Budgeting strategies

[notmyhand]

I have never been great at doing a monthly budget - things always seem to come up.  Therefore, in the past, we have made annual goals and worked towards saving those and then just spent the rest.  I have noticed that our spending has creeped up in doing so however and am thinking budgeting might help us get it back down.  Therefore I spent some time this week and put together a budget for December.

And then of course we get news that our heat pump needs work done on it and we were offered a trailer for our car at a great price, both of which had been unaccounted for in my budget but both of which need to be done.

Therefore, do you:
1. Try and reduce expenses somewhere to fit those in.  For example, cut down on the budgeted dining out?
2. Take it from savings and budget replenishing savings next month?
3. Just go over budget and save slightly less this month? 
4. Budget in a Misc. category every month to catch these?

Which of these, or an alternative, do you do and why?  Normally I would do number three but, like I mentioned, it's easy to go over each month with unknowns.

Thanks for your thoughts!

[OUJAU]

I don't really budget so much as track my expenses to see how I'm doing. The kind of thing you mention tends to even out over the course of a year so I don't worry about messing it up for a month. I'd end up putting the expenses you mentioned into my Misc and Fun categories and then make a note on the line for that month saying why I'm in the red.

There are still some things I choose to segregate though. I keep really large things like student loans, my LASIK procedure, or buying a car in an "Atypical" category. These would totally blow up my budget and make it hard to tell if I'm meeting my goals elsewhere because they are big enough to mess up an entire year. I could probably put LASIK in my Fun category but if I did that, then I might not notice it if I start to spend too much money on crap from Amazon or something. The spending total that includes Atypical is good for long term budgeting, the one that omits it is good for short term. It's not nearly as confusing as I'm probably making it sound. I very rarely use the Atypical category and think hard before making the kinds of purchases that would go in there.
There are probably better ways so I'm curious what others have to say.

[Cassie]

We did number 4 when younger and living on a budget.

[Sugaree]

In my world, the heat pump would come out of an emergency fund and refill that account later.  The car trailer I'd probably try to work in by cutting expenses elsewhere first, but if it were a really good deal I'd take it out of some kind of savings fund and make it up in the coming months by keeping the expenses that I cut low. 

[BrightFIRE]

I have never been great at doing a monthly budget - things always seem to come up.  Therefore, in the past, we have made annual goals and worked towards saving those and then just spent the rest.  I have noticed that our spending has creeped up in doing so however and am thinking budgeting might help us get it back down.  Therefore I spent some time this week and put together a budget for December.

And then of course we get news that our heat pump needs work done on it and we were offered a trailer for our car at a great price, both of which had been unaccounted for in my budget but both of which need to be done.

Therefore, do you:
1. Try and reduce expenses somewhere to fit those in.  For example, cut down on the budgeted dining out?
2. Take it from savings and budget replenishing savings next month?
3. Just go over budget and save slightly less this month? 
4. Budget in a Misc. category every month to catch these?

Which of these, or an alternative, do you do and why?  Normally I would do number three but, like I mentioned, it's easy to go over each month with unknowns.

Thanks for your thoughts!

You should have an emergency fund to pay for "unexpected" heat pump issues. Although the exact nature of the emergency is unexpected, the fact that "something always comes up" is not a surprise. You shouldn't have to do anything with your budget to pay for that. So that would be 4 now, so you can do 2 in the future, because that's what the EF is for. (FYI, if you track your expenses somewhere like Mint, it's easy to see how much you spend in a year on unexpected expenses. We've spent up to $5000 in a year on emergencies several years, but never more than that, so that's our EF number.)

You are a good candidate for the concept of "pay yourself first". If you have a savings goal, figure out what that is and treat it like a bill. Pay that bill first and then budget with what's left. If you don't have the money, you can't spend it and spending can't creep up.

Finally, the idea of just "spending the rest" sounds like you spend for the sake of spending, instead of making conscious decisions about whether that spending will add anything to your life. I could spend a lot more, but I would much rather put any unexpected extra in an investment account. For example, a car trailer is not a need. Were you already planning to buy a trailer? Just because someone offers you a trailer at a good price doesn't mean you need to buy it.

[seemsright]

The heat pump would come out of what I refer to as our oh shit fund. Hubby calls it our buffer account. This is stuff that we know happen just not when. Need breaks on the truck...oh shit fund. The 8 year old out grew her shoes again...oh shit fund. The roof and furnace need to be replaced at the same time the oh shit fund.

