Monday, November 19, 2012

Beginner's Budgeting

I had always had a vague sense that I should "live within my means," but when I was a full-time grad student with four part-time jobs, that just wasn't practical. I was borrowing from my future self, taking out loans to pay for school, anticipating another freelance gig, etc. My "means" were different from month to month.

Budgeting is stressful. Here is a picture of a pomeranian falling asleep on my shoulder. 

Now my life is really different. I have one full-time job that has good job security. I now have predictable means to live within, but not much practice thinking about finances on any level.* I started reading some personal finance blogs - I especially like Get Rich Slowly - but didn't see much advice on how to set a budget, only on how to keep to one. There is an understanding, apparently, that certain percentages of income should go to various life choices, as mentioned in this Unclutterer post on budgeting, but I live in a Manhattan apartment rather than a house, don't own a car, don't eat meat and don't have cable. So perhaps my percentages are different.

I finally decided on a strategy to set my budget, but I resented every second of it. I felt I was reinventing the wheel - surely actual techniques are outlined for doing this? Could I just not find them? Was my Googling power somehow impaired? I'd be thrilled to hear how other people have handled this, or to see links to where other people have already dealt with this.

Here's what I did: I started with my annual income, after taxes. I took all my known, predictable expenses and converted them to annual costs (list follows). I subtracted the known annual costs from my known annual income. Then I divided by 12. I decided how much of that monthly income I wanted to have available, and how much I wanted to save. I declared the spendable part FREE MONEY, and I started keeping track of how/when I spent it in order to stay within my monthly budget.

Here are the categories of spending I could predict:

  1. Housing. 
  2. Recurring medical costs (prescriptions, co-pays, contact lens purchases...).
  3. Groceries and household costs. For this, I looked at last year's credit card statements and took the average. 
  4. Memberships and subscriptions, including annual charitable donations
  5. Student loan payments. 
  6. Subway, bus and commuter rail. Again, I used last year as a guide. 
  7. Dog maintenance. Cody has predictable vet visits, food and dogwalker costs, etc. 
  8. Utilities - for me, this means "phone bill." 
  9. Holiday gift-giving. Again, I looked at last year's credit card statements to predict this year. 
EVERYTHING ELSE is just a monthly expense to be noted - plane tickets, birthday presents, expensive shoes, charitable donations beyond my annual ones, restaurant costs, tips I give to delivery guys, etc. All of it. 

Note: I had to decide when to track expenditures. I use credit cards and cash; I write checks rarely; I split some costs with my boyfriend. I decided to write down the expense when I spend. That is, I record the cost when I make the purchase, or agree to split the cost, rather than when the cost actually becomes "due" to me. Boy howdy is it totally very required to be consistent about this.

Also Note: I had to decide how I wanted to treat leftovers. If I'm way under budget in grocery spending one week, does that money get added to my "free" money? Or next week's grocery budget? Or neither?  If I end the month over-budget, what happens? If I get a $20 check from an unlikely source, where does that money go? I decided:

  • If I am under budget in any predicted category, that money gets saved and does not affect my "free" money or my budget in that category. 
  • If I end the month over-budget, I begin the next month with a correspondingly lower amount of "free" money. My friends, that happened this month. 
  • If money arrives in addition to my budgeted income (credit card rewards payouts, cash gifts, honorariums, etc.), that money is "free." I can save it, spend it on fancy chocolates, whatevs. It's free. 

Also Also Note: I am going against conventional wisdom in a couple different ways here.

  • One, it is generally acknowledged that a weekly budget is much better than a monthly one. I'm not sure why, and I think the monthly budget works better for me. 
  • Two, I did not divide my "free" spending. That is, I don't have a shoe budget, a theater budget and a restaurant budget. It's all fair game within a given month. 
What I might modify: Your suggestions are very welcome! 

* I am pretty certain that most of my readers are ahead of me on this topic. I am reporting here what I'm trying out, but I am very open to suggestions. 


  1. Very interesting. I'm going to re-read this post-sabbatical, which I tell myself, as I spend, spend, spend, is when "real life" begins again. ;-)

    1. For me, starting the job was so welcome that budgeting was kind of fun - like, now I GET to budget for realsies because now it IS my real life!

  2. That all sounds extremely reasonable. I think you have correctly discerned that the most important features of budget tracking are
    1. Have a system
    2. Be consistent
    Which you are doing. The "when to book expenses" question is a fundamental principle of accounting, and most "basic" systems would tend to book expenses when you pay the cash, not when you agree to the purchase, but your choice is totally reasonable and sounds easier for personal tracking. "Use exactly last year's value as a baseline" is also a very common accounting choice. Often it's "last year's figure plus a random fudge factor for increasing costs" (like 2% or whatever the consumer price index is or whatever you think sounds good for that category).

    Your budget should let you make reasonable predictions about what you can afford in the future, which I think this system can do.

    1. Well, you know I love 1 and 2.

      And yeah, I rounded up costs from last year, but since this is the first year I am really keeping track, I'm hoping that NEXT year I'll have a better idea of what to budget for things like groceries and MTA.

  3. I like using Mint to track my spending, but I think I need to go back to a more manual system as well to keep my costs in check.

    I start with my income, subtract unavoidable or at least temporarily unchangeable costs (these can include rent, utilities, prescriptions, cat food since she tends to eat at a fairly steady rate unlike me.) Then I look at what's left, and figure out if I can allocate the amount to go towards saving that I want to. After that I budget for groceries, restaurants, and then a general everything else category. Sometimes I combine restaurants and everything else. This number is based off of how much money I have left and the idea that I can rarely get my food costs below a certain amount based on experience.

    I really need to get back on track with budgeting and spending tracking, and this is a helpful reminder to revamp my systems as needed, like now.

    1. I think it is the "everything else" category that is the big variable. For some people, it is too daunting to have so many costs undesignated. For me, fewer categories feels like less I need to keep track of.

  4. It's been interesting having an unsteady, unreliable income and relying heavily on bartering. I am used to living at a certain price point so what I do instead of make a budget that fits my income is make my income large enough to cover my necessary and desired expenses. I hold what I hope will be enough money aside from my busy months to cover my slow months and find alternate income streams to get me through the leaner parts of the slow months. I arrive at a cost for my necessary expenses much the way people with more traditional income do: my rent and utilities are what they are, my eating habits are what they are. Like you, I lump everything else into an Everything Else category. Then I make lists of things I'm going to need more of soon, like skincare items or brown winter boots and try to pay for them with the money I considered disposable. If I can't barter for them or pay for them with my disposable money, I try to squeeze more out of my alternate streams. I don't track my expenses at all because they came from income I considered disposable or that existed only to pay for the things. Any money I have left over at the end of the slower season is my savings. I typically manage to save a month of expenses every year. This is a fine cushion for me; it doesn't make me nervous.

    I think this would be a very difficult way for most people to live. It's occasionally challenging. It suits me.

  5. Ali, that sounds really great! I admire your bartering and saving.

  6. Hi Emily! I think it’s a good start that you decided to track and allocate a certain amount to budget your monthly expenses. I agree with Jeremy that you should have a consistent budgeting system so that you can easily recognize and determine any changes in your spending habit and adjust any budget allocations that you may need to.

    Valencia Paz

  7. This is a good start in managing your money and expenses. You should develop a system that would help you track your expenses and help you save up.

    Era Kehoe

  8. It takes a lot of discipline and practice to develop management skills. Handling your finances could be stressful, but if you set your priorities and put aside your wants for a while, everything will be easier. Be disciplined enough to live according to your means.

    -Ermentrude Glass