1y ago

YSK: How to Budget

Budgeting is a very crucial part of your finances that will either break you or make you survive into another month. I have a very unpopular belief that says, if we take away the inflation issue, take away the wage issue and wage theft problem in America. I do believe that a lot of people are just simply bad with money.

And I'm no bank-level financial advisor or anything. I've been able to sustain all of my expenses without a hitch. I've paid my monthly loans on time, actually, pretty well in advance we'll say because as soon as I see bills come up infront of me, I want them out of my face as soon as possible.

I always advise people when they're out on their own and that's to watch their numbers. Always total the amount you'll be paid by the month, if it's fixed income. Then, take all of the expenses you're paying for by the month and total them up. Then, subtract the amount of your expenses from the total earning and you'll figure how much you've got left to work with and how you'll spend it if you want to. Saving is also key.

I'm not here to tell you what to do with your money. People get vehemently defensive when you point out the flaws of their spending habits, always treating it as a control issue when you're just simply finding what's wrong with it as they complain all of the time as to why they're broke.

But all I will say in regards to that, is that, you really need to weigh your needs from your wants. Impulsivity is a bad driver in how it ruins our finances. I've done things where I'd be in a store and I'd take something I thought I'd really want to have and I'd carry it around for a while. Eventually over time, the feeling of wanting that thing, washes away because I know that it is simply an impulse issue.

I do get concerned when people lay out their budget plans. They spend triple the amount of groceries for just themselves. They actually even make budgets for bad money sinks like weed and alcohol. They never save anything, it's always spending by the paycheck. You'll never know if something will come up that'll require a specific amount of money and you'll find yourself in a tough situation where you are having to decide whether you want the lights on for another month or your car tire needs to be replaced because you've neglected it for so long that the threads are worn.

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55 comments

So this is just advocating for budgeting in general? Well let's take it a step further...how do you (and others) go about building your budget?
- Don't worry, I'll go first.
  So I ultimately agree that the first thing to do is to recognize your known amounts. I start with a simple Excel spreadsheet and begin with known monthly income amounts first. Fixed or relatively consistent income gets it's own row. Then I try to think about other sources of income that I make throughout the year (if any) and then average that to a monthly amount.
  Next I start with all of my known fixed expenses. Mortgage/rent, car payments, insurance, etc. Next comes known variable expenses like gas, groceries, etc. I always average out the last few months and try to lean towards a higher amount to be conservative. Last, I try to always budget for unexpected expenses. Vehicle maintenance, child injury, unexpected bachelor party...you name it, but every month on average SOMETHING unexpected comes along.
  What I'm left with, I divide by 30 days to figure out what I can spend on a daily basis. Some days I spend over, sometimes way under...but this gives me a good idea every day on how I should be doing for the month. I find it helps to have that "per day" thought in your mind at all times!
  
  Just a minor addition, if you are particularly bad with impulse spending, follow this approach but use separate accounts to help manage the budget - i.e. on payday put the amount of fixed expenses into an account and don't touch it for anything other than these expenses (setting up direct debits for your expenses can make this run on auto pilot). Keep separate accounts for your variable expenses, your "fun money" and of course our savings as well (and only use your savings for a planned goal or emergency). It sounds overkill but it can really help you control where your funds go!
  
  My second account is where my pay goes, and importantly the only way to spend that money is move it first. Laziness prevents me overspending a lot.
  
  This helped a ton for me, I opened a second savings account for travel/vacation savings and I have thought about opening another checking to separate “fun” money from expenses money.
  Some banks make it really easy, where you can freely create sub-accounts for each bucket of money, but it seems like a majority make you apply for each account. In my experience, the application gets instantly approved, but it makes it seem harder and scarier than it really should be.
  
  Speaking on spreadsheets. Another great thing about them is that it takes almost no effort to list your daily expenses at the end of the day; the resulting list will be extremely fine-grained, but you'll still be able to sum everything up automatically. That's huge, when you want to analyse the monthly impact of recurrent but relatively small expenses.
  