Now 3K in surprised dental bills that were so out of the blue the Dentist himself could not explain it nor have predicted it that stuff comes out of the emergency fund.

If things always come up you need to create a fund like we have in the oh shit/buffer it has made life some much simpler less stressful and almost enjoyable. I know things are just going to be taken care of. There is no worry of credit cards, or if I can afford this or that.   

[Freedomin5]

We are like you and set an annual savings goal, which is based roughly on our spending+slush fund.


So for example, if we make $100K/year and our expenses are $36K/year, we will make a savings goal of $50K per year, leaving us $14K per year as a buffer. Anything that isn't spent from that $14K buffer is then put into savings at the end of the year. So I guess it's kind of a large scale #4. If there are monthly expenses beyond the approx. $1K/month buffer, then we use #1 and try to cut down on other expenses that month.

We never take anything out of savings because it's too easy for that to become a bad habit.

[soccerluvof4]

I have a category in my budget that is named Home Maintenance which Is 500$ a month. Couple times a year furnace filters get replaced, yard stuff, new shovels etc,, Since most months it doesn't get touched it seems to workout to cover the big expenses when something goes. I try to keep my budget categories about 10% minimum higher and re-evaluate at the end of every year.

[Kay-Ell]

My approach to budgeting is one most people think is too complicated but works great for me. I have multiple bank accounts. One is for all of my fixed or semi fixed bills. I know what those will be each month, and I amortize annual bills like car registration, so I direct deposit the correct amount into that account and auto pay all my bills. I never have to really touch the account or remember to pay bills so it’s easy for me.

Then I have a spending account which I use for all expected, variable spending including food, gas, entertainment gifts and shopping. I keep myself on an allowance which fixes the issue of “spending the rest” because I don’t give myself free access to “the rest” only my allowance. This also means I can shuffle money around in my variable categories without tracking them or worrying if I’m over or under budget in any particular area. If I spend more eating out, I naturally spend less at the grocery store. On a month when I want to buy a birthday present for a friend I also cook at home more, and eat out less. If I want something frivolous and expensive I can save up my discretional money for a couple of months.

In addition I also have an account which I’ve labeled “Travel” but which wild more aptly be called “One time purchases and experience that I’m splurging on with intention” and which I have specific savings goals on (although it’s not really savings because I plan to spend it within a year or so). It works well for “stuff comes up” too (like heat pumps). It just comes with the trade off of knowing I have less to spend on travel and other fun one time purchases and experience. To me, that’s as it should be. If life is unusually expensive one year, I should be spending less on optional, frivolous expenses that don’t cramp my daily lifestyle.  It also works for me as a good motivation to make me stop and say “do I really want this travel trailer for my car enough to delay my trip?” For instance I recently spent $800 out of this account to adopt a special neees dog who needed an escape proof enclosure. As a result I’m not traveling home for Thanksgiving or Christmas.  It’s a trade off I made consciously as opposed to “oops, stuff came up and now I’m out of money.”

So for me budgeting consists of knowing what my fixed expenses total and making sure I allocate the proper amount into that account.

Putting myself on an allowance for expected, variable expenses and giving myself freedom to spend that money with a lot of flexibility.

“Saving” toward my travel/one time purchase/experience goals and understanding that those are the things I sacrifice when “stuff comes up”

And “the rest” gets saved/invested, no matter how much it is.

This way my lifestyle doesn’t creep with my income unless I specifically decide to increase my fixed expenses, increase my allowance or increase my travel/slush fund. My fixed expenses are the same now as they were 12 years ago. The last time I raised my allowance was 5 years ago. The area where my spending has increased is in my travel account, and not even because I do more travel. But because with added wealth I’ve made the conscious decision to spend more on one time expenses like travel (and upgrading the fencing in my yard) because I feel it adds value to my life and is also easy to eliminate should I need to scale back.   

[2Birds1Stone]

I recently realized that over the past 7 years, we never actually "budgeted".

Sure, we tracked every single penny we spent, and were mindful to spend based on our values/priorities....but we never decided "hey let's spend $300/month on entertainment or $100 on gas, etc.

Tracking your spending gives you awareness on where your outflows are, pivot as you wish based on that knowledge.

[SpareChange]

I recently realized that over the past 7 years, we never actually "budgeted".

Sure, we tracked every single penny we spent, and were mindful to spend based on our values/priorities....but we never decided "hey let's spend $300/month on entertainment or $100 on gas, etc.

