Enforcing a budget

[twaddle]

Here's an extremely basic finance question that baffles me.

Each year I'll take a look at our expenses and establish a budget for the next year. The problem is that we don't really enforce it. If I see expenses that are way out of bound one month, I'll squawk about it, but there's no easy way to "penalize" ourselves for that excess in some future month and get back on budget.

I pay regular bills via online banking, so most of the cash flow is pretty centralized, and I can dump a fixed amount of cash in the bill-paying account each month, but that doesn't help.

Both DW and I have multiple credit cards with absurd limits, and we use them for almost all of our purchases, so I don't really see an effective way to enforce a monthly or even annual budget.

Maybe limit ourselves to one credit card each with a credit limit of budget/2?

How do you enforce a budget?

 

[Janet H]

How about an incentive? First one over budget for the month has to:___________________

Possibilities might include:
Send out all holiday cards
Do all grocery shopping for the month
Reconcile health insurance claims for the year

Since this seems to be a voluntary budgeting program and no one is volunteering, maybe you should save the hassle of making the budget at all and just go shopping?

 

[FIREd]

How do you enforce a budget?

We use allowances. Our monthly spending remains pretty much constant throughout the year. Our monthly mandatory expenses are pretty much fixed, and my wife and I allow ourselves to each spend a certain amount of money on frivolous things each month. We used to use cash allowances, but now we use credit cards (because it's more convenient and it allows to shop online), with the understanding that we should not charge more than $x per month. That allows us to budget quite accurately both mandatory and discretionary expenses on a monthly basis. The only things that we do not budget for on a monthly basis are large purchases (like furniture or vacation), but those are budgeted for on a yearly basis.

 

[Ronstar]

I'm trying an allowance for the first time. Trying to spend less cash on misc so I took 50% more out of the atm and I'm trying to make it last for 2 weeks instead of 1. After I get this working, I'll cut back more on misc spending then start on other categories.

 

[Joss]

Twaddle,

Your perspective at this point seems to be trying to create some artificial device or procedure that functions to prevent you and your wife from excessive spending.... but without your giving anything up. That's sort of like trying to lose weight by wearing clothes to small rather than reducing what you eat.

I know it's no fun... but it's more effective to address this from a lifestyle perspective with the goal of identifying things that you both can forego completely. I think it's usually more realistic to cut a few whole things, than to try pretend that you can just reduce the incremental extent to which you keep on doing everything.

 

[tulak]

We also use allowances. For this, I set up two ING checking accounts with debit cards. Every month we have the same amount transferred to the ING accounts to do with as we please. Makes it much easier to track.

For our regular expenses, we both have the same credit card that we use for everything. We go over sometimes and like you, we really don't have a good way of managing it. What I usually do is when setting next years budget, I'll go back and average out the amount we actually spent and set that as the budgeted amount. I'm ok with this, as long we can meet our overall financial goals for the year.

 

[rs0460a]

Both DW and I have multiple credit cards with absurd limits, and we use them for almost all of our purchases, so I don't really see an effective way to enforce a monthly or even annual budget.

Sounds like you identified the problem. The question is are you really ready to do something about it?

I won't tell you what you should do, but I will tell you how DW I handled this "challenge" many years ago​

Very simply, we used the "envelope method". Although it seems archaic, every payday (I'm retired, my wife will be next year) we would put the budgeted amount in envelopes (food, clothing, etc.) If we had a large expense (such as wanting a new suit, for example) we would not buy the product till we had the cash to do so.

I know what you're thinking - you miss the opportunity to "buy on sale" or get the CC rebates. Yes, sometimes that is the case. On the other hand, sales come and go, and in some instances, I either bought the product at a better sale price (end of season) or better yet, I "lost the desire" to buy the product.

As far as the rebate goes, you only "save" if you "spend" (sort of like saving $25 in taxes if you spend $100 on mortgage interest - but that's another story .)

Yes, we do use credit cards (mostly for on-line purchases). However, we don't charge more than we have in the "envelope" to support the purchase we are making. Oh yes - and each of us only have one card (of course, paid off every month).

