My Budgeting Priorities

I’ve spent some time this week thinking over our monthly household budget. One additional benefit from completing and living off a zero based budget is that I can pull back and see what we are prioritizing in our lives. I firmly believe that if you look at someone’s budget you can tell a lot about them. Dreams, goals and priorities all stand out when examining one’s budget. Below is a list of a few of our generalized budgeting items that I want to focus on today. Percentages are based on our net income and are not inclusive of every “category” on our budget, which is why these items do not equal to 100%.

*Saving: 60% (does not include pre-tax savings going into our 401k)

Housing: 15%

Food: 5.7%

Clothing: 0.01%

Recreation: 5%

Saving and Housing

The two heaviest hitters on our monthly budget are saving and housing. When it comes to saving we prioritize retirement, saving to buy our first home and saving to travel as our most important goals for the future. Time is a huge factor for us when it comes to saving. Within our retirement vehicles and our taxable brokerage account we are investing a set dollar amount every month so that we can be on the receiving end in regards to the power of compound interest. When the mathematical explosion that is compound interest occurs for us in the decades to come we plan to get our time back. The end result being that our investment income will earn more than our working income and we can retire from the 9 to 5 jobs to pursue our dreams of: living and travelling abroad, regularly volunteering, seeing family more often, just to name a few.

On the housing front we have made a conscious effort to keep this percentage figure well below 25%. In the coming years when we have children we want to have the flexibility to be able to choose if my wife will be a stay at home mom for the first years of parenthood. While we are planning to move from our current apartment when our lease is up in the spring (hopefully for a place with a bit more space and even lower rent), we can keep our housing costs within reason of our monthly take home pay on one salary.

Food, clothing and recreation

When it comes to these categories some terms that immediately come to mind for me include planning, ingenuity and thinking outside of the box. Now percentage wise we don’t give ourselves a ton of wiggle room in each area but to be perfectly honest whenever we have assessed whether to raise any one of these categories we always come back to the same question: Would we really get joy and fulfillment from an increase in spending on any of these things?

My wife is a master seamstress and she can whip any piece of clothing that I find at Salvation Army into shape. We are pros when it comes to grocery shopping and meal planning, plus we keep this cost down by consuming less meat and more fruits and vegetables (plus I hear that’s good for me anyway). When it comes to recreation, we’ve gotten pretty adept at finding events and enjoying the city of Chicago without busting the budget.

It’s not that I don’t enjoy a good meal, some nice clothes and a night out on the town. Believe me, I do. But I get a greater joy out of planning to send my kids to college debt free and being on a mission to pay cash for our first home. At the end of the day when assessing my means and opportunity cost, the budget priority breakdown is really a no brainer.  

My Budget Planning Tips

Mastering the monthly budget is the easiest thing to do in concept and yet one of the most difficult to do in application. We are all aware of the concept of the budget but it is very easy to get frustrated when trying to put one together and stay on it. So here are a few guidelines that have helped me out through the years that have kept me from ripping my hair out.

Give yourself grace and time

The first few months you try it the budget is not going to work and it will be at least three until you get used to it, six for it to start working and a year for you to master it. Giving myself the freedom to make mistakes and mid-month adjustments because I budgeted too high/low for certain items encouraged me to keep going and not fall off the wagon. Developing and living on a budget takes effort, intention and most importantly time. Living on a budget is a wonderful habit to form, but again it takes time and lots of practice as I recommend you make a new budget for every month, forever. To this day my wife and I live on a monthly budget that is redone every month, but it has taken 3 years to be where we are today, being able to draft and finish the monthly budget in less than 15 minutes.

Plan every dollar before the start of every month

I know the dates when I get paid and having a pre-planned list of what to do with every dollar earned helps me tell my money where to go rather than wonder where it went. The best tool I can advise for this is using a formula table on an Excel spreadsheet, full of line items that subtract from your net pay. With a formula table you have wiggle room to play with and shift your expenses to see where you can focus extra money. Whether you are paying off debt, saving for your 6 month emergency fund or planning a big vacation, giving ever dollar on name a purpose before you earn it will help you move along in your goals.

Be  realistic

Yes you can pay off your student loans or mortgage payments faster if you only had to spend $50 a month on groceries and entertainment. But being realistic helped me find grace in those early months. My recommendation early on when you are learning to live on a budget, is to get the best ball park figure you can come up with based on previous months, and if need be – err on the side of budgeting too much on line items that might give you fits (groceries, clothing, entertainment, etc.). Once you are about 6 months into living on a budget you will have a better gauge at what you realistically spend month to month on living expenses and you will be able to assess where and how to cut expenses. For us this was especially true in budgeting for groceries. We started out with a ball park figure of $500 a month, and over time we cut our grocery monthly budget down to $350 by choosing to become flexatarians. If we had tried to heavily cut meat from our diet in month 2 of learning to budget we surely would have killed one another.

Be thorough

Renter’s insurance, term life insurance premiums, Christmas and the need for gifts for events (weddings, funerals, newborns, graduates) will happen every year. What you can control is minimizing the “gotcha” moments by putting each of these line items on your monthly budget. Our term life insurance premium is due annually and we use a sinking fund to cover the cost. We know what the annual premium is and when it is due, we divide by 12 and viola, we have a budget line item for every month so when the premium is due we simply pay it with the money saved for that specific purpose. The same goes for all of the aforementioned things that occur throughout our lives. Month to month this also helped me realize my priorities. When I was climbing out of debt Christmas cards were my “go to” gifts to family at Christmas time, and now that I am on the other side of the debt mountain, I can raise my Christmas giving up a tad more than when I started J.

Know your weaknesses

This last bit kind of gets to the heart of the budget: being honest with yourself. Before I budgeted I overspent regularly on entertainment, groceries and clothes. To combat this, the line items that had caused me the most trouble I shifted to the envelope system. With entertainment as an example we budget $300 a month for outings. $300 is all that goes in the envelope marked entertainment. When the money in that envelope runs out, I don’t go out anymore until the new month begins. Embracing and learning from my weaknesses has been more than helpful in wealth building.

Budget planning is about common sense, planning for the expected (your emergency fund handles the unexpected) and taking actionable steps to living below your means.