Budgetting hassle, need to get some tips

[dalralmi]

I use a color coded notebook and excel. I basically write down every expense in a composition book which mostly all goes on a rewards credit card. I then bi-monthly highlight color code each expense and input into my budget spreadsheet. The excel sheet has a years budget in it with my mortgage debt and 401k and investment tracking on different sheets. I can easily check my yearly budget and monthly category budgets to see bi-monthly what I need to cut back on.

Also I can run scenarios when I get unexpected extra income which I can track and throw at the mortgage. I don't neccisarily budget as much as expense track but last year I was only 200 dollars off from what I set forward with but my categories were all screwed up. My gas and grocery budget basically balanced each other out and since it was my first year doing it I was able to really see what different things cost.

My categories are fairly specific so my tracking highlights line up quite well. (Gas, eating Out, grocery, doctor, entertainment, insurance,,car repair, car registration, bills but each bill is broken down separately like phone, Internet, etc.). My misc category is mostly for clothes only since I specifically budget for emergencies and even gifts.

Expense tracking for me also let's me compare month to month to see what months typically cost more and let's me see what yearly expenses like insurance and property taxes are trending upward or downward. It also let's me know what medically I spend every year which I never really thought about as I buy over the counter medicine or random doctor visits.

Honestly I don't feel you can have or keep a budget without first expense tracking. I look forward to hearing how you month of tracking goes.

[jennypenny]

I do a quarterly budget. I like it better than a monthly budget. It's smooths out the irregular spending (like clothing, insurance, tuition, and extra curricular stuff for the kids), and I find it to be much less work than a monthly budget. I track spending for necessary categories like gas, electric bill, etc. I use an envelope system for discretionary spending like clothes, entertainment, and groceries. I consider groceries discretionary because we do one large stockpile trip at the beginning of every quarter, which covers most items and is part of the 'necessary' budget. Anything beyond that is usually more of an impulse purchase except for certain dairy items. Everybody gets pocket money at the beginning of the quarter which isn't tracked to spend however they wish (gifts, coffee, music, books, etc.).

And to answer your question, yes, when an envelope is empty we stop spending in that category unless we agree to transfer money from another envelope.

[jim234]

I track every penny of spending in a spreadsheet with categories across and dates running down. I find this is a MUST in order to see what is happening.

[IlliniDave]

Today, a colleague mentioned he worked with a yearly budget rather than a monthly. Once a month, he simply copy/pastes his bank statements right into a spreadsheet, roughly categorizes each item and then some spreadsheet magic tells him per category whether he's in the green, orange or red budget-wise. Could be interesting as well.

For expense tracking that's probably reasonable. It wouldn't work for me because after a year elapses I'd be doing a lot of guessing about where the money's gone (my rote memory is not the world's best), which is exactly what I'm trying to avoid to begin with. But if it suits your needs then I can certainly see the attraction of reducing it to a once/year endeavor. What I do is similar to what vexed reported, except I do it weekly. I just save up my receipts through the week and sit down with them and a large mug of coffee on Saturday morning. Typically I'll have 3-6 receipts and 2-3 automatic transactions to enter and it takes up to 15 minutes, which is ~13 hours/year. The "worst" part is sorting out receipts from supermarkets or places like Walmart where I might make purchases across up to 3-4 of my categories. 13 hours/year is a lot of time, but to me the precision of the data and being able to monitor things as the year progresses makes it worthwhile.

There's a certain logic to annual budgeting, as that's the longest interval we normally encounter for predictable recurring expenses. For my categories with a lot of month-to-month variation (certain insurance premiums, certain taxes, auto tags, travel, etc.) I plan annually and divide by 12, and put 1/12th into a sinking fund each month). Sometimes that feels a bit excessive, but it works for me. Many ways to skin a cat as they say.

[IlliniDave]

These are items where the cost is non-recurrant, time is not the driver, at least not on the monthly or annual scale (durable goods last many years and are don't appear at regular intervals). Therefore these items should not be included in the post-FIRE monthly expenses. They aren't looked at as closely.

I'm curious about the rationale for this. Even if an expense does not recur monthly, or even yearly, it seems like it would have to be accounted for somehow (unless part of ERE is completely eliminating the item). I have an estimate for these things that I convert into a sort of prorated monthly figure that I add to my planned monthly expenses to account for their burden on my financial assets, understanding that they'll pop up at irregular intervals. How do you take that into account? Maybe there's a better way for me to be doing this.

[vexed87]

Agreed, a sensible approach would be to work out the amortized cost of these big ticket items over their expected lifetime and budget accordingly. There won't be many, but it would be prudent to complete a thorough exercise by working through your possessions to identify all of them (e.g white good electricals, matresses, etc) otherwise they might put the spanner in the proverbial SWR.