All I can tell you is it allowed me/DW to become financially independent at an early age, and be able to take early retirement much earlier than most.

I guess it comes down to the question is can you live the LBYM lifestyle and do what's needed to make it happen, or are you just "wishing and hoping?"

- Ron

 

[maddythebeagle]

I dont get "enforcing" a budget and only track expenses to know where the money is going....I view more about picking what you find value from and maybe finding a cheaper way to get there (periodically reviewing expenses)…As I recall, Twaddle/Wab doesn’t think sweating the small stuff is worth the effort anyway….I hope you aren’t running out of money

 

[dmpi]

You need to make yourself "poor" by locking your money in a long term CD or something. That way you'll be forced to live within your budget.

 

[justin]

I'll take all the credit card statements and add up what I spent for the last 6 months. Then figure out a per-category monthly average spending amount. If one area is ballooning out of control, I know where to take action. Ultimately, it comes down to a choice between choosing not to spend or blowing your budget. Sacrifices must be made to not blow the budget.

 

[chris2008]

I also prefer to track expenses day by day.
At the end of each month I add up the various categories.
After my first month I made it a goal to reduce several categories by 10 % within the next month.
In the middle of that month I checked these items and made some corrections in the second half where necessary. After each year I create an annual overview with monthly average that becomes my reference month for the following year.

I found that tracking in detail alone reduced expenses significantly in the first months.
Then I started to eliminate expenses that did not really provide enough fun in relation to the time I spent to earn the money to pay for that fun.

IMO the budget model often does not really work in private life as I am responsible only to myself for my spending and I do not have to justify exceeded categories.

 

[lazygood4nothinbum]

if i had to budget myself i'd still be working. before i quit my job i looked at spending during the normal course of my year. i'm spending even less than that now. i also padded the budget to account for travel i intended to do but over the last two years i've spent maybe only a fifth of that. it pays to be a cheap lazy good for nothin bum.

 

[Spanky]

We do not have a budget. Every major purchase or vacation trip will be on a discretionary basis.

 

[crazy connie]

To me it is simple to stay home or only go to the park or library as needed. I DO NOT go to the shopping & food complexes for entertainment. That eliminates the vast majority of the gotcha's. All else is essential spending until I decide in advance I want to splurge on something.

 

[Nords]

I dont get "enforcing" a budget and only track expenses to know where the money is going....I view more about picking what you find value from and maybe finding a cheaper way to get there (periodically reviewing expenses)

Well, it's one way to exert a significant amount of control over a part of life that seems to be easily spun out of control. It's certainly a fertile field for sorting out marital [-]discord[/-] harmony.

We stopped setting budget goals of "less for ..." and did better with goals of "more for". It's a lot easier to talk about saving more for ER (and accelerating the process) than it is to fuss about excess entertainment bills. Nobody wants to hang out with the budget police.

During my working years we used to look at a monthly budget. It quickly became apparent that we were spending very little on "entertainment" and "dining out". Every month became a joke about working too hard and needing to boost spending on our pathetic quality of life. Uproariously funny.

So I guess it's no surprise that we don't do monthly budgets anymore. We look at annual spending and Quicken is still a great way to answer the question "When's the last time we fixed that #$%^ing car?!?"

Our kid is not a fan of budgeting. She's not much of a fan of tracking her spending, either, but she appreciates the power of being able to answer the question "Where did all my money go?!?" However the most powerful motivator we've found with her is the question "Hey, how many hours would you have to work at your $8.50/hour job to pay for that? How long do you want to wear that sexy polyester office polo shirt and work with those disgruntled kids?"

So instead of budgeting, maybe it's better to frame the spending debate in terms of how many hours somone is willing to work for something.

 

[kaudrey]

I have savings targets - I save the max to my 401(k), X amount to my brokerage account, and X amount to my savings account. Then, , my monthly bills are paid automatically. I can spend whatever is left on discretionary things (oh, and food).

Just because you use credit cards doesn't mean you can't keep track of how much you are spending each month. If I know I only have, say, $1500 to spend, then I stop spending when I am getting close to that amount. End of story.