Tracking your spending gives you awareness on where your outflows are, pivot as you wish based on that knowledge.

+1. What is this "budgeting" you speak of? :)

[NoVa]

I recently realized that over the past 7 years, we never actually "budgeted".

Sure, we tracked every single penny we spent, and were mindful to spend based on our values/priorities....but we never decided "hey let's spend $300/month on entertainment or $100 on gas, etc.

Tracking your spending gives you awareness on where your outflows are, pivot as you wish based on that knowledge.

+1. What is this "budgeting" you speak of? :)

Same here. I track every penny on a spreadsheet. I look for areas to cut that don't impact my quality of life. But I have no "budget" and my projections are just historical reference.

[sparkytheop]

I started YNAB when I wanted to get more serious about saving for college for my son, and toward building a house on my property.

I could "just save x for each per month", but I work a lot of overtime, and some holidays (so get paid extra), and want to optimize my savings without sacrificing too much of my lifestyle now.

So, I have everything as a line item.  I budget for known bills, things that are going to come up (car maintenance/repair, home maintenance/repair, household goods, etc) and really try to minimize any need for "crap, I need to pull money from savings to cover this".

However, if I have something bigger come up than I've budgeted for, I'll move money from other areas (on a road trip, I knew I'd use more gas, so I lowered how much I set aside for gift giving for the month).  If I work a lot of OT, I'll add a little extra to the areas that seem low.

I realized recently that I hadn't accounted for a new cell phone within my "cell phone" budget line, so had to pull from others to make up for it.  Now I've added a little extra each month to that line, so that it should cover a new phone when I have to do that again (hopefully not for many years).

Groceries is an area where I'm close each month, but I might go a little over on occasion.  Unless I work a lot of OT, I just let that balance rob from the next month and make up for it later.  It usually balances itself out fairly quickly, so I don't worry about covering for it from other budgeted categories.  If I were to go over every month though, I'd know I'd need to take another look at either my self-imposed budget, or my spending, because one of those would be off.

I saved over $28k toward the "new house build" alone this year, so budgeting has definitely been working for me.  If I'd just kept with "save x amount toward the house per month", I wouldn't be anywhere close to that.  A few months ago, when I realized I might be able to save to a "round $50k" by the end of the year, I made that my goal, and really kept myself in check with hobby spending, wasting money grabbing fast food, etc.  I rewarded myself for reaching that goal by adding the extra to my vacation fund, and booked a (very frugal) trip to Sweden.

[hadabeardonce]

I have never been great at doing a monthly budget - things always seem to come up.  Therefore, in the past, we have made annual goals and worked towards saving those and then just spent the rest.  I have noticed that our spending has creeped up in doing so however and am thinking budgeting might help us get it back down.  Therefore I spent some time this week and put together a budget for December.

And then of course we get news that our heat pump needs work done on it and we were offered a trailer for our car at a great price, both of which had been unaccounted for in my budget but both of which need to be done.

Therefore, do you:
1. Try and reduce expenses somewhere to fit those in.  For example, cut down on the budgeted dining out?
2. Take it from savings and budget replenishing savings next month?
3. Just go over budget and save slightly less this month? 
4. Budget in a Misc. category every month to catch these?

Which of these, or an alternative, do you do and why?  Normally I would do number three but, like I mentioned, it's easy to go over each month with unknowns.

Thanks for your thoughts!

#3

As long as you have developed good frugal habits and an understanding of the value you are receiving for what you're spending, you should be fine. Behaviors make or break budgets.

[Prairie Stash]

A budget isn't a target, its an actual reflection of income and expenses. If you aren't matching your budget, then you don't have one, you have monetary targets for expenditures you would like to achieve that loosely resembles a budget. 

Once you realize a budget is meant to reflect reality, not targets, budgeting is a lot easier. It will reflect real life and become a tool that makes planning easier, if planning (like the trailer) isn't matching your budget then you have a problem.

I account for one offs by not caring about them. I just track annual expenditures in aggregate; then I look at individual expenses when I want to cut costs (I have the data, I just don't care enough most years to worry about it). I don't want to skew my budget low in pre-retirement by delaying any expenses just to hit a target, that's courting disaster just to achieve some arbitrary goal. You want a budget that accurately predicts what your comfortable level of spending is, it shouldn't feel constraining.

If your spending is constantly going over your budget, it means you aren't able to accurately forecast retirement expenses, so you'll never know when you can retire. Thats the most dangerous part of poor budgetting, it makes it hard to plan. A good plan is only as good as the inputs, including your budget.