Naturally, the more minimal your lifestyle, the less impact these goods have on your capital.

[Dragline]

I don't keep a formal budget anymore, but I do look at spending/saving patterns monthly, quarterly and annually. But if you don't know where your money is going, you need to spend some time doing this.

I've found that the most important thing is to automate savings first. Then you know what you actually have to spend. Ideally, at the end of the month, you will have extra that you can also save. If you do, you probably don't need to spend much time on budgeting. If you don't, it means that you need to focus on budgeting/spending patterns more closely.

The other thing I have found most important is to focus on your largest expenses. Mine often occur in chunks, like the semi-annual property tax bills and children's school-related bills. You need to make sure these are covered in your calculations so that there is extra saving happening in the months when they are not due. And plan ahead. Another example: a few years ago I could see our roof was going to need replacing. I began budgeting for that then and so it was not a struggle to deal with this year. The way I like to think about it is that everything you own/use will potentially need to be replaced, unless you can make a decision to do without it (which is the best choice, but not always practical). So you need to plan for that replacement.

I think "mental accounting" is the most dangerous habit that puts people off track. By that, I mean "not counting" certain expenses because they are "special" in your mind for whatever reason. A couple of examples from above are "its infrequent" or "its for a business". Others I have heard over time include "its for my pets", "its for x family member", "a vacation", a "charity or church", a "hobby that defines me". The list of special mental items is endless. There is nothing wrong with saving or spending money on any of these things. But if you are pretending that the money spent on them is somehow "different" than the rest of your money, you are likely to have problems reaching your goals.

[vexed87]

The list of special mental items is endless. There is nothing wrong with saving or spending money on any of these things. But if you are pretending that the money spent on them is somehow "different" than the rest of your money, you are likely to have problems reaching your goals.

This is why I find it helpful tracking every penny, mental accounting is highly susceptible to fudged figures. Most of the time these special purchases are not recurrent or predictable and you can easily kid yourself that the odd purchase here or there has no impact on savings rate at the end of the month, only to end up disappointed with your own progress. For example I'm still not great at avoiding blowing the odd £5 here or there on amazon when the mood strikes me.

In my case they tend to be books about permaculture/self sufficiency and will have a ROI so it's harder to say no to oneself! Yet without tracking where I go wrong with these special 'mistakes', they start to add up to bigger numbers if purchases are left unchecked as Ican get carried away with buying more than I need.

In my case, a few books won't break the bank but they do stop me reaching that fabled 75% savings rate I set for myself each month. This month I'll have to be happy with 69%. but at least I can clearly see where my money went.

[steveo73]

I don't keep a formal budget anymore, but I do look at spending/saving patterns monthly, quarterly and annually. But if you don't know where your money is going, you need to spend some time doing this.

I honestly don't know where my money is going.

I've found that the most important thing is to automate savings first.

I do this. I view it like this income - savings = spending. I know my income and I know my savings. I do look to get rid of expenses though that don't give me value for money. So I used to pay for cable and that is gone, lunches out are gone, paying for coffee outside is predominantly gone. I will probably sell the second car at the end of the year.

The other thing I have found most important is to focus on your largest expenses. Mine often occur in chunks, like the semi-annual property tax bills and children's school-related bills. You need to make sure these are covered in your calculations so that there is extra saving happening in the months when they are not due. And plan ahead. Another example: a few years ago I could see our roof was going to need replacing. I began budgeting for that then and so it was not a struggle to deal with this year. The way I like to think about it is that everything you own/use will potentially need to be replaced, unless you can make a decision to do without it (which is the best choice, but not always practical). So you need to plan for that replacement.

We do something similar but not as focussed. We realize that unexpected costs come up and we budget for that in a separate account. You can call it an emergency fund. We call it our bills account. This account isn't included as part of our savings.

I think "mental accounting" is the most dangerous habit that puts people off track. By that, I mean "not counting" certain expenses because they are "special" in your mind for whatever reason. A couple of examples from above are "its infrequent" or "its for a business". Others I have heard over time include "its for my pets", "its for x family member", "a vacation", a "charity or church", a "hobby that defines me". The list of special mental items is endless. There is nothing wrong with saving or spending money on any of these things. But if you are pretending that the money spent on them is somehow "different" than the rest of your money, you are likely to have problems reaching your goals.

We do this but we do it in what I consider a smart fashion. There is only one area where we do this though and that is for daycare costs. For budgeting purposes we take off the daycare cost from my wife's wages. This is not going to be an ongoing cost and it is basically a cost in relation to my wife working. We do though include all transport costs (cars included) in our expenses.

