First of, let me say we are not financial planners of any kind. This is the way we came up with our budget.
We decided to come with a monthly budget when we decided to open a shared bank account five years ago. The first thing we did was write every purchase we made down. I mean EVERYTHING. We wrote down personal and shared expenses. The key to doing this is to spend as you really would. It’s cheating if you wait until next month to buy the book you know you would usually buy this month. The same thing goes for fancy shampoo or even cleaning supplies. We decided to round all purchases up to make the accounting easier. A $3.50 trip to the bakery became $4. Our current checking account does the same thing and deposits the rounded up amount, in this case $0.50, into our savings.
When it came to bills, we collected all of them and looked at what was fixed monthly and what wasn’t. We then tried to get on monthly budget plans for the unfixed bills. Monthly budget plans are great for us. Utility companies come with an average of what your monthly spending is and lets you pay that each month. At the end of the year, if you overpaid you get a refund and if you underpay you pay what you owe. The nice thing is that you usually don’t overpay. We’ve never overpaid in 5 or 6 years. Some argue that the utility company is making interest that you could be making but we’re fine with that. They are probably making about $5 a year from us on interest and we’re happy to hand that over if it means we have a stable budget each month. I think you have to have a year of billing history to get on a monthly budget plan.
Next, you need some where to save money. We went with the saving associated with our checking but now are opening a high interest savings account elsewhere to take advantage a mildly better interest rate. We liked the linked account at first because it helped us transfer money back and forth. We needed to transfer money back and forth in the first few months as we were tweaking the budget. In some cases we over budgeted for things and in other cases we under budgeted.
We kept track of our spending by writing everything down for about two months. We liked two months because we could see how long it took for us to run out of things we bulk buy like toilet paper and coffee. If you know you won’t write everything down and you trust yourself, you can use your debit or credit card for all your purchases. We used our credit card since we never carry a balance and we wanted to earn miles. Speaking of miles, we love the Alaska Airlines card. We have to pay a monthly fee but we get a $99 companion fare coupon every year, vouchers for the first class lounge and you can accumulate Alaska Air miles on SO many airlines. The only airline I’ve flown that I couldn’t get Alaska Air miles on was Ethiopian Air (which I HIGHLY recommend).
Back to the budget. So, now that you can see what you spend, it’s time to makes any needed changes. We saw that we were buying a lot of books and cds we weren’t loving so we stopped. The Seattle Public Library has an AMAZING collection and will buy just about any book/cd/movie you suggest. We cut our entertainment budget and just got better at putting new releases on hold. We’ll still buy a book we really want and know will reference in the future. We spent a lot of time on our food budget. We eat a lot less (or just spend less) in the summer than in the winter. So that took some adjusting.
Once we had some joint budget categories down, we looked at individual spending. We decided that $300 each would be good number. We could each use our money as we saw fit. Micah’s go mostly to instrument and bike maintenance and mine goes mostly to clothes, crafting supplies, mani/pedis and mutual funds (every other month).
The next step is mostly a negotiation game. We took our monthly joint income (minus play money and retirement savings) and started subtracting all the necessities from it (utilities, food, phone/internet, savings, gas, insurance, rent/mortgage). Once that was done, we looked at everything else like eating out, entertainment, travel, etc. and ranked them by importance. We really like to travel so we budgeted a lot for it which meant we needed to cut back on happy hour(s) and eating out on weekends. Back then we were saving for our wedding, so we put less away for travel and general savings. Now we put more into those budget categories and have a house decorating category too.
The last thing we did is decide which budget categories should rollover. We decided money for Izzy, health/beauty, entertainment, dining out (we never under spend here) and gifts would all rollover. Anything we didn’t spend in the other categories would be applied to the travel fund, the general savings and now the mortgage. We also decided we’d use any extra money we received (tax refund, rebates, utilities refund) the same way. Right now, we save a little less and apply extra money to our monthly mortgage payment. We want to pay that down as soon as possible.
And that’s it. Sort of. Our budget is a living thing. We have to tweak every so often and make sure we’re always getting the best deals. Sometimes a better cell phone plan comes along or your cable provider will cut you a deal by bundling it with internet service. We check to see we’re getting the best deal on services every 6 or 8 months.
Our budget has really worked for us and we, for the most part, have been able to live within our means every month. Occasionally we have an off month that has us borrowing from our savings account but usually they are very few and very far between. We had a couple of those months when we first moved into the house and realized we didn’t own a lot of things we suddenly needed.
I hope this helped. Please feel free to ask any questions!