How we budget our monthly expenses

Published January 31, 2015   Posted in How to Save

About midway through 2014, we adopted our new “fuck this” attitude about working until 60 and decided to achieve financial independence as early as possible and retire before I hit the big four-oh three-six.  Since then, our household has become much, much more stringent with our finances, and our budget has been instrumental in keeping us on the straight and narrow.

How we budget our monthly expensesBudgets aren’t all that sexy (lots of numbers and stuff), but they can be effective if designed appropriately for your life and goals.  If you ever cheat your budget, all you’re doing is cheating yourself…or to be more specific your future self.

Don’t cheat your future self. He or she will hate your guts for it. If time travel were possible, your future self might travel back in time to punch you in the face. Right now. And let’s be honest – who really wants a black eye from our future selves because our current selves decided to be jackasses and cheat on the budget?

Okay, let’s get down to business.  My wife and I budget virtually every one of our expenses every month.  We know exactly what we bring in and exactly what we spend…and on what.

While some subscribe to the “don’t buy shit” budget, which basically means nothing is bought outside of absolute necessities, we haven’t adopted this philosophy yet.  We want to know exactly how much we are spending and where our money is going…and budgeting just makes that whole exciting process so much easier.  If we ever need to cut costs, a quick inspection of our budget can easily pinpoint where we might be able to cut back a bit.

How we budget

How we budgetI’ll be honest – my wife is the meticulous one.  She’s the rocket scientist engineer with a masters degree in aeronautics, so I generally let her design the budget and work the numbers so everything adds up in the end.  It’s just easier on both of us that way.  🙂

Our budget is designed around a reasonable expectation of what our lives should cost every month. We do not feel constrained by our budget because, quite frankly, neither of us buy “stuff” anymore. The sensibility that took a firm grasp of our lives last year makes the acquisition of useless crap virtually nonexistent.

How does our budget actually work?

We have a simple Excel spreadsheet that gets updated nearly every day. We save all receipts for every purchase. We formerly used Mint to help visualize our purchases but have since upgraded to Personal Capital, a much more robust application for financial visibility.

Our spreadsheet is broken down into standard monthly costs (like mortgage and car payments), variable monthly costs (utilities, cell phones, etc), standard yearly costs (our dogs, backyard pool, car maintenance and insurance, etc), food costs and “fun money”.  We also budget for health-related costs, like prescriptions, gym memberships, bottles of Tylenol, etc.

What the hell is fun money?  Our fun money pot is money that we can use to spend on things outside of our standard monthly or yearly costs.  If I want a new jacket, for example, this would come out of my fun money.  “Don’t buy shit” people effectively don’t have this particular budget category.

We do not put very much into our “fun money”, and we also do not let any unused money roll over from month to month in an effort to keep us from making expensive purchases, even if they are technically budgeted for within our “fun money” pot of cash.  Instead, any unused fun money at month’s end goes straight into our savings account for the Sedona, AZ townhouse that we plan to invest in.  The Sedona investment property is more important to both of us than buying new jackets Airstream that we intend to buy.

How do we account for larger purchases that do not fall nicely into one of our regular monthly categories, but surpass the cost of a single month’s budget?  Glad you asked!  If there is a more expensive item that my wife and I need, then we make a new budget item for it and redirect some of our fun money into that pot and track it separately.  Here, money can accumulate from month to month, and both my wife and I both need to agree that the purchase is important enough to break out into a separate budget line item.

It’s all in the name of budgetary transparency.  It also keeps us honest about the things that we are buying.  If we still want it after a few months of saving, then we can be more certain that it is a reasonable purchase.

It is important to note that not every freaking dollar that we make goes into our budget every month.  Yeah, we’re complex like that.

Both my wife and I work full time, but we fund our budget every month by using just one of our two salaries (mine). We (and by “we”, I mean my wife) did the math and we use about 91% of the money from my salary to fund the budget. Our goal is to get this number down to something closer to 80%. Whatever money is left over from my salary after our budget is completely funded (in other words, the remaining 9%) goes into our short term savings account for the Sedona townhouse Airstream. My wife’s entire salary gets contributed into our savings.

