For this post we’re getting back to basics. Today’s topic is one that many of you may already understand. While Johnny and I are fortunate enough to be out of debt, we realize debt is a reality for many. And so we’d like to share one of the tools that helped us slay the Debt Monster.
Today’s Back to Basics post goes back to the most basic of basics of basics: budgeting. If I asked 10 random people on the street whether they budget, I’d guess that 9 out of 10 would say, “Yes.” My follow-up question would probably be, “And how do you budget?” To which they’d say, “I watch what I spend.” “And how do you watch your spending?” “Oh, you know. If something is too expensive, I don’t buy it.” “And how do you decide if something’s too expensive?” To which I’d hope to hear, “Well, we have a budget. And we know exactly what we can afford to spend on specific items while still saving money each month.” And I’d say, “Good boy/girl. Go play.”
Ugh, I really didn’t like myself in that hypothetical scenario. Did I sound kind of like a bossy school teacher to you? I think it’s time to get out of the hypothetical. And play a game:
Two Truths and a Lie
Truth: Budgets are a pain. They’re wretched, fun-killing demons. But they’re also the way to financial happiness. And unless you’re rolling in the dough, itemized budgets are the way to go. Otherwise, there’s no way to keep an optimal saving and spending balance.
Lie: I can keep track of my spending in my in my head. Noooo. I know this is a lie because it’s one I’ve told myself. Unless you are a calculator — and I’m strictly speaking of a plastic square with buttons and a screen — you can’t do this.
Here’s an example: On Saturday, the first day of June, Johnny and I began our new monthly budget. On that day, I ordered $47 worth of diapers, Johnny filled up our car with $35 of gas, I bought a $20 gift card for a baby shower, and we bought $17 in groceries. That was day one. And we have 29 more days of similar spending situations. And add recurring expenses such as rent and utilities to the mix. There’s so much involved in a month’s time that guesstimating just doesn’t cut it. Time and again when Johnny and I haven’t recorded our spending, we’ve had scenarios such as this (back to the hypothetical… bear with me):
“I think we did good on spending this month.”
“Yes. Definitely. We barely spent anything.”
An hour later…
“So I just calculated everything, and somehow we overspent on food. And clothes. And entertainment.”
“Really??… Oh yeah… we did go out to eat with the So-n-So’s. And I got that dress I’ve been wanting for so long. And…”
You get the idea. A month is a long time, and one extra expense here and there adds up no matter how much you think you’re mentally keeping track. Which brings me to my other truth:
Truth: Budgeting needs to happen in real time. Calculating every expense at the end of the month doesn’t help. The damage has been done. And while it’s good to know where you stand on the last day of every month, it’s better to know where you stand each and every day, while you can still decide how your month will end up.
A Few Last Thoughts
- If you haven’t been keeping a budget, it should make you feel a little bit claustrophobic in the beginning. It shouldn’t suffocate you, but you should feel like you’re restraining yourself at times during the month. While it may be uncomfortable initially, ultimately you will have much more financial freedom and peace.
- If you think your money is already too tight for a budget, that is all the more reason to have one. You have more cause than anyone to know where every cent is going. And I could very well be wrong, but you might find a few areas you can slash. Even if it just comes to saving $50 in a given month, it’s worth it.
Budgeting is exhausting. And talking about it is even more exhausting, amiright? So we’re gonna revisit this topic in a few days, and next time discuss how to actually get that freaking budget started. Rest up until then!
UPDATE: Who needs rest? Go check out How to Start a Budget: Part II right now!
I have kind of the opposite attitude about budgeting – our budget frees us up to spend without anxiety. It seems that most people I talk with about money are in a similar spot. Their living expenses are far less than their incomes and they don’t know what to do with the excess. In some cases those people need to set up savings goals instead of letting their checking account balances rise, and in others they need to spend a bit more freely and a budget will help them do that.
We’re the same. Our spending plan is generally laid out 12 months in advance. As the days/weeks pass I update the planned amount with the actual amount. I find I can’t leave the spreadsheet alone more than a few days before I become uncomfortable about not being right on top of our spending. Once I’ve updated and entered everything and balanced to our bank account I can relax again, knowing we’re on track.
We also choose to live massively below our means, so every Friday after everything is balanced up, the week’s charges are paid off on the VISA and the pay has been deposited, I assess how much excess can safely be removed without causing a problem next week, next month or in six months (the advantage of having a year of spending planned out in advance), and that money gets transferred out to our retirement accounts or we make an extra mortgage payment. I only let the excess pile up in our account if we’re about to have a large one time, non-standard expense.
Years ago we tried budgetting a month at a time, but it felt a little like looking at the world with blinders on. Sure we’d planned everything through to the 30th, but what if there was a large expense due on the 1st or 2nd? What if the next pay wasn’t going to arrive until the 3rd? By creating one long endless spending list (an excel version of the way you track your balance in a checkbook, I know the balance after every planned expense and pay deposit. If I update a number (higher or lower) the impact ripples down the spreadsheet to show the impact way into the future so we can avoid a problem before it happens.