One way to avoid those costs that you are talking about though is to make your expenses your left over as we do. Income - savings = expenses. It basically doesn't matter where it goes because its not going to savings so therefore its an expense.

[jacob]

My personal method is extremely simple. 1) I know what I get paid at the beginning of the month. 2) I deliberately spend as little as possible at each and every transaction. 3) I know what I've got left at the end of the month.

I think this methods completely hinges on the skill level of (2). Also this method won't work unless "spending as little as possible" is the primary tactic.---Which is rare!

[henrik]

@steve073 - I think the idea to take off work related costs from salary is clever. It is essentially a tax on your working income and shouldn't affect your calculations for post-retirement.

[Scott 2]

Jacob - how do you handle behaviors in step two that would result in a low effective hourly wage? Especially now that your SWR is so low? Examples:

Sometimes I need to travel 15 miles from a train station to my office. I can spend 90 minutes taking the bus, or 20 taking a cab. Effectively I have to choose between an hour of my time or thirty bucks.

My wife let me know we needed cold medicine while at a gas station. It was an extra $5 there (effectively twice as expensive) compared to driving several blocks out of our way and stopping at another store.

We had to replace the air conditioner. The first quote, from our known regular service company might have 20-30% profit built into the price. Maybe it's possible to do better, but it takes time and adds risk to the transaction.

These are recent scenarios where I've paid the premium to save time. I know seller is getting a solid profit, but the resulting hourly wage didn't compensate for the opportunity cost of getting a better price.

[dalralmi]

I think "mental accounting" is the most dangerous habit that puts people off track. By that, I mean "not counting" certain expenses because they are "special" in your mind for whatever reason. A couple of examples from above are "its infrequent" or "its for a business". Others I have heard over time include "its for my pets", "its for x family member", "a vacation", a "charity or church", a "hobby that defines me". The list of special mental items is endless. There is nothing wrong with saving or spending money on any of these things. But if you are pretending that the money spent on them is somehow "different" than the rest of your money, you are likely to have problems reaching your goals.

Mental accounting works for me but only on small scale. im sure most here won't agree with some of my methods on this but here it is. Part of my budget involves underestimating my income. Since I look at my accounts on a spreadsheet with budget minus expenses my budget is exactly equal to my expenses in theory. That's what I account for including all my savings. The budget number however is based on a rounded down number by about 100 a month on my actual income. Normally at the end of the year when I'm balancing out the checkbook this translate to extra money I can either spend on a trip or investments even though that money is already budgeted. Mostly though there are rare things that in my mind I don't always include in my expense breakdown every month that I know comes from this magic pot. It's never much (loaning someone money for coffee and rounding down by a few cents what they owe me, a rare purchase of gum at a 7-11, or occasional mini gift for someone for some odd reason not included in my gift budget). Rarely do these mental purchases (which are almost always rounded down loans between a penny and five dollars) make a dent in what would be my underestimated budget.

Secondly I treat all extra random income with choices. (Tax returns, birthdays, Christmas, and the people I loan money to who continually pay interest back to me). I will put the majority of extra money towards my mortgage and then use rest as mental purchases where I budget the extra money accordingly. Normally for a vacation where I spend the extra money first before bleeding into the budget travel fund.

I know I know I could increase my savings rate or not indulge in the system, but my indulgences only come unexpected I never plan my budget to have this money cause it might not come... If it does I've basically said I get a better vacation this year or I get more savings. Either way the mental purchases help me feel a little happier to know I always have a buffer. Although if I knew I didn't have the buffer I wouldn't make the mental purchases and then I'd probably just build the buffer into my budget, it's just be less precise.

I do have a friend that basically minamaly budgets and ANYTHING extra at the end of the month just rolls directly into savings... I tend to save that roll of extra til the end of the year and include my extra income with it.

[steveo73]

@steve073 - I think the idea to take off work related costs from salary is clever. It is essentially a tax on your working income and shouldn't affect your calculations for post-retirement.

It makes sense to me as well within reason. I don't exclude the costs of driving the car of catching public transport however these are in reality buffers for when we retire. Our WR basically looks slightly worse than what it really is.

[vexed87]

@Scott2, when you're in Jacob's position, you probably shouldn't sweat the small stuff as much, particularly if you get to a SWR of <2%. In accumulation mode, your goals are different so minimising expenses is key.

Of course, there are better things you could achieve with your money than paying 250% over the odds on paracetamol, like giving money to people who need it more. Taxi vs Bus decision, wouldn't just be economical decision, environmentalism and health should weigh in on the decision too. Riding your bike will take longer but there's less pollution, its better for your health. The bus is a compromise between the Taxi and the Bike, whereas the taxi is plain evil choice!