If you can't do that, then set yourselves a limit - you can't put more than $500 each on your cards each month - no matter what the limit is. If you hit it on the 10th of the month, you are out of luck for the next 20 days. You'll learn pretty quickly to reign in your spending, if you enforce that rule.

 

[ladelfina]

Move to a foreign country. Make cash transfers in the amount you'll think you'll need for 3 months. Watch the dollar fall 1/3 and use it up in 2. Repeat.

Works for me!

 

[toofrugalformycat]

DH and I each have checking accounts into which we put our monthly spending budget. If the account gets too low (this happens sometimes to me, not DH yet!), I take out a little more cash from a money market account but keep track of how much I "owe" myself. Then I cut back on things until I can put the extra back into the money market.
We set aside money each month separately for big stuff, one budget for amortizable stuff like house roofs, cars, and expensive dental work, the other for fun stuff like travel. So our monthly "spending money" is less than the total we spend each year.
Of course this is obvious, not rocket science, but sometimes simple is best.

 

[Milton]

Each year I'll take a look at our expenses and establish a budget for the next year. The problem is that we don't really enforce it. If I see expenses that are way out of bound one month, I'll squawk about it, but there's no easy way to "penalize" ourselves for that excess in some future month and get back on budget.

How do you enforce a budget?

I don't like your words "enforce" and "penalize", which seem awfully draconian. Spending and saving are all about self-discipline, not imposed discipline.

If you are routinely spending more than your income, you probably have a problem. You are postponing your future retirement (perhaps indefinitely), and perhaps facing eventual bankruptcy. If you are already retired, you risk outliving your money.

There are any number of excellent books available that can help remedy the above situation. You can start by reviewing where your money has gone over the past year (I assume that you keep detailed records; if not, start), and then reaching agreement with your spouse regarding which categories can be cut back or eliminated.

If on the other hand you are LBYM and the budget is more or less arbitrary, then you don't really have a problem and it is not worth worrying about. I'd get rid of all but one credit card, though ... why complicate your life? Multiple cards also increase your risk of identity theft.

Presumably you and your spouse have shared goals and neither of you are impulsive or otherwise emotionally immature. If not, all bets are off, and budgeting is unlikely going to do any real good.

 

[NinjaPigeon]

I haven't tried to enforce one yet, but I kinda suck at it in general. As a single man, I'm used to spending whatever I want, whenever I want. And I've been lucky enough to just not get carried away so far

But once I'm married, I want to go the allowance route and see how it works for us.

 

[twaddle]

Good stuff.

The beagle is right that we don't sweat the small stuff. Once a year or so, I'll look at our spending and try to identify low-hanging fruit. Big impact spending with fairly painless alternatives. These are almost always monthly recurring expenses, like cell phones, TV, internet, etc.

So, we're in pretty good shape in terms of having streamlined the obvious expenses, bargain hunting, setting priorities, etc.

The potential problem is in "miscellaneous" discretionary budget categories. Mostly toys for me and clothes/shoes for her.

And it's hard to get a handle on these expenses since we use the same credit cards for buying both non-discretionary items and this discretionary stuff. We can't even detect a problem until after the overspending has already occurred and the data have been sorted and analyzed.

I like the idea of an "allowance" for discretionary purchases, but it still comes down to implementing it with credit cards since cash is practically obsolete.

So, I'm leaning toward each of us using a dedicated credit card for discretionary purchases with a fixed credit limit. So, it's easy to track and easy to enforce. Obviously, it's easy to circumvent too, but at least it'll require forethought and it'll be easy to make a mental note to take it easy the following month.

 

[Martha]

Interesting question. Are you budgeting too little or spending too much?

 

[CybrMike]

Sounds like you need to make more money.

 

[twaddle]

Are you budgeting too little or spending too much?

Who can tell without having an easy method to track the budget categories, ideally before the new spending happens?

We can easily increase the budgets -- that's not the issue. The issue is tracking and enforcing whatever budget we establish.

I suppose we could just say "spending is unbounded!" I wonder where that would get us.

 

[cute fuzzy bunny]

Hmm, sounds like a little unexpected inflation is affecting your budget.