Ultimately as long as you’re doing something to keep track it’s better than nothing, and if you create a system that is too time consuming you won’t stick with it. I happily spend 5-10 minutes every couple of days on it so that every Friday I can maximize the amount of excess I transfer to our personal priorities (killing the mortgage, and boosting our retirement savings so we can retire as early as possible).
Everyone has different priorities, ours is early retirement while still taking a major trip every year in the meantime. For others it’s living in a large home, or driving a particular car, or wearing the latest fashions, or eating out more than at home. Whatever it is, knowing you are on track with your spending means you’ve consciously chosen where to send your available dollars rather than wondering later where it all went and why you never seem to have enough for those things you wish you could afford.
What a great way to keep your budget! I agree that it’s very important to look at the big picture and have an end game, and not just look from month to month. I’d love to know more about how you plan for an entire year.
Having a 12-month spending plan must mean you are one organized woman! Major kudos.
Wow, I haven’t really heard much about a year spending plan. I’m 28 now and in my 3rd month of budgeting. I never really lived like this until starting to read Dave Ramsey and listening to his Podcasts and also Suze Orman books on CD, etc. I really liked this article on the blog, and found this comment about a year of budgeting fascinating!
Right now, I’m pretty obsessive with my budget because it’s so early in the game. But I feel so in control and I really like it. I think it’s great to be learning this while still single. Presently the monthly budget is working well for me, but I can totally see the bonus of a year budget. Cool comment!
The comment “… week’s charges paid off on the VISA…” was a welcome eye-opener to me. Never thought of that. I will go home and start doing it, and I like your spreadsheet idea. I need to look that up. Thank you.
I think it’s all about what your particular situation may be. We know many people who are just trying to make ends meet each month and don’t have all that excess you mentioned.
You’re right – hind sight is 20/20. Real-time is what matters in a budget. We found this out the hard way. Can’t tell you how many arguments get started at the end of the month. It takes a while to get there as my wife and I are making progress. Communication is key and follow-up is critical.
Agreed, Chris. Staying on the same page money-wise with your spouse is half the battle. Being a support to each other is key!
I thought I would disagree on this article because I can track our household expense on a day-to-day basis but since you’ve mentioned that it is for month, I am convinced. It is hard to mentally track our expenses day in and day out for a month without writing it down. That’s why, every night (or every morning in case I forgot to do it at night), I note our expenses in the spreadsheet to monitor if we’re still on budget or not.
That’s great, Elvin! It was hard for me to get into the habit of tracking everything initially, but once you get used to it, it’s easy peasy!
oh my gosh, I am definitely the girl who would answer, “sure, I have a budget, I spend as little as I can.” I’ve always had a lot of trouble sticking to limits within categories. I’m overwhelmed by how much I have to keep track of. I put everything together at the end of the month. Looking forward to your next post. Maybe this time I’ll actually figure out how to budget and stick to it!
I’ve totally been there, Joanna! (Great name, btw :)) Budgeting is overwhelming initially, but it’s possible. And spending as little as you can is a great mindset. I hope our next post helps!
AWESOME post! You guys are seriously my heroes! I’m in the process of saving for a house and starting to really get serious about how our money is spent. Can’t wait to hear about how you make the actual budget. Thanks J & J!
Thanks, Sara! We may have our budget down pat, but I need to take a page out of your book in the fitness department!
We’re starting to save for a house, too. It’s a great motivation to save more and spend less (though easier said than done!)!
i’ve been addicted to your blog ever since i found it a month or so ago, and get all kinds of nerdy excited when i see there is new post up! my husband and i are currently working on slaying our own debt monster. it’s a long story but basically it comes down to the fact that we’ve never budgeted and 10 years and 3 kids later we are finally trying to get a handle on things. i mean we didn’t go crazy buying expensive things but just the day to day things add up pretty dang quick if your not paying attention like you should. i wish there was a prettier way around it but we’ve done it to ourselves. we are trying our hardest not to fall back into our old ways. i think the hardest part is staying motivated because we aren’t going to get out of it over night. but happy to be learning these lessons now instead of 10 years from now. i can’t wait to hear more on this from you guys as we need all the help we can get!
Thanks, Erinn! Hearing from people like you is what keeps us motivated! It’s great you and your husband have each other as a support. Even after keeping a budget for a few years, Johnny and I still take turns needing a little pep talk from the other one on why we need to stick to our budget!
What’s important is that you’ve figured things out now, so just keep looking forward! If there’s ever any specific topic you want us to post about, feel free to contact us!
I totally agree with you. Our budget sucks to keep up, but it’s the main reason we’ve been able to get out of debt and help plan for our future. I really like how you said that just looking at the end of the month doesn’t work. My wife and I try to do it weekly or at least before we go shopping to know where we’re at with everything. I know having a budget will be totally worth it in 5, 10, or 20 years from now when we’re more wealthy because of it.
Yup, looking at the big picture is what makes it worth it, Jake. Even if it does suck at times. Hence, the name of our blog :).
