How I budget

For over a decade, I have tracked every single dollar that has come into or gone out of my household. Want to know how much we spent on pet healthcare in November of 2016? I can tell you to the penny. Interest earned in May 2018? I can tell you that, too.

I’ve tried all manner of personal finance software (Quicken, Mint, etc.) but my favorite so far is YNAB (an acronym for “You Need a Budget”). One of the first things I do every morning is log in to my account. This pulls transactions from all of my spending and savings accounts into one place. I make sure all transactions are legitimate, and I assign them to custom categories that reflect my family’s financial life.

Tracking expenses in arrears is only step one, though, and it’s the step I was stuck on for a long time. Most budgeting programs use months as their framework when it comes to actually planning expenditures. This makes sense, to a certain extent, since many expenses are monthly: mortgage, rent, utilities, etc. But plenty of expenses are incurred quarterly, or annually, or variably. Still, I dutifully tried to follow the monthly model, inevitably overstating some budget lines and blowing others out of the water. It was dispiriting.

At my day job, we budgeted the school’s expenses annually. Because the fiscal year ran from July to June, we’d spend the spring reviewing past spending patterns and gathering information about projected expenses for the next school year. This work culminated in a draft budget that was presented for approval to the board of directors in June.

By the time September rolled around, the schools’ financials often looked very different from the June budget. We hired teachers above or below salary predictions. Enrollment numbers changed. The state legislature added budget trailer language that increased or decreased our general funding. When these things inevitably happened, we didn’t alter the budget. We used what’s called the current forecast to incorporate this new information and adapt our plan for the year.

A few years back I decided to see if the way we managed the school’s finances would work for my personal finances. It did, and I can’t imagine ever doing it any other way. Each year in late December, I’ll take a look at our spending and savings over the previous year and draft a preliminary budget for the upcoming year, making adjustments where appropriate. If I know I will be making major purchases (say, buying a computer or remodeling a whole ass house) I’ll incorporate that information into my projections.

I practice zero-sum budgeting, which means that each dollar that comes into my household has a job. Some will be used to pay current expenses and some will go to chipping away at debt. Others will be assigned to savings, either in short or long term vehicles. At the end of this process, revenue equals expenses. Once I’ve established the budget, I lock it in my Excel spreadsheet and never touch it again.

This is the secret to my personal budgeting success: I don’t see budgets as sacred. They are simply best guesses, made at one point in time, using the available information on hand at that moment. I think this is where a lot of people, myself included, struggle when they try to manage their day-to-day finances. Income and spending inevitably vary from expectations, and people throw in the towel rather than adjusting their forecast to incorporate the new information.

The current forecast is where the real magic happens. This is where you can bob and weave, financially speaking. At the end of each month, I enter my expenses, by category, into a simple Excel spreadsheet I created. I’ll take a look at my spending patterns and see if they are roughly in line with expectations relative to that point in the year. For example, if my annual budget for household goods is $5,000, I would expect to spend roughly $2,500 by the end of June. If my spending is significantly over or under, I’ll decide if I want to adjust the forecast for that category. If I adjust upwards, I need to find dollars elsewhere in order to keep the net sum at zero.

As each year builds on the next, I acquire more data to inform my predictions. Juniper’s latest trip to the ER vet didn’t phase me, in part because I have pet insurance and in part because I know that she will, on average, eat at least one thing per year that she shouldn’t. If she doesn’t, great; those dollars can be reallocated elsewhere.

I treat all savings like an expense. This helps me think of dollars that are allocated to long term savings (529 accounts, retirement savings, etc.) as money that has been spent, and is therefore no longer available. I consider short terms savings as a cash flow source when I need it, and try to repay myself as quickly as possible.

Because The Project will span calendar years, I created my first ever multiyear projection for my family budget. In general, the farther away you are from the present time the harder it is to accurately forecast, but because spending in this year will directly impact decisions made in the next year, I figured it was worth a shot.

Managing finances is my happy place. I love gathering information and organizing it and making it understandable. One time when I was sad, Daughter #2 looked at me thoughtfully and said: “Why don’t you come sit on the couch and pull up a spreadsheet?”