Budget Night at the Stark Household

For many it’s a day filled with such dread that most families skip it entirely. But there’ a way to make using the most powerful financial tool in your arsenal into an enjoyable highlight of your month. So how do the missus and I make budget day one of our favorite parts of the month? That’s what I’m here to discuss today!

What a budget is

A monthly budget is a tool you utilize to help monitor what money you have and where it’s going. It’s the most powerful option for accomplishing Step 1 of the 10 Step Plan. By determining what you spend on and your satisfaction level with that spending you’re empowering yourself to allocate your money to where it needs to go and where it will have the biggest impact. What you spend and how you spend it is entirely based on your goals! Your budget simply documents those goals so you know how well you’re doing in a concrete fashion.

What a budget isn’t

Budgets are like diets. The American marketingsphere has convinced us that they’re something we do under special circumstances to cut back and resource constrain ourselves. That’s bullshit. Your diet is all of the calories you consume in a given day. That’s what “diet” means. It’s not cabbage soup and the occasional tap water. It’s not South Beach or Atkins. It’s the food you consume in a day. That makes up your diet.

Likewise with a budget, the amount you spend in a given period of time is your budget. For most Americans they have no idea what’s in their budget, just that they’re spending. Doing a physical budget is taking ownership of your budget, determining for yourself what your goals are, and setting targets to help you reach those goals. Your budget is not about restricting yourself from spending money or enjoying life. If you spend $1,000/month on the crystal spider-of-the-month club from QVC and that’s important to you, your budget isn’t going to take that away from you. Instead it just quantifies how much of your spending goes towards that goal each month.

If instead your goal is purchasing a house, or paying off high interest debt, or maximizing a tax advantaged retirement account you can decide $1,000/month on those crystal spiders is better allocated elsewhere. You might cut it down to $500/month for your spider collection and put the extra $500 towards a different budget goal. At all times you control what spending decisions you make with your budget! No one tells you what’s right or wrong, and you’re in control of your spending goals. Don’t like a particular goal? You can change it. What I find for most folks who actually document their budget is that they’re surprised they were spending as much on some categories as others and determine they would rather put some of that money towards other goals. Using their budget they gain that knowledge and can monitor their success in focusing on these new goals, and that’s powerful!

Lazy Budgeting

In my introduction of the budget as the most powerful (and free) financial tool in your arsenal I focus on my approach to budgeting: being lazy. Instead of tediously tracking every receipt and accounting for every penny that goes out, we use Mint.com to automate our tracking. By inputting our bank accounts and credit card every dollar that comes in or goes out is tracked and categorized. We update a few of the categories but because Mint relies on millions of users to help it learn what types of expenditures qualify as what we don’t have to spend much time on this. After all, if 100,000 people indicate “McDonald’s” is a restaurant, Mint learns when we spend at a place called “McDonald’s” it’s probably restaurant spending.

During the month we don’t think about our budget much outside of keeping a mental check on where we’re at with spending. Because we’ve been tracking our budget for a few years this part is pretty easy and doesn’t occupy a lot of time for us. If you’re adjusting to a new budget or using one for the first time you might want to keep a closer eye on things. Fortunately Mint.com has an app for Android and iOS that allows you to monitor things at any time from your phone. You can see how much you’ve spent on each category throughout the month so you know if you need to step on the gas or hit the brakes.

At the start of each month the missus and I get together to talk about how the month went and compare numbers. This is the bulk of the activities for doing the budget in the Stark household. We start with pulling our numbers from Mint on what we actually spent for the month and compare that to what our targets were. If we’re over or under by a lot we talk about why and make a note in my Excel spreadsheet (these notes come in handy later when we re-evaluate our budget for the year). Once all of our numbers are in we calculate how much money we have in our emergency fund. Because my wife is only working part-time while finishing up graduate school we keep six months expenses in the fund. Any amount over that number is then allocated towards our savings goals. We pay those in this order:

• High interest debt (which we paid off thanks to our budget!)
• Health Savings Account (HSA)
• Roth IRA
• 401k
• Down payment for a house

With our high interest debt paid off, our health savings account stocked up through workplace matching, and my 401k managed through pre-tax income from work as well we’re primarily focused on our Roth IRAs and then saving for the down payment on our house. Getting to put money towards these goals each month and seeing the results of our hard work is the positive reinforcement that has made budgeting a positive experience instead of a headache. Mrs. Stark actually gives me the hard eye roll when the 1^st of the month rolls around because at 12:01 a.m. I start pestering her to sit down and do our budget. It’s like adult Christmastime!

What should a budget look like?

