For today’s money feature, let’s discuss living within your means — how to make a budget and stick to a budget. What does “budget” mean to you? What tips and tricks have you used to set a budget, pay down debt, save money and protect against lifestyle inflation — and what alarm bells have you used to tell you that it’s time to reassess?
The No-Budget Budget
I’ve mentioned before that I don’t think every person needs to make a budget — there were years in BigLaw where I would automatically move my second paycheck to savings/investments, living entirely off my first paycheck (and auto-contributing to my 401k). That was enough of a “budget” to me, with no further thought. I knew then and know now I was lucky in those years, and I’m still so grateful for them — that simple decision has laid a great groundwork for me and for my family.
How to Make a Budget When You Want/Need to Be More Strict
There have been other times in my life where I’ve done a massive spreadsheet and reviewed the previous month in order to make a budget and assess my spending. I usually like to total purchases into different buckets: Restaurants. Shopping. Pharmacy. Essentials (mortgage/rent/whatever). (I’ve used Mint for years, but I prefer to do this kind of analysis in Excel — working with the numbers, cutting and pasting lines, figuring averages and sums — it’s a different kind of connection. It’s simple enough to export my transactions to Excel and winnow to the relevant time period. )
Once the spreadsheet is done, I look at our expenditures against our income and see where we are. Are we in the red or the black for the month? Is anything artificially high, e.g., a new appliance purchase or a weekend away? How do I feel about my spending in my categories, even if we are in the black — does anything seem crazy high?
Where to Cut
If we’re in the red, I always ask myself where can we cut easily. The first answer is often found in recurring payments, like a gym membership, premium cable channels, Netflix or NYT subscription you never use, etc. (Don’t forget to check your Paypal account, too — I sometimes forget that I’ve signed up for subscriptions to things like Fresh20 or others that require you to pay and cancel them via Paypal.) The other two categories that regularly need to be dialed down for me personally are shopping, cabs, and things like ordering food delivery from Seamless; I tend to spend more on all of those when I’m stressed. Finally, it isn’t an easy cut to make, but it’s worth a note here: where you live is one of the biggest money decisions you make. AirBnB and roommates, if space allows, are easy-ish options to mitigate spending too much on rent or mortgage. One of the pros to living with a romantic partner is that you can save money, but I wouldn’t advise moving in just to save money or with that as the primary driver; I’ve seen too many relationships go way past their prime because breaking up meant finding new apartments.
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Consider Amortizing Expected High Expenditures
When there’s an expected expenditure that has a big impact on the monthly budget, such as a yearly insurance premium, or a fee for signing up my kids for a quarterly class, I’ve tried to amortize those costs over the year. For example, insurance: my term insurance + my husband’s term insurance + home insurance + personal articles insurance are each yearly bills that total $X. $X/12 = $Y, so I’ll set up an automatic monthly deduction to savings for $Y. I like to use Ally for this, because they have a pretty high interest rate (1%, woo woo) and you can set up any number of small accounts, so we have one for “Insurance Fun,” one for classes, one for dental checkups, etc. When the time comes to pay the bill I don’t have to worry about it from a budget perspective; I just move the money over from Ally. (2019 Update: Check out our whole post on how to automate your savings!)
Gauge Your Budget By Automating Investments, Loan Payments, and Savings
In addition to this sort of expected-expenditure saving, I like to automate as much of our savings as possible. The automatic payments we make on our mortgage are always a bit higher than what we owe (we also did this when my husband still had student loans), my husband’s 401K deduction is automatic, and as a self-employed business owner I take my retirement and tax payments off the top before I consider any money as “income.” Where possible I try to automatically invest money for other savings, even if it’s as little as $25 a week.
In theory, if you do a big spreadsheet like I’ve described and there are a few months in a row where you’re in the black by a significant amount, then I’d urge you to strongly consider setting up an automatic investment for at least half that amount, to protect against lifestyle inflation and other unnecessary spending. If an automatic investment is scary to you, at least go in and manually move money from checking to savings at the end of the month — after your savings account hits a suitably high number, move it over to another account (Ally) or an investment account. In a way, I use these automatic investments to gauge our budget — if our checking account always seems worryingly low, then I reassess both our lifestyle (via spreadsheet method) and the automatic investments.
I actually have two other Excel spreadsheet methods that I use to assess our finances and make sure we’re living within our means — what I like to call my “snapshot” method where about once every six months I take a snapshot of our whole money picture, as it stands right then — as well as my “financial goals” spreadsheet, which I use at the beginning and end of the year — but those will have to wait for future posts.
Ladies, how do you make a budget and ensure you’re living within your means? How often do you reassess, and what tips and tools do you have for assessing it — e.g., does anyone else do the big Excel spreadsheet method, or the envelope method? Do you use other tools like the You Need a Budget software? For those of you who lived through the worst of the recession a few years ago, how did that change your money habits (or imprint them on you, if you were just getting started then)?