[JL13]

@ IlliniDave

It's imprecise, more of a shorthand back of the envelope calculation. In theory if you wanted precision, you would amortize and depreciate these things. It's too complicated so I just ignore it. How long will my current jacket last? I don't know, it may rip while hiking or if I fall off my bike or I may decide I don't like the style anymore or it may last me 25 years. At any rate, even a $200 jacket which lasts 3 years amortizes down to less than $6 per month. The true value might be $.50 per month or $20 per month. There is not enough information to have an accurate answer, so I just ignore it and focus on the known.

[George the original one]

Sometimes I need to travel 15 miles from a train station to my office. I can spend 90 minutes taking the bus, or 20 taking a cab. Effectively I have to choose between an hour of my time or thirty bucks.

The correct question is "how can I use that hour of time on the bus to make money or otherwise be productive such that it is a better choice than spending $30?"

[jacob]

@Scott2 - I've never been in a position where "effective hourly wage" has been useful to me. For someone who can instantly exchange time for money on demand at any time and scale this transaction to any size, it makes sense. I've never had such sources of income.

For example, for a salaried position, "effective hourly wage" makes no sense at all because you can't increase it by working more hours. For contracting, it makes a little bit more sense but most contractors struggle to fill their entire schedule and do so at will.

For creative work, it's impossible to just sit down and have brilliant ideas. That doesn't scale either.

The first rule of finance is that as soon as you go beyond counting, addition, and subtraction, and start introducing weird stuff like fractions, you're "making stuff up" usually to justify some world view.

E.g. a salaried person will take his $40000/year salary and divide by 2000 hours (lets say commute, etc. are all included here) and arrive at the fraction called "effective hourly wage" at $20/hour ... even if there's no such thing ... and then compare that other activities. E.g. "I should not spend 1 hour to not spend $10 because I make $20/hour" to which I say hogwash, because spending that $10 involves actual negative cashflow.

So how do I handle it? ... Like I think pretty much like any wealthy (<- low SWR) person does. Price may not matter as much or at all but value certainly still does. Even a billionaire is going to know that a $20 gallon of milk is way overpriced. He might not care, but he does know. If he doesn't care, it's likely that he didn't care back when he had less money either. I just haven't seen more money substantially change people's values. Money may unlock previously impossible behaviour, but that's different.

Essentially my values haven't changed just because I have more savings. I'll still walk an hour to save a dollar on the busfare because I think it's nuts to pay for conveyance over a distance I can just as easily walk. I did this when I was a student with $0 savings. I do it now. Several blocks? Ha! Park the car and run over and get it at the other store. OTOH, I'd overpay for the A/C just to get out of the hassle/risk of dealing what's likely to be a one-time transaction that I'll learn little from by DIYing it. Even if the savings of doing the A/C myself would correspond to walking thousands of miles in saving bus fares.

Like vexed87 points out, I consider several different dimensions where money is just one of them and it is definitely not the most important one. It just so happens that my other values (anti-consumerism, DIY, environmental, ...) most frequently result in not spending a whole lot of money.

More money has only served up to open some venues previously closed to me. E.g. I can now buy houses or land in cash whereas once upon a time I could only buy computers and other gadgets in cash. It has not made me more wasteful.

[DSKla]

@jacob Thanks for putting that into concise terms that I am going to steal for future rebuttals to people who tell me that lengthening my commute by switching to bus ($132/yr bus pass instead of $2280/yr parking pass and vehicle operation) "costs me money" because of my hourly rate. Lots of FI people, especially MMM readsrs love to pull that one out, and it never made any sense to me, but I wasn't quite sure how to phrase it. Scalable. That's the word I'm looking for. As a salaried employee, I get a fixed paycheck. The best I can do outaide of those 40 hours is to not spend the money they give me, whatever time that takes.

[Scott 2]

So the cost minimization acts as a proxy for your other values. Which since they are complementary with low spending, makes the metric effective.

I see the hourly wage a little differently. It's a matter of, if I don't want to keep working full time at a rate that is effectively $XX/hour, why would I take on another task that returns $Y an hour, especially while already working full time? Doing so because it is consistent with non-financial values makes sense to me.


The individual scenarios weren't the point of my question, but for what it's worth, my job requires traveling to a city twice a month, staying overnight. I've already taken the train 90 miles, which does allow working. I'm carrying clothes, two days food and a laptop that creates a huge hassle if lost, stolen or broken. I'm poor at biking in city traffic, some neighborhoods are at the edge of my safety threshold, the stop and go makes me sick, and people like me don't quite fit in on the city bus. I can't imagine busting out my computer would go well. The extra hour goes into my career, which possibly gets me ahead long term.

That cab ride represents $1400 of waste in my annual budget. I've had it for years and have yet to find a better overall option for me.