As I mentioned earlier this week, Theresa asked me to share more details about how we budget. She correctly deduced that we do not have a zero-sum budget – in other words, I do not account for every penny that comes in and goes out, leading to a difference of zero. I could do that, but it would take up so much effort that I probably wouldn’t do it at all.
What works for me is to set up categories and establish amounts for them – for example, some of our current categories are:
I also establish categories for savings, including:
Infrequent Bills Account (IBA)
The IBA is how I budget for regular but infrequent expenses, like insurance premiums and property taxes. I add up one year’s worth of expenses, divide by twelve, and save that amount each month. If I have an expense that month, then I deduct that amount from the monthly amount before transferring it to savings. About twice a year, our expenses are more than the monthly amount and I take money out of the IBA instead of putting it in.
The Car Savings is a subaccount at ING that will be used to pay cash for our next new vehicle. Investing is an amount automatically transferred into investment accounts each month – we hardly see that money at all.
Note that these categories don’t take into account expenses like taxes and retirement savings, which are automatically deducted from our paychecks. When I budget, I’m only concerned with the money that’s actually making it into our bank account.
With all of these numbers in place for each category, I can look at our take-home pay and see what’s left over. From that amount, I come up with an amount that should go into savings each month. I make that number reasonable – it’s not the entire difference between our take-home pay and our expenses. For example, if our take-home pay is $4000 and the expenses I’ve calculated are $3000, I might allot $600 for savings every month and leave $400 for discretionary expenses.
That might seem like a lot to some and not a lot to others. It works for us in large part because neither of us is going to go out and spend the money just because it’s there. Some months we spend more than the amount allotted for discretionary expenses and some months we spend less – for us, it generally balances out.
We could probably save more on a zero-sum budget, but we are at a point where the lack of stress of accounting for every penny is worth a little extra spending. It’s the price we pay for sanity right now.
The nice thing about the way I budget is that income from sources other than our day jobs can be snowflaked straight into savings. I’m talking about things like rebate checks, gifts, tax refunds, blog income, etc. This is how we have been able to regularly save more than the amount I’ve budgeted for each month.
This is the budget that works for me. What works for you?