If I don´t budget, it´s sooooo easy to go overboard with my spending. Suddenly I´ve spent to much on food, on alcohol, on clothes etc. By having limitations, I find it easier to live in a good financial way.
Agreed. I’m so good at convincing myself that I “need” to buy something. And my budget either confirms or denies whether I should follow through with it!
I am so curious to see how you guys set up your budget. I track everything, almost to the point of annoyance, but yet I still have trouble reconciling my records with what the bank shows I have. Typically I’ve underestimated and have a “Bank error in your favor” moment, but somehow, things are still slipping through the cracks. I don’t know if I’m too detailed and therefore bogged down or what, but I’m excited to get another perspective on a still relatively taboo topic (i.e., not something I can ask to see of my friends’ over dinner).
It’s tough to keep track when there’s so many ways money can leave your bank account these days. We’ve set up bill-pay for some of our utilties/cable/etc., and we have to be careful to remember to factor those in.
And I’m always curious as to how others keep their budgets, too! Here’s a link to our April budget, if you want an idea of how we break things down: http://www.ourfreakingbudget.com/monthly-budget-april-2013/.
This post is spot on! We found that developing a budget and tracking our expenses was the only way we could get a good handle on our spending. Before creating a budget, I had major perception problems when it came to spending. I thought I was saving a LOT more than I actually was. So far, we’ve done a good job of creating a budget and sticking to it (in total). We have months where we spend more or less in certain categories. But overall, we’ve spent less than we planned, which feels great.
And you’re absolutely right that tracking expenses needs to happen in real time. In February, we waited until the end of the month to add up our expenses. That’s when we discovered that we had exceeded our grocery budget by 50%. Yikes! We now track expenses on a weekly basis.
I was the same way! I used to assume we had spent way less and saved much more than we really had! I guess you and I are just optimists :). Glad you guys’ budgeting is going so well!
I’ve been guilty of having a running budget in my head for the last couple months. Fortunately, it’s just me spending so it really is super easy to keep track of. I need to get the in the HABIT of tracking my expenses better so when my finances get more…complex…I won’t be up a certain smelly creek with out a paddle. Thanks for reminding me I’m not a financial super hero. As much as you and I wish that I were.
Sounds like we’ve finally found your kryptonite. But I get the feeling that a bad month for you is a good month for us! 🙂
We were on a super strict track-every-single-penny-we-spend budget for about 8 months, and gave it up. Now we just track our fun- and clothes-budgets, since those are our problem areas. In other words, household goods, groceries, gas, etc don’t get tracked on the budget (because these aren’t things we’re apt to splurge on). However, if I buy new shoes, or go out for a drink, it gets tracked. This, combined with sticking with monthly savings goals, has worked very well for us – less of a pain than a full-blown track-every-penny-budget, but still keeps us on track.
That’s great, Becky. It’s definitely important to figure out what works for you and then stick with it. Johnny and I actually had a similar problem to you guys. We now have an “Everything Else” category that covers a bunch of areas of expense. We still track every item, but how much we can spend on several different areas just has to stay under that “everything else” number. It’s cool to hear how other couples have made their budgets successful—thanks for sharing!
One thing I’ve found really successful with budgeting is overbudgeting in certain categories-if your budget allows it. For instance, I like to estimate that my natural gas & electricity costs will be $100 when I do my monthly budget. Then when I get my bill and my utilities add up to $70, I just gained $30 in my monthly budget! What you do with your “bonus” is your choice-save, fun, debt payoff, etc.
I find overbudgeting for events like a dinner out with a friend, etc makes me feel so much better. When I lie to myself and underbudget, I feel frustrated when I go over my allotted amount. So why not overestimate and feel happy when you “save”? Plus, things (like a dinner out) tend to sometimes ring up more expensive than you may have anticipated, like an extra drink or appetizer…so if you overbudget a little, the unexpected extra owed doesn’t feel like the end of the world, which it can feel like sometimes with a new budget-er. 🙂
Just my two cents!
Awesome tip! I’m a huge advocate of over-estimating different categories. We’ve always budgeted our most expensive month of each utility combined. And since that usually only happens once every 12 months (if that), it means that there’s almost always a little extra leftover (which usually just goes to savings… boring, I know).
It’s still worth trying to keep your budget as true to costs as possible, but if you have to over- or under-estimate, always choose over.
I’m not going to lie. These posts couldn’t come at a better time. I’m in the process of creating a budget and every cent does count! Also, living from paycheck to paycheck is a thing of the past. I’m ready to be a responsible, single adult who has a … Budget! As you said, it will be painful, but it will eliminate wasted money and me pulling my hair out!
Way to jump on the budget train. It’s a sorta boring ride, BUT the destination is pretty freaking awesome. It might take a couple months to get the hang of it, but stick with it and you’ll be able to boss your money around like a… boss.
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Ummmm… Would anyone be willing to help me set up my initial budget? I’m sort of in a scary/exciting place and have no idea where to start. I have a full time job and 5 part times jobs, so my monthly income is all over the place.
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