How I Budget

This week I am travelling, so I’m tacking a short break from my weekly Five Friday Favorites series. But fear not, I have some great budgeting info for you instead!

I recently talked about how doubling down on my budget is going to help me reach my audacious 46% savings goal this year. Today I’ll share the logistics of how I budget.

First, let me say that I love LOVE spreadsheets. Especially personal finance spreadsheets. The numbers, the trends, THE ORGANIZATION. I’ll make a spreadsheet for just about anything, just ask poor BF.

I’ve had a personal finance/budget spreadsheet for about the past five years, and I continually adjust it to make it maximally functional. On a weekly basis, I track my income and all account balances, and on a monthly basis I compile all transactions and categorize them to create a monthly budget summary. I also track my financials on Mint daily, which is useful when I have to remember on April 30 what that $12 at Target was for on April 3.

You manage what you measure

This might sound like a lot of work, so you might wonder why I go to all this trouble. During my MBA, this phase was often repeated: you manage what you measure. It is important to track metrics related to a goal in order to understand if you are making progress towards that goal. Metrics help you understand where there is room for change or where you are succeeding.

This is especially true in personal finance. You really can’t do anything without knowing where your money is going. If you don’t know how much you are spending eating out, you’ll never know how much you could be saving by cutting back on eating out. The same goes for buying clothes or groceries or utilities. It is imperative to know where your money goes so that you can ensure that you’re spending money where you want to, ideally where you see value.

Also, see above: I LOVE spreadsheets!

The logistics of my budget

Currently, I budget for my portion of expenses only. My budget does not track any of BF’s expenses since we have separate accounts. We do have a shared credit card for joint expenses, but I only record half the value of each transaction on that card to represent my portion of each expense.

My budget has been through many revisions since I started keeping a formal budget in 2011. This is only my expense budget, and does not take into account my income or savings. I have arrived at a very simple structure that works best for me. It involves breaking down my monthly budget into five key categories.

Why my budget only has five categories

As you can see, I keep my budget at a pretty high level. I do this because aside from the basics (food, housing, utilities) I don’t really have consistent spending from month to month. One month I might take a ski trip. The next I might decide to buy some new clothes. Sometimes I go to a concert, or the movies, or on a Target binge where I have no idea how I managed to spend $100.

My feeling is that all of these are fine choices, as long as I am able to maintain my overall budget. Within the “other” category, I try to make decisions about what I want to spend my money on that particular month. This goes back to my motto: you can have anything you want, but you can’t have everything you want. I might want to take a trip to Cape Cod and buy a new purse this month, but I recognize that so much of life is about tradeoffs and so I know that I really shouldn’t do both. If you’re spending your money on one thing, you’re not spending it on another (or saving it!). I don’t want my spending now to affect me negatively in 10 or 20 years. Keeping the “other” category flexible helps me feel like I have freedom to make choices, while also keeping me accountable to my goals.

My budget does not specifically contain the ever-important “contingency,” but the “other” category effectively serves as my contingency. Having this broad category for all of my non-recurring expenses gives me the flexibility to make decisions each month about how I want to spend my money. It gives me the flexibility to not feel disappointed in myself for spending too much on clothes some months. It also gives me the freedom to deal with unexpected events, good or bad.

What goes into each of those categories?

I do keep track of what specific categories I am spending in each month on a “spending” spreadsheet. I break expenses down into many spending categories, which then get lumped together to fit into the budget above. This allows me to see where my money is going, without obsessing about gas costing $28 this month instead of $25. As long as the high level budget category is on track, I’m happy.

The categories I track are as follows:

Notes:

1) Health insurance premiums are taken out of my paycheck pre-tax so are not counted in my budget.

2) I don’t track cash spending. I use cash very infrequently, and I find it difficult to keep track of where it goes, so I just lump all cash spending into one category.

3) I track small amounts of additional income (anything other than my regular salary) from gifts and checking account dividends and I subtract that from the “other” category total. I do not factor larger additional income (such as tax returns) into my monthly spending.

How do you like to budget? Do you use a spreadsheet or budget management tool?

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