So what does our budget look like in a given month? Here are the categories we track after years of documenting our budget month-to-month:

• Rent and Utilities (no more than 30% of income)
• Internet
• Car, Renter’s, and Life Insurance
• Cell Phones
• Debt payments
• Gas and car fees
• Medical expenses
• Groceries (calculate how much you should spend here)
• Gifts
• Personal Spending allowance (a small amount of $ we give ourselves to spend on whatever we want, guilt-free each month)
• Entertainment (just Netflix for us because that’s our goal)
• Other (this captures all other spending, mostly non-grocery items at places like Target)

I’ll provide a sample budget you can work with but yours may look similar or different from ours and that’s okay. Ours is built on years of knowing what we spend on and tracking our changing expenses. Yours will be built on the same data for you, which might be different. The key thing is to track all your known monthly expenses (groceries, rent, cell phone plan…) as well as accounting for semi-annual expenses (holiday gifts, car insurance payments, membership fees…) as best you can. My recommendation for the first month is to just let Mint.com track what you spend automatically and then build your budget based off of that. Each month as you add more data you’ll have a better idea of your actual spending levels. I also recommend a budget that doesn’t account for all of your earnings going towards a spending category each month if you can afford it. Making sure there is a buffer between “what you spend” and “what you earn” means you have a bit left over each month to stock your emergency cushion/fund or to put towards a debt paydown or savings goal.

Annual Reviews

There are a few circumstances each year in which the missus and I take a look at our budget to see how we’re doing outside of the usual monthly visit. The key reason we do this is to make sure we’re managing the deadly influence of lifestyle creep to prevent ourselves from setting our spending to match our growing income. A quick summary of when we do these budget examinations, what we do during them, and why.

Summer check

The June/July timeframe is the halfway point of the year and it’s a good time to take an extra half hour to look at your budget progress so far this year and see how well you’re doing on your budget goals. If we find that gas prices have gone way down and we’re spending far less on gas each month than we thought, we might adjust our gas target for the rest of the year to match expectations. If our grocery spending is higher than we thought it would be we examine why that might be. Could we work harder at hitting that target? Or do we really need to adjust our expectations upwards? Midway through the year is an excellent time to check where you’re at with your goals to help keep them on target.

Pay increases

Over the past few years we’ve been pretty fortunate to have some big pay increases that have allowed us to bust through some of our budget goals faster than we had anticipated. Each time we’ve received this windfall we’ve readjusted our budget. What did we adjust? Our savings goals! I can’t impress enough how important it is to tame the lifestyle creep beast. To ensure that we do so after a pay increase we sit down, look at the budget, make sure we’re on target, and then readjust savings goals. It’s a powerful thing to know how to live on less than you earn so that any additional money can go towards the goal of financial independence.

Pay decreases

Under a circumstance in which our pay goes down we adjust our budget goals again. With less money coming in each month we look carefully at our goals and which may need to be adjusted to manage a new reality. Can we afford to cut some spending on our grocery budget? Are we spending too much shopping at Target or Fred Meyer? The amount we earn is static so if that number goes down we must adjust elsewhere to make up for it.

Meeting your budget goals

Your budget tells you what’s happening with your money and what you want to have happen with your money. But sticking to those goals can be challenging, particularly for those of us coming off a debt-fueled existence of spending far more than our means. To accomplish the goals we’re setting for ourselves and to make sure we’re staying on target consider giving the Envelope Method a try.

Instead of putting all of your expenses on a credit or debit card, something psychology shows us can lead to higher spending as our brain tricks itself into feeling like we’re spending “pretend” money instead of actual hard-earned dollars, you spend cash only. To separate which cash goes where you write a budget category on a series of envelopes and put the money you’ll spend in that category for the month in each envelop. When you need money for that expense, pull it out. When there’s no money left in the envelop? You’ve spent your max amount on that category for the month.

The envelop method is a time-tested tradition that has served many a conscientious budgeter over the years. Even yours truly still uses it for his weekly allowance for eating out at work because I just couldn’t stay within the budget lines when I was relying on my credit card. If you’re struggling to meet your goals the envelop method may be able to help.

Sample budgets

In closing today I wanted to end on some sample budgets you can tinker with to determine what works for you. Remember: your budget is an accounting of your financial goals, not some boss telling you you can’t enjoy life or spend money. You control what your budget is and does, and these samples can be custom-fit to meet your family’s needs.

• The Mint.com sample budget template (Microsoft Excel download)
• Vertex42 yearly budget
• Kiplinger budget calculator and download

Have better budget suggestions or questions for help? Sound off in the comments below.

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