Why this works for us

Accountability. Knowing where our money goes is critical to maximizing our savings and pinpointing where we could probably cut back.  For example, knowing how much we spent on gas in a month may encourage us to ride the motorcycle more rather than driving the pickup (the pickup was a mistake).

Starting point on which to improve. We never kept track of our spending to this extent before, so this budget gives us a baseline that can be used to perfect our monetary habits, especially as we roll closer and closer to jobless bliss.

Also, we don’t necessarily spend everything that is budgeted.  Yes, we have a certain amount to spend every month, but we think of our budget more as the upper limit of what can be spent, rather than what should be spent.  The less we spend the more we save, and the more we save, the closer we get to achieving our long-term goals of financial independence and early retirement.

Oh yeah?  Prove it!

We have a bunch of monthly budget statements published on the blog. Take a look through them for a look at the numbers!

We track our net worth using Personal Capital



Comments

14 responses to “How we budget our monthly expenses”

  1. Steve,

    Looking forward to the monthly income/expense reports you will be publishing soon. Looks like we are both starting this for the first time in January (I just published mine today. I could not wait to get it live on the site ). I have always used mint and a spreadsheet to project where I think we end up, but not really to budget per say.

    But as my wife and I get may more serious this year about wanting to pay off our mortgage in 7 years or less and reach financial independence before most ever do (if they ever reach it).

    I think the accountability of reporting this to your readers is going to be huge. I know it has me thinking of all kinds of ways that I can save here and there. Unfortunately, we have a few projects around the house we have committed to that will drive our expenses up in February, but we will try to offset those by not going out as much.

    Preparing for this transparency had me take a closer look at Mint with respect to our spending for last year. The interesting thing I found that I didn’t realize is that we spent $14,000 on eating out last year and another $6,000 on groceries. We do love our food but after seeing this, I realize that we have at least $4,000 to $6,000 to cut in this category. This is one area of spending that gives us a lot of joy, but I don’t think we need to be indulging as often as we did last year.

    The funny thing is we love to cook also. And it is way cheaper to cook at home and have people over then to go out just the two of us. We also tend to be pretty generous at dinner by picking up more than our fair share of tabs. We love that we can be generous, but we are going to shift that generosity towards dinner parties. I can make a great Rib Eye Steak Dinner for 8 people for about $75 (Steak, Potato, Salad, and wine) instead of blowing $150 for just my wife and I, or $300 when we are out with another couple that we happen to pick up the tab for.

    We like wine, but are not snobs about it. There are some really nice bottles of wine for $8-$12/bottle (lets say we get 2 bottles at $10 each). We can pick up up 5lbs of Rib Eye Steak from Costco for about $8/lb or $40 (sometimes cheaper). That is 1/2lb or 8 ounces of steak per person. Potatoes and salad stuff maybe costs another $15. With tax and everything you are looking at about $75.

    Now we are throwing such a dinner party next weekend and actually have people bring sides, wine, and desert…while we will provide the main course. This becomes very cheap for everyone.

    It is simple choices like these that don’t hinder your quality of life but can make a huge difference in your spending.

    Cheers!

    • Gen Y Finance Guy,

      I definitely agree on the accountability part of publishing monthly budgets online for everyone to see and comment on. I’m sure it’ll be an interesting experience for us, as I’m sure you as well.

      Regarding wine, my wife and I like wine as well, and one technique that we’ve found to keep costs down is to keep very few more expensive bottles of wine in the house, but primarily stock the lower end stuff. When we want a couple drinks, we start with a small glass of the nicer wine, then switch over to the cheaper stuff. Saves some good cash every month!

      Thanks for dropping by. 🙂

      • Nice strategy. Start with the good stuff when you can enjoy it…and if the night gets carried away you don’t waste the good (expensive stuff). We typically save our expensive bottles ($40-$80) for special occasions or when it is just us.

