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.

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!
  
  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.
  
  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.

My plan is to combine a big income with a healthy hatred for buying things. It's working great so far, but I've hit the limit for what I can chuck into retirement funds so I'm not sure what I'll do when the money number gets too big.
- I’ve hit the limit for what I can chuck into retirement funds so I’m not sure what I’ll do when the money number gets too big.
  Invest into non retirement accounts. When you have 30x your yearly expenses invested, you can safely retire.
- donate to food banks or sum shit
- If your 401k, Roth IRA, and Traditional IRA are all maxed out… A) great job! and B) put it into a regular investment account (not recommending Robinhood, but that’s the easiest example). There’s no max on that.
  
  *Roth IRA OR Traditional IRA.
  +1 to the good advice, keep investing in a brokerage account. Vanguard has great index funds and you could go with a 3 fund portfolio like VTSAX/VTIAX/VBTLX. I found the target date fund and built the ratios off that but there's plenty of people who do something like 60/30/10 and let it sit.
  
  I recommend M1 for ease of use, but don't bother with their bank account. I use SoFi and Schwab for my investment accounts. Schwab only for treasuries.
- Do what I do and chunk it into a self directed investment account. A 3 fund portfolio is easy to set up and runs on autopilot.

I think making a budget for bad habits is a great thing. Better to know and be aware than not be.
I have a budget for weed and alcohol, like I do for everything else. I also have a budget for savings, charity, portfolio contributions, gifts, retirement contributions, emergency fund, and other "good" things.
Being a human is hard, no need to disparage an "unnecessary" pleasure budget.
I would TL;DR your post with really the idea that you must save and avoid debt. However you do it, budget or not, spending money or not, does not matter. You can be super frugal and save, or not be super frugal. You must save, though.
You actually gloss over saving and focus on budget, when really I see the budget as a means to the end of controlling your spending so that you can save.
If saving was not the ultimate goal, there really is no reason to budget in the first place.
All that said, I agree with a lot of what you're saying. We've been using YNAB for about 5 yrs now and it's been wonderful.

To this end, for some it might be helpful to start with tracking spending (speaking from personal experience). I couldn’t determine what was a reasonable amount for a given category for a budget because I didn’t see my current circumstance.
I spent several years categorizing my expenses into two broad categories: fixed vs variable.
Fixed costs are utilities, mortgages, grocery, and insurance etc, variable costs were anything else (more or less).
By doing it this way I could see the minimum I needed to live—and also how much I was spending on frivolous shit.
Use Google Docs, and make a simple spreadsheet to track numbers. It doesn’t have to be a beautiful sheet, just functional. It will grow with you over time as you add and remove functionally to track different aspects of your finances that are important to you. If you don’t know how to use spreadsheets, online MOOCs have courses for a tiny amount of dollars relative to what you learn.
- The most crucial thing for me back when I learnt to not treat cash point says no = I'm broke was that: simply tracking my spending. When I had a better idea of where it was going, it was easier to cut back.
  The other thing was always know your balance, which helped say no to things that were going to take me too close to skint.
  I guess the third thing is understanding compound interest, but that came after I was on the path to financial health.

If I could throw my little tidbit of advice onto the already great pile here: when it comes to expenses where you don't know for sure the amount, always err on the side of overestimating. Then you can save any extra that was left.

If you're a bit on the techy side, take a look at plain text accounting.
I'm not overly familiar with how things work financially in the U.S. for day-to-day things, but here in Australia, I run everything through my debit card, so at the end of the month, I import all my transactions into Hledger, allocate them to their appropriate expenditure account (i.e., food, gas, utilities, dining out, etc.) and then I can run a report on where my money has gone. I've been doing it over the past 2 years and it gives some really good insight.
Although it's retrospective, it helps me understand what I'm spending my money on and can help forecast and budget.

budgeting is super easy though, just spend less than you deposit in your spend account.
done
- Same thing with weight loss, just consume less calories than you spend.
  
  Yes, why even talk about these things?? /s
  
  Heehee. At least with money I can know exactly how I'm spending it. I hate the effort it takes to track calories and the level of associated uncertainty.

