How do you decide how much to budget, per category, every month?
Do you let your budgeting app decide for you? Do you use the same numbers you used last month, or cut those numbers by a few hundred bucks because you're trying to spend less?
Or do you take the time to think about everything you're going to need to pay for that month - from brunch with an out-of-town friend to a new pair of shoes - and budget accordingly?
I started using the "budget by the individual item" system about four months ago, and it's given me a much better picture of where my money is going - and whether or not I can afford what I want to buy.
Wanting to spend a certain amount isn't enough
A lot of us do the "I usually spend $600 on groceries and $300 on clothing every month" budget, or the aspirational "I want to spend $400 on groceries this month" budget.
But wanting to keep your spending under a certain amount isn't enough - especially when you find yourself halfway through the month and you've already run up a $442 grocery bill. Instead, you have to figure out what the stuff you need to buy actually costs.
I use Mint to track my budget and spending, and although Mint would be happy to create budget categories and amounts for me based on my spending history, I take time every month to customise my Mint budget based on what I anticipate actually spending that month.
- I look at my calendar to determine how many trips I'm taking that month. Then I make a list of all the Uber rides to/from the airport, airport meals, and Gogo Wi-Fi I might need to purchase, along with the estimated costs of each. Once I've figured out how much it might cost just to get me to and from my destination, I start adding in other travel costs like restaurant meals.
- I also check my calendar for birthdays, out-of-town friend visits, and other social events that I know will cost me money. I add those expenses - gifts, restaurants, more Lyft rides - to the budget.
- If I'm planning on buying clothes, I think about the number of items I'm probably going to buy (three shirts? five shirts and one pair of jeans?) and how much I can expect to pay for each item.
In other words: I'm not telling myself "I want to spend $150 on restaurants this month." I'm telling myself - and my budget - that I will probably eat five restaurant meals this month, and three of them might only cost $30 but two might be closer to $60. Therefore, I need to budget $210 for restaurants and choose my menu items accordingly.
Change your budget when your plans do
I know your first question is going to be "But what if something changes?" so here's how I deal with unexpected expenses.
First, I always build in a budget buffer, because I know that I can't go an entire month without something coming up that I hadn't planned to buy.
Second, I know that overspending in one area might mean cutting back somewhere else. This year, I made a list of everything I thought I might need or want to buy between May and August (along with the assumed costs of each item) and as I overspent or added new items to the list, I deleted others or figured out ways to cut back.
For example: Instead of buying expensive airport food, I started packing my own TSA-friendly lunches to take to the airport with me. (YNAB users will be familiar with this technique, too!)
I also earned extra income to cover some costs I hadn't budgeted for. (I'm a freelancer, which means it's relatively easy for me to pick up an extra assignment when I need it.)
You might think "well, why bother planning such a detailed budget if you still can't anticipate all of your actual expenses?" For me, making a list of what I want and need to buy every month - and how much it will cost - helps me make smarter decisions when those unanticipated expenses do come up (which they will).
In other words: If I say yes to this new opportunity, what do I need to say no to? If I get invited to an unexpected dinner out, does that mean I need to plan to bring my own food to the airport? If a big expense comes up, do I want to A) pay for it out of my savings, B) cancel this month's clothes shopping trip, or C) hustle up some extra income to cover it?
Take time now and save money later
Thinking about how much you plan to spend every month, down to the restaurant meal, rideshare, or T-shirts, takes time - and you don't need me to tell you that it gets more complicated the more people you have in your household.
However, my budgets have gotten so much more accurate now that I've started calculating every item I am likely to buy and then figuring out how much to put in each category.
Yes, I know this technique won't be for everyone - but if you're having trouble sticking to your budget categories every month and want to know how much you should actually be budgeting, it might be for you.