I’ve been interested in personal finance for about 10 years now - ever since my first encounter with envelope budgeting back in senior year of college. It continued through paying off tens of thousands of dollars in student loan debt, to learning about 401(k)s and investing.
The foundation of my system comes from the website You Need A Budget. I first read the 4 founding principals back in 2007 when it was still a desktop software product, but it fundamentally shaped my idea of how to handle money.
It involves 4 core principles:
- Give Every Dollar A Job [https://www.youneedabudget.com/method/]
- Embrace Your True Expenses [https://www.youneedabudget.com/method/rule-two/]
- Roll With the Punches [https://www.youneedabudget.com/method/rule-three/]
- Age Your Money [https://www.youneedabudget.com/method/rule-four/]
I’ll go through the 4 rules here, but if you want a more in depth description, I suggest checking out the founder Jesse Mechum’s book on all the ins and outs of the program.
1. Give Every Dollar a Job
It doesn’t matter if you make $100/month or $10,000/month - each dollar you’ve earned should get ear marked for how you’re going to spend it. Some dollars will go towards true needs, like rent or the utility bill. Some towards wants like Netflix or that shiny new gadget. Finally, some dollars go toward servicing debt, such as student loans or your monthly credit card bill.
This process of deciding how to allocate your dollars is considered conscious spending, and I’m a big believer in it. By taking an honest look at what money is coming in and what is leftover after your basic needs are taken care of can we truly control your money instead of letting it control you.
I generally take care of this at the very end of the month in preparation for the next month. Specifically, I take all of the money earned in the past month and use that as my baseline for the next month (more on that later).
2. Embrace your True Expenses
Numerous expenses don’t fit into the nice monthly process, such as:
- Car insurance & maintenance
- Tax Return
- Christmas Gifts, etc.
These are very real expenses that pop up whether we’d like them to or not. But they’re not surprises, and because they’re not surprises, it means we can plan for them. For example, if you spent $1,200 on Christmas last year, then you could put $100 in the “Gifts” bucket every month.
I have several of these “accumulating” buckets - all of the ones mentioned above, in fact. The biggest one by dollar amount is my “Emergency Fund” bucket. Dave Ramsey suggests growing this bucket up to $1,000 before focusing on things like student loans. I agree with that approach, because it more easily allows you to follow the next principle.
The other one I’d like to mention is my “Miscellaneous” bucket - it’s basically my “monthly overspend bucket.” The YNAB software calls this bucket the “Things I Forgot To Budget For.” This bucket allows to me keep my “Emergency Fund” bucket untouched except for true emergencies.
3. Roll With the Punches
The biggest thing to know about this process is that you will make mistakes, and that’s okay! I had a bit of a hard time with this one when I first started out.
Budgeting gets a bad rap because many people set up their budget how they think they should spend their money, not how they actually spend it. So when the true numbers come back a month later, they get discouraged and cognitive dissonance sets it (the uncomfortable feeing you get when two competing ideas are fighting in your head). It is much easier for the brain to give up on budgeting altogether to avoid this discomfort.
Every single month for 10 years I’ve had to go back and fix my budget. 98.723% of the time it’s overspending in a few categories, and this is where my “Miscellaneous” bucket comes in - I just move that money to the overspent categories. I take note of why I overspent in those categories, and sometimes will adjust the budget upwards in the future.
For example, our “Dining Out” budget was constantly running over when we lived in the NYC and ate out all the time. If you’ve ever seen the size of an NYC apartment’s kitchen, you probably wouldn’t want to spend too much time there either! I had set it absurdly low at $200/mo, and was constantly over spending by $100-150/mo. That is, until I finally accepted in my head that $200 was unrealistic, given our behavior. I increased the budget that month and every month thereafter.
4. Age Your Money
I mentioned this one earlier - the core concept is that you spend money this month that you earned last month.
For example - my wife and I get paid every other week, so we have 2 paydays per month. If those days are January 1 and 15, then the sum of those paydays because my total budget for February.
The beauty of this system is that it works for any kind of payday schedule - weekly, bi-weekly, monthly, and even freelance. The more irregular your paycheck, the more important I think it is to know the ins and outs of your cashflow.
The YNAB software actually calculates the age of your money for you, but I don’t find this metric all that helpful.
Our Buckets Here is the list of our family’s categories. We practice the “Yours, Mine, and Ours” approach to shared finances, but I’ll cover that in another post.
- Bills * Mortgage
- Lawn Care
- Property Taxes
- Car Payment
- Food & Entertainment
- Dining Out
- Travis Play Money
- Carolyn Play Money
- Big Things
- Emergency Fund
This is just how our finances have shaken out. Yours will likely be somewhat different, maybe even very different.