My retirement target is to have 25X what I spend in comparison to the last 5 years. Admittedly I have two expenditures planned for the retirement year totalling $9-10K, both of which are once in 30 year events (shingles and solar install).  Neither of them is unexpected though, I've known for several years my shingles are reaching end of life so its hardly a surprise.

2019 will be above average but 2020 is forecast to come in lower then 2018 expenses with the reduced power cost. Does your budget allow you to predict future years expenses and match predictions? That should be your goal of your budget, forecasting the future.

[highlandterrier]

I have long. medium, and short term savings that I pay into every month.

Long term is for retirement and will not be touched until then unless something extreme happens.
Medium term is primarily for a new car, so savings over multiple years, but earmarked to spend.
Short term is for annual and unexpected expenses , holidays, maintenance, medical etc..

This way I never feel like I'm dipping into my long term savings, and if there is any left over from the medium or short it's a nice bonus. Psychologically it works for me!

[Vibrissae]

For small surprise expenses, not more than say $100-200, I go with #1. For larger oh-shit ones, it's sort of #4: I have multiple budget line items to help encompass the unexpected, including car service/repairs, home maintenance, and even cat health, plus an emergency fund on top of that. (I'm still building the latter, but it's getting there.) I'm not perfect not about falling over budget, and very occasionally have to draw from my investment account to cover the gap, but I'm doing a *lot* better than I used to.

[KBCB]

I do not have much luck with fully budgeting. What seems to work for me when I am doing well is using cash or budgeting for the areas where my spending that is most prone to going out of control.

Example: If you typically spend well on groceries then keep doing your thing without worrying budgeting. But if you spend lots going out to dinner use a monthly cash or a stated budget to keep that area in check.

I am sure this doesn't work as well to save the most money, but it seems to work ok for me without overwhelming me.

[Gremlin]

We do budget.

We split our budget our spending into four broad categories (and specific spending categories, such as groceries, electricity, etc beneath those).

Our four broad categories are as follows:

Investments - this is what we put towards any after tax investments and always gets "paid" first.

General - these are ongoing regular expenses that occur pretty much without fail every month and are pretty much the same each month.  As examples, food, petrol and monthly health insurance premiums live here.  We have a set budget each month for these.

Regular - these are expenses we know about but it may be a different amount each month or not every month.  Electricity, which tends to be cyclical or car registration which is annual lives here.  Over the year, if we expect these to add to $6,000 say, then each month we fund $500.  However, for each particular month we look at the expenses we expect and determine whether we are over or under budget based on those expenses only.  So if we have a month where there are no "Regular" expenses then our target budget is just our "General" budget.  But if we expect a $1,000 car registration bill, then our budget is "General" + $1,000.  This helps to ensure we don't beat ourselves up simply because the timing of bills makes one month look particularly bad (or vice versa).

Major Items - these are expenses that we don't know about nor do we know when or if they're going to occur.  We fund these separately to an emergency fund because otherwise we treat our emergency fund as a slush fund.  So this might be another $500 a month that we put aside and stays there for things like unexpected repairs or emergency dental work for the kids, etc.

Others tell us that this is overly complicated, but it works for Mrs Gremlin and I, so that's all that matters.  But a couple of Mrs Gremlin's siblings have adopted something similar, so it might work for you as well.

[aGracefulStomp]

I use YNAB, which encourages you to save for stuff that you know will happen but don't know when - they call it your "true expenses".

For example I've started to put money away each month for a new computer. My computer is working fine and there's no indication that it's going to break, but it will at some point and computers are expensive so I should start saving now.

Seperate to all the specific things that I'm putting money away for, I have a very healthy emergency fund. I'll draw from that if something comes up that I haven't accounted for or I don't have enough to cover an expense in a category and I can't draw money from other categories. I'll then focus on replenishing the emergency fund in the next month/s.

So ideally number 4, then number 1 (draw from other misc. categories), and then number 3.

I would suggest you start putting money into various sinking funds for expenses that will happen at some point. For example, for the heat pump expense, you should have a house maintenance category (assuming heat pump is for your house) and always be putting money into that each month.

The other great thing with YNAB is that they can tell you how much you've spend in a specific category, so after a while you'll know how much you should save each month to make sure that you are saving enough :) For example I know that I spend about $220 on my bike maintenance a year so I save $19 a month into that category.