Here is another question from M: How to make a budget that flows better? I've been too strict with my monthly budget and it never seems to work out. Some months we are really short and some month we are way over.
When I just started to date my now husband, he asked me if I have a monthly budget. I said: "No. I don't use a budget. I just buy what I want." I could see that he got scared because my answer sounded like I suffer from uncontrollable spending. In reality it was the exact opposite.
I already went trough my budgeting phase and learned my best way to spend and to save. When I saw that my method is working, I didn't see the need to track my spending anymore. My savings were maximized. Everything was automated and "didn't have a budget" anymore.
He didn't know all that. I explained it to him and he calmed down. I guess I passed his test to be suitable as a potential future wife who will not spend the family money out the window.
For me, budgeting is not a torture instrument. It is just an emotionless tool. Let me explain.
Most people use budgeting to restraining themselves from overspending. Some kind of a too to enhance will power.
But that is not what I used it for. I used it as information gathering about my spending, comparing it with my goals and making adjustments.
To start using a budget, you first need to learn what your expenses are and only then you can start to budget.
You can't start to budget before you have enough information about your spending habits. If you don't know your expenses it is like budgeting rainfall. You predict some level of rainfall and get either disappointed if there was more rain and happy if it was less. This is not budgeting, it is guessing.
Here are steps I used:
Step 1.
Write down all your expenses. Everything: fixed and variable expenses. Include luxury items (like Louis Vuitton bags or expensive travel).
Step 2:
Track your expenses for 4 or 5 month.This is not budgeting yet. It is careful collecting of information about your expenses.
Step 3: (optional)
Divide all your large fixed expenses which are payed yearly like disability insurance, car insurance payments or vacations. Calculate the total estimate for a year and divide it by 12. This will be your monthly amount which you can put into a separate savings account, which can play a role of an escrow account. When a large expense comes, the money can come from that account and the monthly budget will not show any wild swings. This is an optional step. I used to do that when the money was less.
Step 4:
Start budgeting. Get your monthly numbers from the data you collected. Ad 10-20% for surprises if you prefer to be in a good mood. Don't add any % for surprises if you like to torture and guilt yourself with no reason.
Watch for 4-5 months and see if you need any adjustments.
If you buy more Louis Vuitton bags and blast your budget, you have to either add it to your expenses or to convince yourself that 6 of those bags are enough. If you just can't stop buying those bags, there might be another solution (see this post about consumerism versus minimalism). If you are constantly under your budget you can celebrate at the end of each month. If you like celebrating, keep that 10-20% room to stay in a good mood. If you don't like celebrating, adjust your budget numbers and celebrate less.
People in general like to constantly put themselves under some sort of restrictions. Even young children do that. You see it when they start to jump over the cracks in the asphalt or seams between the bathroom tiles, trying not to step on the lines. Putting restrictions on yourself is very natural. But like anything, if it becomes extreme, it becomes pathological.
Budget is simply a realistic projection based on previous statistics which will be evaluated, adjusted and used for more projections and optimization. It will help you to know what to expect and to catch deviations early.
Some people talk about saving 50% of gross income or setting 10% of bonuses for fun things like vacations and hobbies for emotional well being. But the percentages say nothing. If your monthly income is $2,000 you just can't save 50% of your gross income. If your monthly income is $20,000, setting only 50% for savings is not appropriate. And if you have loans, all of that will be modified by that. The same problem is with setting 10% for vacation and hobbies. If the budget is made and used properly, it should not raise questions about arbitrary percentage amounts.
