Ensuring you have enough for the things you love most

3/26/20238 min read

piggy bank budgeting saving
piggy bank budgeting saving

Budgeting sometimes gets a bad rap. Fair enough, it’s not everyone’s idea of a fun Saturday afternoon activity, but I think there is power both in understanding where you are spending your money and, more importantly, making sure that those choices align with your values.

Why Set a Budget?

As Carl Richards puts it in The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money, “[y]our financial decisions should align with what you know about yourself and the world. The more you know about yourself, the more successful your investments will be – that is, the more they will align with your true goals as a human being.”

This is an exercise in self-reflection as much as an exercise in managing money. For that reason, no two budgets will look the same. If you love going out to restaurants and can make room for that in your budget, great! I might choose to divert that same money to a season ski pass or save it for future travel. The situation you want to avoid is mindlessly spending a bunch of money going out to restaurants when you don’t particularly enjoy it, leaving you without enough to spend on what you really want to do.

In addition to making room for different things within the budget, different people will require different budgeting strategies. The most beautiful, detailed Excel spreadsheet will be worth nothing to you if you can’t be bothered to update it. My own approach has evolved significantly over time. I’ll walk through both how I started budgeting and how I think about it now.

Regardless what approach you use, it does take some time to set up and get into the practice. My ultimate goal, though, is to minimize the amount of time and mental load needed to maintain good habits.

Where I Started

I started this process with conversations, reading, and reflection on what I wanted to get out of it. I linked my accounts to an app that allowed me to observe the last couple months’ worth of spending. There are free apps, like Mint, and paid subscriptions, like You Need a Budget. You can try these and see what you prefer or just use a spreadsheet (which is too manual for me but works for some).

I then broke my spending into various categories. These will vary depending on life circumstances. For example, when I started budgeting, I had a monthly daycare line item. As my kids aged out of daycare, that went away (or, more accurately, was replaced by a host of different child-related expenses).

I divided my budget into three types of expenses: recurring monthly expenses, predictable other expenses, and unpredictable/emergency expenses.

  • Recurring Monthly Expenses. For the recurring monthly expenses, I budgeted for those and paid for them out of my main checking account. My monthly expenses have included the following categories: gas and fuel, utilities, entertainment, food and dining, health and fitness, mortgage/rent, kids (which includes things like toys and activities), miscellaneous, and personal care.

    The amount we spend in these categories fluctuates month to month, but they are fairly predictable. I flex how I categorize things like eating out, which could be classified as either food or entertainment.

  • Predictable Other Expenses. For both expenses that are predictable but less than monthly and those that are semi-predictable, I have historically used sinking funds (separate accounts set up for these different categories of expenses).

    Expenses that are predictable but less than monthly include things like your annual membership fee for Amazon Prime, your auto insurance (if you pay annually or semi-annually), fees for an accountant or accounting software during tax time, tuition if applicable, etc. It can take some time to track down all of these expenses. These costs are a set amount but occur less than monthly.

    Expenses that are semi-predictable include things like repairs to an older vehicle – you may not know exactly when they will fall but it makes sense to set aside some funds for them so you aren’t caught off guard.

  • Unpredictable or Emergency Expenses. These are expenses from events that are truly unexpected, like a job loss or a car accident. To cover this type of expense, conventional wisdom calls for a fund sufficient to cover three to six months of expenses. When I was building this fund, I contributed to it monthly (like any other budget line item) until I reached my goal amount.

The point of identifying and separating out predictable expenses is to ensure you have funds available when these expenses arrive and aren’t tapping into your emergency fund to cover them. It can also harness the power of mental accounting (our tendency to mentally sort our funds into different accounts) to ensure we don’t fall short of our goals.

A common source of overspending is because people fail to account for this type of irregular but predictable expense, and therefore it pops up and seems unexpected. A good episode of one of my favorite podcasts, Hidden Brain, tackles this subject if you want to learn more.

The categories I have used for accounts to cover irregular and emergency expenses include:

  • Charitable Giving. I set an intention for annual charitable giving, but I don’t give consistently the same amount every month. Setting aside this money monthly accomplishes two things: (1) it holds me to my commitment to an overall annual amount, as I do not take money from my charitable account to pay for other things (that would make me feel like a bad person); and (2) it ensures the money is there when something arises to which I want to contribute, be it a friend’s fundraiser or a crisis situation.

    In addition to being a good and helpful thing to do, research has shown that giving is one of the best ways we can increase our happiness.

