For someone who doesn’t track or budget at all, knowing where to start can be daunting. There’s a misconception that a budget is essentially a diet for your spending habits. In actuality, a budget can be a really helpful planning tool and doesn’t necessarily have to be restrictive. Our current budgeting process has evolved so much over the years I couldn’t even begin to explain how it got to where it is today. However, I can explain how our system works and why I feel that it makes sense.
Step 1 – Define All Expenses
Set Expenses vs Variable Expenses
We look at each expense and consider whether it’s a constant or a variable. Constant monthly expenses are things we know we’re going to have to pay, even if the amount may vary slightly from month to month. Currently in this category we have:
- Debt payments: student loan, mortgage, car payment
- Monthly bills: gas, electric, insurance, cell phones
- Household expenses: groceries, toiletries, cleaning supplies, paper products, etc.
Given that some of these can vary in amounts from month to month, we create a line item in the budget for each of these and allow for the maximum that they could be in any given month.
Variable expenses are those predictable but unexpected expenses that pop up over the course of a year. Automotive maintenance is a great example. Our state requires annual safety inspections and some years the cars may not need any repairs or replacement items. Other years, we may get dinged for tires, brakes, or an exhaust system. Just one of those could be a $600-800 expense that is absolutely predictable. That is, we know that these components don’t last forever, we just don’t know how soon we’ll need to replace them. So, we play the law of averages and figure that among our 3 vehicles, we should only expect 1, maybe 2 major repairs per year. The age of the tires, brakes, A/C, and exhaust are considered for each vehicle. Then we add in the cost of inspections and registrations for each, oil changes for our one ICE vehicle, and we have an annual budget somewhere around $1,100. This works out to be roughly $90/ month. We won’t spend that every month, but it goes into a digital “envelope” in our bank account and the money is there when the time comes.
We pay some utilities like water, sewage, and trash on a quarterly schedule. Since we don’t pay these every month we include them with the variable expenses and we set aside a small amount each month to cover the bill when it does come due.
Until recently, a huge variable in our spending was the “gifts” category. Without a specific line-item in the budget, money that we had set aside for savings would get eaten away because we pulled money out here and there for birthdays, Christmas, and various “greeting card” holidays. Without going into too much detail, we’ve adjusted the way we spend on gifts, and we’ve also created a line item in the budget to accommodate this predictable expense. A few years back we simply tracked every purchase that could qualify as a gift. At the end of the year we analyzed how much we had spent, evaluated whether that seemed like enough, not enough, or too much, and then divided the resulting amount into monthly allocations (another digital “envelope”!).
Personal / Discretionary
To keep ourselves sane and maintain some semblance of independence, my wife and I both allot a certain amount of “personal” spending for each of us monthly. This exact number is going to vary based on your situation, location, and priorities, but the goal is to have some pocket money that allows for some freedom of spending without totally derailing your financial goals. This isn’t a hard and fast “we need to spend this every month” or “we can’t go over this” but a guideline. We don’t ask each other before we spend this money and we spend it on things that we value or that otherwise wouldn’t fit into the budget. In our house that has included things like digital music, craft supplies, decent beer, new aquarium plants, happy hours with co-workers, lunch or coffee out with friends… This is our “play” money if you will. Sure, we could be more frugal and reduce or totally eliminate this line item if we needed to but we choose not to. Enjoying the journey is just as important, if not more so, as reaching the destination as quickly as possible. Having a small personal spending allotment also helps prevent the deprivation burn-out that comes with a very restrictive budget.
While part of my philosophy is all about sharing numbers and expenses, another part of me is not quite there yet. So, here’s how our budget looks on paper, sans the actual dollar amounts:
Some of these line items are self-explanatory, so I won’t get into those. Some others simply match the examples we went into above. You can plug your own numbers in and see how things look using this method.
Mortgage: The amount here should reflect the total payment – principal, interest, taxes and insurance.
Childcare: For us, this is a combination of before school care for our half-day kindergartener, and full time childcare for our youngest kiddos.
Vacation: We usually plan one nice long beach vacation and a few extended weekend trips here and there. Generally we make some loose plans at the beginning of the year, set our monthly savings amount to put towards the vacations, and let ‘er rip.
Annual Memberships: This covers things like local zoo memberships, AAA, Amazon Prime, etc. We total up the annual cost of these memberships and split it into monthly savings “envelopes” until it’s needed.
Summer Camp: Childcare runs year-round for the younger kids, but our school aged children need somewhere to be in the summers while we’re still working. We found a reasonable option which covers just about the entire summer. This local community camp program runs about $1,500 per child. For two children, that works out to be $3,000 per year. Again, we take this amount and split it into monthly savings envelopes.
Miscellaneous: Things like automotive maintenance, clothes, medical / dental copays, home improvement, etc. where the purchases are few and far between fall into this category. We used to split this out into individual line items but since we weren’t pulling money from them very often, it didn’t make sense to leave large sums just languishing in a digital envelope. Instead, we combined all of these into one big envelope, assigned a minimum balance we’re comfortable with, and replenish as needed to maintain that minimum balance.
With all of our expenses identified and categorized, we then move on to assigning payments to people and paychecks. I receive a paycheck twice a month, Mrs. BetterHalf is paid every 2 weeks.
Step 2 – Splitting the Bill and splitting the bill
It’s taken us a few revisions to get to where we are, but we’ve identified an ideal balance that makes best use of the amounts and timing of each of our paychecks. The reality is that some expenses come out at the beginning of the month, some come out at the end, some come out in the middle. We’ve gotten around this by designating each paycheck as either a “1” or a “2”, and then we split the expenses up within each individual’s budget accordingly so that expenses designated for the 1 paycheck are less or equal to the amount of that paycheck.
Whenever I have the option, I prefer to use a credit card (responsibly and paid off on time every month of course) to pay bills in order to earn rewards points redeemable for cashback and travel. I am also the family’s designated spreadsheet junkie, so I take charge of maintaining our “digital envelopes”. Additionally, since the mortgage and most of the utilities are in my name, I take charge of those as well. Depending on when these bills are due, I’ve assigned them to either the 1st or 2nd paycheck of the month.
Mrs. BetterHalf drops the kids off at daycare in the mornings, so she drops off a check every 2 weeks to daycare and sets up an ACH debit once a month for the half-day kindergarten supplementary program. She is also working on paying down the last of her student loan, so that comes out of the “2nd” paycheck as an ACH debit. She also prefers to split her personal spending money into 2 equal “allowances” instead of one lump sum at the beginning of the month. Mrs. BetterHalf was formerly in charge of car payments and gas for the family van, but we’ve since paid that off.
So now we have a nice budget where all of our expenses are covered on time and in full by our take home pay. But a few questions remain – Where do we store the money for our variable expenses until they are needed? What should we do with the surplus of money that we have after our expenses are paid? Stay tuned to find out more!