Recently in the Millionaire Money Mentors forums, there was a discussion on how people control their spending.
One concept was mentioned over and over: Budgeting.
Sweeping semantics like “budget” vs. “spending plan” vs. “spending goal” and so forth, most of the participants saw the value of being aware of planning at some level for spending.
For now, we're better with budgeting than without
My finances were pretty simple prior to getting married (early aughts). It was just myself and a nice income. (Any income from a “real” job is nice income following being a grad student!)
As such, I didn't really have to budget much at all.
Things got more complicated after getting married and living on one income. (Wouldn't change it for the world, though!) But as things were a little more constrained, we started spending a bit more than we made each month.
What got us back on track was budgeting and tracking our expenses. (Here's the pen-and-paper budget worksheet we use each month.)
Through the tracking, we saw exactly how much money was going out the door for things. With this information, we were able to adjust our spending down, and eventually get used to it.
Of course, while we were readjusting, it wasn’t fun, but getting back on the right side of the balance sheet continues to be worth it.
As for trips and the like, we plan for them. We have a budget line item that gets $X/month and the money is accounted for when we take the trip.
We drank the budgeting Flavor Aid, and got back on track.
Reasons why we budget
Do we follow our budget down to the penny each month?
No. But we’re far better with one right now than without. Here's why.
1. We look at our income and spending regularly
It gets us looking at our income and spending in detail at least once a month.
It's a bit embarrassing, but at some times I've had incorrect charges on statements that have gone on for four months or more. That's how little I had been paying attention to some of the statements.
There's less chance of that happening now that we go analyze the transactions each month.
2. We start out each month with intention
Doing a budget at the beginning of each month is a good way to remember what we're doing, and why.
(HEADS UP! Church stuff in this paragraph.) In our Baptist church, we take communion about once a month as a remembrance of what Jesus did on the cross: “Do this in remembrance of Me.” Taking communion is a regular opportunity to re-affirm our relationship with God, and course-correct on things that need course-correcting.
Doing the budget drill is a regular opportunity to look at what went down the previous month, and set the course for the coming month. It could mean adding a spending/saving category or cutting back on something that went over the previous month. It doesn't change what's happened already, but it can change what happens next.
3. It reconditioned our habits
The first few months we did the budgeting was a little painful, but it adjusted our spending down, and reconditioned our spending habits over time.
The toughest area at the beginning of our “reconditioning period” was eating out. We would stop at Sheetz (our gas station chain that originally was a restaurant) regularly for lunch or dinner. We set a budget for Entertainment (which included eating out) and a fairly strict allowance for ourselves that could include eating out if we wanted.
Doing this got us in the mode of preparing more meals at home, and treating eating out more as a special occasion than a regular habit.
4. It gets big-ticket items on our radar
We purposefully save up for vacations and other large purchases. They hit our balance sheet and got chunks of our income over a few months.
A neat feature of Ally bank account is Buckets. They're like accounts within accounts. We have accounts called Emergencies, Vehicles, Rental, and Home, which cover general emergency situations, vehicle maintenance and purchase, rental stuff, and home maintenance stuff, respectively. The Vehicles one specifically will be going toward our next car purchase. The Rental one likely will go for a new central AC unit, or a new roof. And so forth.
Putting these Buckets in our Ally account were the result of looking at big expenses coming up and budgeting for them.
5. We have productive conversations about money
With the budget cycle, we talk more productively about money than we perhaps have in the past.
Prior to starting up the budgeting again, we would mostly talk about it when we needed to make a withdrawal from a longer-term savings account to pay for current expenses. That wasn’t fun.
Now we're largely ahead of these kinds of issues (though bad stuff can happen at any time, of course). It's a much calmer situation, at the very least!
Needing a budget?
A blogging contemporary of ESI and myself told me that he doesn’t budget.
His spending is so far below his income that he doesn’t need to. He knows where he's headed financially and his level of spending doesn't impinge on that course.
I’m not at that point yet, but it’s a good goal!
Until then, we budget every month and reap the benefits.
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