  2. […] So in comes the budget. Budgets don’t work for everyone and in the future it may not be necessary for us but for now it is the way we are buckling down and meeting the tough goals we’ve set for ourselves. Read more about how we budget here. […]

  3. […] So in comes the budget. Budgets don’t work for everyone and in the future it may not be necessary for us but for now it is the way we are buckling down and meeting the tough goals we’ve set for ourselves. Read more about how we budget here. […]

  4. […] and we keep a fairly strict budget, and we record how well we managed them online from month to month.  For […]

  5. […] So in comes the budget. Budgets don’t work for everyone and in the future it may not be necessary for us but for now it is the way we are buckling down and meeting the tough goals we’ve set for ourselves. Read more about how we budget here. […]

  6. […] in reality, that is not how effective budgets work.  My wife has written about how we budget on the blog in the past, and it has fundamentally changed the way that we look at the numbers in […]

  7. Elizabeth Fleming says:

    I find that daily tracking of expenses is vital. Many times I have used this to look back and find places where the money is leaking out (fast food). Or I find that yeah, I’ve spent a lot of money but it was necessary (unexpected bill or big ticket item that HAD to be purchased at that time and could not be put off). Or I decide that this is where I want to spend my fun money and just leave it at that. My “budget” mostly consists of putting 20% of my monthly salary aside right after I get paid and also putting all money from “extra” jobs into savings with no exceptions (these extra jobs are equivalent to 30% or so of my normal monthly salary).

    • Steve says:

      Definitely agree, daily tracking has been a huge help for us as well. I can’t think of a better way to gain visibility into exactly where all your money is going. 🙂

  8. hi – really enjoying your blog and learning a lot from experiences like yours. A few questions if you don’t mind!

    1. I used to track all my expenses on a spreadsheet but find mint.com MUCH better – is there a reason you prefer the spreadsheet other than it is geekily fun?
    2. Do you or have you ever had a budget item for things like car/house maintenance – basically money that you put away on a separate bucket that will be used for repairs and unexpected stuff?
    3. When you were looking at trimming expenses, what areas where the hardest for you, if any? Or did you not have a problem with this at all? For me, travel is the piece that i just…it is hard to go lower.
    4. Did you ever have any concerns about being so transparent with your numbers? I am just starting with my own FI journey through my blog (traveltravelandretire.com) and I am choosing to go down the path of full transparency when it comes to the numbers and even showing income history. I think it is weird that speaking of salaries and expenses, etc. is so taboo so I don’t care about that (and I find this specially useful and encouraging on FI blogs, I mainly worry about any security issues or something I had not thought about. Your thoughts?

    Thanks for sharing all this information in public – it certainly helps a lot those of us that are getting started on that path on a more serious way!

    • Steve says:

      Hi! Thanks for your comment and questions. Let’s go!

      #1: We use spreadsheets cause my wife is a whiz at them. We can get things done faster with them than other software. We do use Personal Capital, though, for an overall picture of our net worth.

      #2: Absolutely! We have an “Airstream repairs” budget that we put some money in every month. It just builds up if we don’t use it, which is good because repairs and renovations can be very pricey. Basically, everything is budgeted for in one way or another.

      #3: Really, nothing was all that tough. Curtailing our restaurant habits was kinda tough for me because I LOVE going out to eat. But other than that, nothing was tough. It’s all just STUFF. Or monthly subscription services that we never really used much anyway.

      #4: We didn’t have concerns, no – but, this is a personal preference for sure. Some people prefer to keep their numbers secret while others are more open. That’s just the way that we are. Nothing wrong with taking either route, though. I just tend to be an open book! 🙂

      Thanks for your comment!

      • thank you for your super prompt response! It is amazing how much one learns from these blogs and like minded people.

        For me the travel part of the budget is what hurts to cut (as you can imagine from my blog name ha), and…Chipotle..mmmmm. But once you start cutting I am surprised how much easier it gets – definitely the ‘want’ goes down when you break the habit.

        I definitely need to be more diligent at adding that contingency savings cushion.

        And thank you for your perspective – now that i have actually written down all my numbers (income for over a decade, net worth, dept, progress, goal for retirement, etc) it is kind of liberating actually.

        Again thanks you. Off to reading some more!

  9. […] We meticulously budget our expenses, though I also admit when budgets  don’t work […]

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