Honing a Budget

Lauren writes in:

I’ve been using budgeting software You Need a Budget to help me build a budget for our family and I think it works great! I only have one problem and it’s something I don’t really think software can help with. At the end of the month, we have certain amounts budgeted for certain things, but when we’re under those amounts, we feel like we’re supposed to spend that money. If we’re way under on our food budget, we feel “free” to buy steaks and stuff on the 29th of the month. I feel like maybe we should be spending more on food and other categories throughout the month but I don’t feel like we do anything out of the ordinary on our food spending or entertainment spending. Thoughts?

First of all, congratulations on setting up a budget that works well for your family! No matter what tools or system you use, if you’ve come to a place where you’re able to spend less than you earn each month on a consistent and repeatable basis, you are already doing very well.

The “problem” you mention is an interesting one that I’ve had to deal with myself. As I’ve said before, there’s a certain amount set aside in our monthly budget for Sarah and I to each spend freely, as well as all of the usual budget things – food, utilities, and so on.

In a given month, we never exactly meet the amount that we target in our budget. It doesn’t happen. It would be weird if it did happen for anything other than a fixed payment.

Instead, we strive to have a budget that works in which all of our numbers will come in below budget.

For example, on our energy bill, we budget each month for the average of our last year’s worth of energy bill plus an additional 5%. Unless we start gobbling a lot of additional energy or our energy company jacks rates like crazy, we’re going to come in below that.

So, each month, we expect that we’re going to spend a certain amount from our checking account on all of these expenses. Let’s say we’ve budgeted $1,800 a month for food, utilities, internet, gas, and other such things. Let’s say we also budget $100 for each of us to spend freely each month, leading to an even $2,000.

During the month, we don’t really look at the budget at all. Instead, we just focus on keeping our spending low throughout the month using all of the short-term frugal strategies we’ve built up over the years.

The only amount I really “budget” is my free spending money each month, just to make sure I don’t spend too much. Most months, I spend way less.

Less? Yes, far less. That’s because, twice a year, I go to a gaming convention with friends and I go substantially over during those months. I’ll also sometimes save for bigger personal expenses, like a replacement tablet computer. For personal spending, I don’t feel bad about staying “under” my monthly amount because I’m usually saving up for something bigger down the road.

What about the other categories, the ones where we don’t look at the budget? As I said earlier, we focus solely on keeping our bills as low as possible during the month.

When I go to the grocery store, for example, my goal is to make that trip as inexpensive as possible. I use a grocery list. I use a meal plan. I hit the grocery store flyer.

What I don’t do is worry too much about the budget. I know that if I minimize my grocery store costs, I’m going to come in under budget. I don’t need to worry about it, so I don’t.

Each month, I know that we’ve budgeted to spend a certain amount from our checking account, so I make sure we have that much in our checking account at the start of the month (with quite a bit more as a buffer). So, as mentioned earlier, we might have a budget of $2,000 each month, so at the start of the month, I make sure we have $3,000 in checking ($2,000 plus a $1,000 buffer). At the end of the month, there’s always some left over – we never reach that budgeted amount. That means that, for the next month, I don’t have to put as much into the checking account. I have the “leftovers” from last month.

Those “leftovers” stay in our savings account and, since we’re debt free, are occasionally invested elsewhere. When we had debt, these “leftovers” always went into extra debt payments.

Let’s say, at the end of the month, I have $1,200 left in checking. I only have to add $1,800 to get us back up to the $3,000 I want to have at the start of the month. That leaves $200 of budget “leftovers” in our savings account. After a few months, those “leftovers” will build up to a significant amount, at which point I’ll invest that money.

Occasionally (monthly at first, less frequently now), I’ll take out my box of receipts and make sure that my budget is still making sense. Are expenses creeping up in some area? Am I missing anything? I might end up adjusting the budget a bit, but the end result will be that I just put a bit more or a bit less into checking each month.

So, for us, our budget “leftovers” wind up in savings the following month. Since our savings are for big goals like buying a country home, we don’t feel compelled to run out there and spend that money.

All you have to do is focus on keeping your expenses low each time you spend. The fact that you’re well under budget at the end of the month shouldn’t ever compel you to spend. Instead, those “leftovers” should be swept into a bigger goal, such as getting rid of your debts. Consider it a “bonus” that moves you toward your big goals.

Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.