Budgeting For Mistakes

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.