How We Budget – Part I

First up, just a bit of a notice. I’ve been trying to write a fortnightly post plus a monthly net worth update. So far I’ve been succeeding! I’m going to attempt to up this to weekly seeing as I seem to be able to stay disciplined, but let’s call it a trial and see how it goes 🙂

There’s plenty of opinions out there regarding budgets and whether they should be called budgets and whether you need a budget. Some people probably don’t. They’re just good at not spending. I’m not one of those people. I thought I was, but then I started tracking how much I was spending and realised I was spending hundreds of dollars every month on all sorts of crap. So unless you know that you know that you know that you are one of the most frugal people on this earth, it probably wouldn’t hurt to review your spending and consider whether you might need a budget.

The purpose of our budget is to set a realistic amounts of money to spend in each area of our lives. We actually try to allocate a bit more money than needed as we’d rather have savings building up rather than each budget line constantly zeroing. So we allocate how much money each area will need and how much will go towards savings. Knowing how much money will go to savings each fortnight helps us to know how long it will take to reach our goals, which is pretty important when your goal is financial independence.

The system we use is essentially an electronic variant on the envelope system. I have occasionally wondered whether it would be worth hybridising it so that certain non-essential areas of spending such as dining out run on an actual envelope system so that we have to part with cold hard cash to make purchases (adds a psychological barrier to spending) but we haven’t tried it. It’s probably worth a trial though.

For the uninitiated, an envelope system of budgeting traditionally involves withdrawing your whole pay check in cash, then physically putting that cash into envelopes allocated to different areas of spending, such as bills, groceries, rent etc. Using cash instead of a credit card (or EFTPOS if you’re in NZ) helps you to question your spending because you have to physically hand someone your money when you buy things so you get that “loss aversion” working for you instead of against you.

Ours is a wholly electronic version of that. At our bank (ASB) we can have up to 15 accounts. So we have one transaction account and 14 savings accounts, each savings account storing money for various areas of spending. Just an FYI if you’re from the US, here in NZ most people get paid weekly or fortnightly so the numbers you see here will probably vary from what you’re used to. It runs both ways though! Sadly due to most budgeting tools and apps running on the assumption of monthly incomings and outgoings, they can be a right pain to use for us Kiwis who run on a different schedule.

So here’s how our budget is set up right now. These figures are fortnightly.

House costs$1200
Home expenses$50
Day trips$50
Philippines Trip$250
Clothes and grooming$50
Dining out$100

We’ve always run on some variation of this system and it’s only improved over time as we’ve analysed our spending properly and either enlarged certain envelops to make them more realistic or cut our spending to match what we’ve actually budgeted for. Sometimes we can even reduce our spending and the envelope in unison if we can make gains in areas such as insurance.

We spend a crapload on our mortgage because we are paying this down as fast as possible as part of our savings towards our retirement plan. For the same reason we actually don’t contribute as much to the transport account as we would if we had a more conventional retirement plan. Because our plan is to sell up and move to the Philippines we are not taking depreciation into account in our transport expenses as we expect to sell our car when we leave the country and will not need to buy another one. If you’re planning to retire in NZ, unless you are one of the lucky people who can walk, bike or take public transport everywhere (I envy you), you need to factor depreciation into your transport budget if you don’t want to have to borrow to buy your next vehicle. Budgeting only for fuel and other on road costs is not enough. If we were expecting to buy another vehicle we would probably budget more like $200 a fortnight so that we’d have that extra $60 to sock away towards the purchase price of our next car.

All up as a system it seems to work pretty well, I would recommend it to anyone. But it definitely goes hand in hand with tracking your spending. If you don’t do that, your spending and your budget will gradually get out of sync and you’ll either end up dropping the budget altogether out of frustration, or constantly feeling guilty about not sticking to it. Neither is a nice feeling!

That’s how we budget. How about you? There are so many ways to approach this and each will work best for different personalities and people. I’d love to hear some alternatives! Next time I’ll go into what kind of expenses we include in each envelope.

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