I hate budgeting so much, as you will read in one of these links. Basically I pay to not have to budget by saving a huge amount extra so that there’s always slush. Technically, our spending is always one month behind our income, so what we did last month determines what we do this next month. I can look into my check register and go, yep, we can afford more stuff, or nope, we need to cut back. This only works because even when we were in graduate school and spent 40-60% of our income on rent for a 300 sq ft apartment, we spent a lot less than we earned and had a relatively large emergency fund (compared to our income). Some of the sacrifices included not buying meat for so long that the first time I had a steak (to celebrate paying off DH’s student loans), I threw up. That’s not normal.
What I’m saying here with this illustration is that 1. I don’t do detailed budgets, and 2. There are a lot of different ways to spend less than you earn and keep on firm financial footing for different people. If one method just does not work for you, you can sacrifice in a different direction and try a different type of budget.
What you shouldn’t do, though, is to keep going into more and more debt (or not doing any saving for future you) through inattention to your finances. Some system is necessary, even if that “system” is always to spend far less than you bring in. Most people want to spend a bit more than we did while we were in graduate school at that income, and there’s no reason not to if you want to unless you really value not budgeting, which I apparently value more than I do red meat (at least on a graduate student stipend).
For a third note, 3. Your system may change with your income levels and required expenses, and that is AOK.
Here’s where to start if you’re in debt.
Posts on whether or not to have a detailed budget:
Do you budget? MSN Money used to have a fantastic post of Liz Pulliam Weston’s about when it’s ok to ditch the budget, but unfortunately that post has gone to the ether. Nick from Step Away From the Mall did a nice summary of her post that you can read here, though he notes that this list is really a general budget, just not a detailed one. And here’s bit of a personal post (from when DH was unemployed and we had to keep a tighter rein on spending) in which I talk about how much I hate budgeting. You can also combine a loose budget with tighter monitoring of spending as Leigh (who doesn’t need a detailed budget but enjoys tracking her money) discusses in this recent post.
Different types of budgets:
The general idea behind a budget is to allow you to balance all of your spending/saving needs and goals. In general you will want to balance saving for long-term goals like retirement with medium goals like automobile replacement and with short-term goals like eating. You want to do it in such a way that keeps you out of high interest debt and allows you to save for the future while still enjoying today as much as being a responsible adult will allow.
A good general guideline for people who don’t want or need to retire early is the Balanced Money Formula by Elizabeth Warren. This is really just the idea that you spend 50% of your income or less on fixed expenses (she calls these “needs”), things you would have to pay whether or not you have income. Then 30% goes towards variable expenses (she calls these “wants”) that you could cut if you lost your job and 20% or more goes towards savings. These percentages don’t have to be perfect, but if you’re a member of a dual income family then keeping to these guidelines will put you on a good track for the future while insuring against catastrophe if there’s a job loss in the family. If you’re interested in the balanced money formula, Get Rich Slowly has some really great posts on it, including this nice worksheet from back in the day when JD Roth was figuring things out.
Another possibility to get those percentages for yourself for a general budget is to look at your specific circumstances in the case of a job loss or other emergency and do a financial fire drill. Think of the worst case scenario and run numbers for that, then based on that set your major recurring expenses like housing, car, etc. It will also show you if you need to target debts or sell things you couldn’t really afford to get rid of regular payments and so on.
Some people argue that you should target only big expenses and let the little ones figure themselves out. Others argue that the latte factor, money you spend on little things, adds up and is important. Both these arguments have elements of truth and elements of untruth. We talk about these two belief systems in this post on the latte factor vs. big item spending. Here we address gazingus pins, which is a type of latte factor.
As much as I dislike them personally, detailed budgets are incredibly useful and a really healthy thing to have. Probably the most popular method of doing a detailed budget on the PF blogosphere is YNAB (You Need a Budget). Some people prefer Quicken or make their own spreadsheets. Some people just use MINT, though many people use MINT in conjunction with YNAB or Quicken. MINT is great for tracking your expenditures by category and if you’re new to finances and use a lot of credit cards, it’s a great thing to just do. However it’s not as good a budgeting software as YNAB or Quicken. Ana talks about how she makes a budget here.
A zero-sum budget is one in which every dollar is accounted for.
Some people have strict envelope budgets. Instead of dealing with spreadsheets and so on, they will have cash-only budgets. This is especially useful if you truly have a limited amount you are able to spend without going into debt. Once the cash is gone for the month, you’re done. Some people allow you to take cash from one variable spending budget to add it to another (ex. if you spend less than expected on food, you can add the additional money to fun) and some people don’t.
One way to allocate “fun” money for non-necessities is the use of an adult allowance. Adult allowances are also great for balancing “fun” spending between partners while keeping below a budgeted sum and removing resentment. Here’s two posts on adult allowances: In praise of DH’s. How they work.
What about that nebulous idea of “savings” and “emergency fund”? Some people will include things like vacations and so on in “targeted savings” either virtually or in actual separate accounts and others will include all short-term savings into one general fun. We talk about when to use targeted savings in this post.
For people who don’t use detailed budgets and can wing things because they’re already saving a large portion of their earnings, it may still be useful to compare the cost of things when trying to decide whether to, for example, hire a house-cleaner. This post discusses how to make those kinds of comparisons.
Special budgetary topics:
A good heuristic to reach financial independence, definition here is to “simply” save 70% of your income until early retirement (there are more complicated formulae as well, but they all require a lot of saving or a lot of luck). Partial financial independence can be achieved at a lower savings rate and is a wonderful thing to have even when you’re still working. We talk about how having partial financial independence as a goal can make your life a lot less stressful because you will not be trapped by a bad job.
Not spending can be hard, even if you know you have to not spend now that you’ve looked at your budget. Here’s some recommendations for how to delay gratification. One that works really well for me is telling myself I can have it later!
Blitzing with a spending challenge
Some people do spending challenges for various time-lengths. I love reading about these and they can make really big changes to people’s mindsets. (Please link in the comments for spending challenges you enjoy reading. I also really like reading about “the compact.” Here’s our challenge tag, but we do more than just money challenges and we’re not that interesting.) They’re really great for stopping an addictive behavior or bad habit, such as buying clothing every weekend because you’re bored even though your closet is already full of things you never wear. Here we talk about how maybe no-spend days aren’t really the appropriate length of time unless you have real problems.
How to deal with joint finances
We at grumpy rumblings are not going to take a stand on whether you should fully merge your finances with your partner or not. There are a lot of different methods for sharing finances that we discuss here.
Ok, Grumpy Nation. What have we missed? What do you want to know more about?