    I have heard from friends with experience in non-profits that committing to monthly, recurring contributions to your favorite charities really helps them budget, so this could move into the monthly recurring expense category if your contributions are set monthly.

  • Personal Gifts. Gifts to family and friends for things like birthdays and weddings aren't always evenly distributed, so I set aside funds separately to cover these types of occasions.

  • Christmas/Holiday Gifts. I know, I know, three different kinds of gift accounts seems like a lot. I don’t know that it’s really necessary to have three separate giving accounts, but I like to separate out Christmas because it’s such a predictable time of expenditure for those who celebrate, and it's easy to save up and account for since it's once a year.

  • Pet. I started to budget for our dog monthly, but I noticed some of his expenses, like vet visits and grooming, were irregular. His food and pet insurance are predictable monthly costs that are part of the recurring monthly budget.

  • Home. I used this account for larger predictable home repairs (for example, when you know you need a new roof or new windows in the future). If you pay for your homeowners’ insurance and property taxes outside of escrow, this is a good place to account for that as well.

  • Travel. I set an annual target for travel and save toward that amount monthly. That way, the funds are there when you want to go somewhere. It’s also an opportunity to plan for future travel, which is fun!

  • Auto. I used this account for auto repairs and maintenance, such as oil changes and estimated future repair expenses, as well as auto insurance, which we pay semi-annually, and registration costs. If you’re saving up to buy a new car in the near future, this account could also serve that purpose.

  • One-Off Expenses. This account was, just as it sounds, a place for miscellaneous other expenses that don’t merit their own separate account. It took a while to identify all of these, and they change over time.

    For example, I used to include saving for my kids’ summer camps in this category when I didn’t have access to a dependent care account through work, but now I deal with those expenses separately.

    The types of expenses I’ve identified that fall in this category include: annual subscriptions (such as an Amazon Prime membership), life insurance if not paid monthly, credit card annual fees, accountant fees, and annual licenses.

  • Estimated Taxes. When I was self-employed, I was responsible for paying estimated taxes quarterly. I would keep a separate fund to ensure I was saving the right amount to make those payments.

  • Emergency Fund. When I started, I did not have a robust emergency fund set up, so contributing to build this became part of my monthly budget. I would allocate a certain amount each month until I built up enough to cover around six months of regular expenses.

    I kept this separate from the sinking funds so that I wouldn’t feel like I had more of a cushion than I actually did. Unless you’ve built every irregular expense into your calculation of six months of expenses, it’s worth keeping this separate, at least as you’re getting started.

It was a bit of a process to set up all these different accounts, but once they are there tracking is a pretty easy once-a-month process. You can automate moving the right amount of money to each account monthly and then just need to track when you incur the expenses to pull from the appropriate account.

What I Do Now

Over the years, a lot of life happened. The pandemic, managing kids with no school, moving to a new city, starting a new job in a new industry, moving again (this time to the mountains), my parents getting sick…it’s been a lot. I had developed a pretty good sense of my budget, but moving to a new city and dealing with a new job and everything else shifted things quite a bit.

I gave myself some grace to spend less time obsessing over the budget and found that things continued to work. I still keep track of the overall budget, including the budget categories, through an app, but I don’t spend as much time on it as I once did. Instead, I automate by dividing my direct deposit into three separate accounts (after contributions to my 401K and health savings account). One goes directly to investments, another goes to savings (which covers all the categories above), and the third is for day-to-day living expenses.

I still sit down with the budget and think about how the breakdown aligns with our bigger financial goals and overall values but I’m less in the day to day weeds and less concerned if we spend more than expected on food vs. another category in a given month, as long as we’re in line with the overall allocation between savings and spending.

I would not be able to do this if I had not gone through the process of budgeting using the original system for several years, which gave me a good sense of how much needed to be within each of these three buckets. This works for me for now. If I encounter a new life situation that requires more careful attention to nuance, such as a layoff or new job, I will likely revert back to the old system for at least some period of time to ensure I’m keeping a more careful eye on things.

There are other budget systems out there. I found that going through the process of careful tracking and setting up a system initially enabled me to take a lighter touch approach later while still making progress toward financial goals.

I'd love to hear about what systems you've found the most helpful!

Disclaimer: I am not certified in financial planning, nor am I familiar with your personal financial situation. These are my thoughts grounded in my experience, which will differ from yours. Please run any of these ideas by someone familiar with your situation!