Just adding in a couple thoughts.. there are lots of apps for this or you can keep it simple with your own spreadsheet. I've used EveryDollar for like 6 years now, it's gotten a little bloated but the core functionality is the same.
Budgeting sucks at first. It feels super restrictive, and it's a little stressful. This goes away after like a month or two and you will feel the complete opposite. It feels like so much more freedom once you get the hang of it and you will feel very empowered controlling your money.
I had a buddy try it out, saw how much he was spending on weed, then gave up trying. What you should do is just factor in your spending on weed and work around it if you need to, or change habits if you're ready. Budgeting doesn't mean you have to change your spending habits... you likely will, but it's more about being in control of your money.
- For sure. The key to getting into budgeting is to base your budget off current spending rather than desired spending.
  Setting a goal to budget and cut spending at the same time conflates the budgeting with "I can't spend money anymore" feeling, and adds a hugely unnecessary, negative connotation to it.
  
  This was a much more succinct way of saying what I wanted to say.

Budgeting is one of those things that seems really obvious once you "get it". And in this case, "getting it" means your income is above average.
- Not necessarily. You can have a budget at any income level. It just might mean facing the fact that your expenses are higher than your income. No one says a budget can't show you how much your going into debt instead of how much your saving. My partner was there through his college. It's just depressing so you are less likely to do it. I don't know if I would stick to it.
  But I think knowing where your money is going and where it is coming from is a key step in motivating yourself to make a change... either to fight for other opportunities or to change spending habits. And it also gives you visibility into what differences it makes on a weekly or monthly or yearly basis.

Now if I could just actually stick to a budget... I get spendy sometimes and my budget doesn't like it.
- I'm going to reply to your comment... But check out the philosophy of You Need A Budget. One of their keystones is roll with the punches. If you go on a spending spree, you just acknowledge it, cover those categories with money from somewhere else (or have it be on a credit card where it'll warn you youre going into debt).
  
  I've tried using YNAB but I eventually stopped setting it up. I think it was because it didn't have bi weekly type transactions, or that might have been mint. Both I've tried using, both I just couldn't. Maybe I'll give it another shot.

So I definitely have some privilege here in the form of not paying rent. But I'm able to live off my savings and being as frugal as possible while letting my investment account slowly grow and mostly come out net zero for the last 6 months. Pretty nice not having to work and just living as low-impact and low-cost as possible. Of course this isn't possible for people who have unavoidable bills and payments but I still absolutely agree that many people could do better with saving and budgeting.

I've never been able to budget in the literal sense due to how utterly unpredictable my income is (artist sole proprietor kind of thing- don't do it, kids!), and how wildly the structure of my months vary...but getting wise to tracking all incoming and outgoing transactions on my own spreadsheet has brought such peace of mind.
It came naturally after dealing with self employment income records, so it's frankly silly that I never applied the same ideas to my personal finances.

I have had two accounts for a while, when I get paid I leave an amount in the account with the regular payments set up to cover utilities and mortgage and then I copy over the rest to a different account that I know I can spaff up the wall.
- Envelope style budgeting:)

this always feels like such loading screen advice to me, like yeah thanks game i'll try not to spend more money than i have!
sure there are people who need to be told but 99% of people fully understand that not getting shot is what they're supposed to be doing it's just that the whole game is a constant barrage of bullets from every angle. My finances don't run low because i'm wildly spending money on frivolities, it's the endless grind of necessity and the endless uphill climb towards a stable life - the reality is budgeting is literally an impossible problem, it's impossible to predict how any particular purchase will have an effect on future purchasing power or standard of life especially if you try and factor in social and psychological factors. Even a simple question like 'what point is it financially sensible to replace the threads on your car tire?' is endlessly complex from a budget perspective, maybe allocating that money differently would allow allow a more significant increase in earning potential or save a larger future cost so that it would be more sensible just to eat the larger car maintenance cost later - and this could be as complex an option as looking after your mental health by socialising with friends to help relieve the stress of studying, maybe a better grade results in a better job that comes with it's own car... budgeting is an impossibly complex and chaotic muddle of equations so pretending it's as simple as 'just do a budget' is infuriating.

The Simple Path to Wealth book has an interesting approach about the savings part of the budget:
Spend less than you earn—invest the surplus—avoid debt
Try saving and investing 50% of your income. With no debt, this is perfectly doable.
The beauty of a high savings rate is twofold: You learn to live on less even as you have more to invest.
I also highly recommend reading it.
- With no debt, this is perfectly doable
  With no debt, no family and a high paying full time job
- "Try saving 50%" ok thats about my rent which isn't actually that high for where I live... so I just stop eating to invest?
  
  Try, if it's not possible, try another amount that will fit your goals.
- I think #2 is unrealistic for a lot of people... The other points aren't bad.

55 comments