrying is worth the loss for the lost interest.
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 each month $300/12=$25 per month). If you own a car you know you will have to spend a certain amount to maintain it, either track those expenses for a while or do an educated guess on how much it costs and divide by 12.
2nd – Emergency Fund. Your emergency fund is for some of this stuff. As an example, in my opinion needing new tires for your car shouldn’t be an emergency, it should be built into your budget because you should know a car needs new tires every x miles. But say your clutch unexpectedly goes out, that is unforeseen and probably an emergency that could come from your emergency fund. In the examples you gave, the unexpected $600 cat vet bill should probably come from your emergency fund. The $100 oven part is iffy – it could be considered an emergency, or you might want to have a budget category for something like home maintenance and repair that covers this sort of thing. When you spend from your emergency fund, you should replenish the fund with money you would normally have used for debt repayment or other savings until it is back up to its old level.
3rd: Then you need some sort of budget category for “Miscellaneous”, “Unforeseen”, “Blow Money” – whatever you want to call it. To me that where something like the $30 you mention for your kids’ book fair should come from. That’s really discretionary spending, you don’t *have* to spend that money, but you really need to have room for stuff like that build into your budget or you will go crazy.
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.
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…
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.
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.
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).
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.
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.”
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.
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.
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.
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
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.
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.
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.
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.
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!!!
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.
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.
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!
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.
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. :o)
I budget.. but i like to wiggle!
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…
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!
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.
Great post, Sierra. Simple idea, but easily overlooked (he says, guiltily).