  This. Track everything. Once you see it all in front of you and assuming you don't hide the spending from yourself, it is very eye opening.
  I spend how much on beer!?!
  Be ruthless with tracking and, assuming you found a job with a living wage, and the cost cutting opportunities will start to show themselves
  
  Take this one step further and make it into so many bank accounts, they're free after all!
  One bank account for only the things you know don't change each month (rent, insurance exc)
  Another account for things you can estimate each month (house gas, electricity exc)
  I like another account for things like groceries and car gas after that, I find there a bit less predictable than things like electricity.
  A few savings accounts for emergencies, trip planning, exc.
  Finally one account for fun money to spend each month.
  The beauty comes when you set them all up for automatic transfer and bill pay and only have to think about most of it once or twice per year!
- Thanks for your follow up comment because this post is more like a YSK: You Should Learn How to Budget From Somewhere But Not This Post
- I have multiple bank accounts for me and my wife. My wages get direct deposited into my "monthly Bills" checking account. Then I have a spreadsheet that calculates how much needs to stay in there and how much needs to go to other accounts. I have a groceries account and a joint spending account, which is mostly for take-out food. Then what's leftover gets split into personal spending money for each of us. I often cheat, and move money from one account to another, but before I do that, I always make sure I'm keeping track of regular monthly bills and other needs. It's envelope budgeting, but without cash.
  One point I'd like to make is that I have a good job now, but most of my life I've lived in poverty. It's hard or impossible to budget under such circumstances, and you just have to sorta do your best day to day. It wasn't till I had reliable steady work that I've been able to do well budgeting.
- I'm not seeing it yet - but YNAB is my current approach and I adore it.
  I used to approach it in a project my income for the month and then assign that money into categories and into a savings pool. It was a good spreadsheet. I liked it.
  But I find the envelope system that YNAB uses extremely powerful. You can set your categories (and it encourages you to remember expenses that only come up once in a while and budget for them on a monthly basis) and then you use the money you CURRENTLY have to fund them. You assign every dollar a job. Which means I can totally splurge on a fancy dinner... But it means I might be pulling money I assigned to my ski pass out (I sound ridiculously entitled, sorry... the blog posts they have give better perspectives if you are starting from high debt or low income). And I don't want to pull that money because I've been setting it aside slowly for months... So I don't splurge on drinks and dessert or I suggest street tacos or cooking at home for my friends instead.
- You need to make a vertical list (ideally in a spreadsheet but paper is fine) of all your expenses that you can recall. Keep adding to this as your life progresses and you spend money on something not previously on it.
  Add a vertical column and put the amount of that expense there.
  Next to each item on the list note the expense frequency (monthly, daily, bi-weekly, etc...). Now, ask yourself how often do you get paid? Daily, Weekly, Bi-weekly...?
  The next column over you need to convert any expenses with a frequency that isn't the same as your income frequency (Daily, Weekly, Bi-weekly). The way I do this is to multiply the expense amount by the number of times in a year you'd have to pay this to get the annual value for that expense. Then, divide by your income frequency/year to get it to match.
  For example: Lets say you are paid weekly. You need to convert monthly rent of $1000 to weekly in order to match your income rate. To do this multiply rent x 12 (12 months/year) = $12000/year. Divide by 52 weeks in a year = 12000/52 means you pay ~$231/week (round up to the dollar) for rent.
  Once you have done this calculation for all the expenses that don't match your income rate you can now add all the matching values and compare this total to your TAKE HOME paycheck as it all matches. If your expenses are greater than your take home pay you need to cut back on things immediately. If you make more than you pay out then you can start adding 'savings' to your expenses list for things like emergencies, large 1 time purchases, and retirement.
  There are many, many ways to get stupidly pedantic about how the math is done. This was written to keep things as simple as possible in the hopes of reaching the most amount of people that could use it.
  Edit: for expenses that are unpredictable (groceries, entertainment) you need to ballpark an approximate value. Conveniently, these type of expenses are often the easiest to control or over-budget if you can.

55 comments