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microbudgeting

Budget: Positive news

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Well! Only six more days till the end of the current budget cycle, and an amazing $352 is left in the kitty. Not, we might add, through any extreme deprivation: I’ve gone out to eat with friends four times in the past three weeks; bought $38 worth of scrumptious wine at Costco (some of which I enjoyed last night with steak, asparagus, and a mighty tasty avocado salad); spent over $80 on gasoline; and had my hair done. Two women have even asked who does my hair! Since I cut the budget to $1,000 preparatory to canning day, having some $350 left with a less than a week to go is a very positive development, indeed.

How is this happening? Since January, on a $1,200 kitty I’ve run over budget five months out of nine. Of the four months in the black, only one of them came in with expenditures of less than $1,000; a second was close, but no cigar.

One explanation, I think, is stockpiling: at the start of this cycle, the freezer held plenty of food. Yet I’ve spent about $317 at Costco, much (but not all) of it on food. There have been no extraordinary bills (yet): no vet bills, no car repairs, no plum…oh, wait: there was a plumbing bill. Hmmm…

The big change is that I decided to abandon microbudgeting and see what would happen if I set up virtual “envelopes” for the month instead. In microbudgeting, the budgeted amount for the month is divided in four and allocated to four periods of roughly a week each. With the envelope system, you establish an amount to spend on each of several categories, and then quit spending on a given category when you reach its limit.

Presently, the result looks like this:

In this first experiment, it appears I’ve overbudgeted for Costco and underbudgeted for gasoline and hair. Since I don’t get my hair cut every month, I figured I could think of $20 as a kind of “average,” but maybe it would be better simply not to have a “hair” budget in the months when I don’t need a trim. No law says you have to have the same budget categories, month in and month out.

I hardly ever go out to eat—really, it’s a rare month when I spend as much as $50 in restaurants. For some reason, this month all my friends have been asking me to join them, and since I have precious few friends, I incline not to turn them down. At any rate, it’s covered by the savings from the pool and Cost Plus categories.

So the question is: Does a virtual “envelope” system, even when the proprietor cheats here and there, work better than microbudgeting?

Psychologically, it may: with the weekly microbudget, one feels it’s OK to spend all the way to the hilt. In fact, when the overall monthly budget gets tight, it’s difficult not to spend the entire week’s microbudget: $250 is not much to cover all one’s bills, from food and gasoline to pet care and property maintenance. One $200 run on Costco plus a tank of gas and you’re over budget…and how often can you get out of Costco for under $200?

With the envelope system, you don’t feel so constrained: you have all month in which to spend the money allocated for groceries, clothing, gasoline, and the like. One $150 trip to Costco came nowhere near running me into the red, but if I’d spent that much out of a one-week microbudget and then had to spend $35 on gas and $30 on the hairstylist, I’d have had $35 left to last the rest of the week. One trip to Safeway would have blown it. With the virtual envelopes, it’s easy to see what remains in the budget for specific purposes, making it easy to back off some expenditures as needed.

Clearly I’m going to have to reallocate allowances for some of the categories: less on Costco and more on gas, for example. But if I’m right that this approach works better than microbudgeting, the implication is huge.

Huge.

It means that next year I should easily be able to live within my much constrained means, without having to hold a fulltime job and without even having to crank any freelance work. Combined income from Social Security and part-time teaching should more than cover my needs!

$14,400 SS + $14,160 teaching – 20% tax = $22,848 net income
$565 monthly recurring costs + $1,000 discretionary budget x 12 = $18,780 routine expenses

That leaves me almost $4,070 to the good. From what I can tell, that extra amount will just cover the cost of Medicare, which should run around $300 a month, by the time I’ve cobbled together all the aspects that go to creating full coverage. It doesn’t leave anything for emergency savings, but I have $10,000 in that fund to cover 2010; in the following year I’ll be allowed to earn more money.

So, if I don’t get the Glendale Community College job, it won’t much matter: as long as I can keep discretionary spending to around $1,000 a month, I should be fine.

And in the unlikely event that I do get the job, it would make sense to stay on this budget and save all the unspent net income, thereby making it possible not only to buy a car in cash but also to replenish savings with new earnings.

Either way, the new budget is a winner!

How dumping your credit cards can keep you on budget…

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…even if you’re a credit-card “deadbeat” who pays off all charges in full every month.

As I was saying yesterday, if and when my credit-card issuers try to sock me with annual fees just for carrying their plastic around in my purse, the cards will go away. Substituting cash, purchasing cards, and checks for credit cards will, on the surface, add an extra layer of complication to my bookkeeping: I’ll have to go to Costco and Safeway to buy the purchasing cards, and I’ll have to keep track of amounts spent with each of these spending tools.

Or so it seems.

In fact, though, I think a credit-card-free system might be no less involved to track than what I’m doing now: budgeting $1,200 (down from $1,500 after the furlough; an amount that will drop to $1,000 when my job ends) for all expenses other than monthly recurring charges (such as utilities), and staying on budget by trying to spend no more than 25% of that amount in any given week. To make this work, I have to enter each week’s bills against the week’s microbudget, a recurring Excel tedium.

Allocating a specific amount of monthly income to each of the three tools would work much like the “cash envelope” system favored by many frugalists. The idea is that you set aside a specific amount for each category in your budget—in cash, physically in an envelope—and when an envelope runs out of dollars, you have to stop spending on that category until you get more money. The psychological message is You’re out of money!!! Stop spending!

Well. A purchasing card with X amount of money on it is effectively the same thing as an envelope of cash. Run out of money—quit spending until you have more money. You could, in theory, regard the other two tools in exactly the same light: cash is easy; checks would be simple if you kept only enough money in your checking account to cover your monthly check-writing budget.

My plan is to have one purchasing card from Costco and one from Safeway, the merchants where I buy most of my food and household goods. Then to pay in cash for meals out, entertainment, and small incidentals, and to cover all other more-or-less discretionary expenses (such as house and pool maintenance, clothing, etc.) with checks.

In a way, this plan would be simpler than my present scheme. Instead of balancing all these expenses out of one “envelope” (the credit-card budget), each category would be strictly finite, and spending would have to stop when a given month’s limit was reached.

Right now I spend about $425 a month at Costco, about $68 a month for Costco gas (by far the cheapest source of gas in town), and about $80 a month at Safeway. Averaged out over the past nine months, I’ve spent about $48 a month on clothes at emporia other than Costco, my favorite purveyor of jeans and knit shirts; about $20 a month on haircuts; and about $68 a month on all pool care, including repair bills. Some of those costs aren’t going away after the job ends: I have to buy gas, for example. Others don’t happen every month—I get my hair styled about once every two months, and repairs on the pool happen only a couple times a year. Money set aside monthly for those categories would accrue until a need arose.

Regarded in this way, my base costs actually come to less than $1,000 a month:

Current predictable expenditures come to almost $870 a month. In the new, ascetic regime, regular expenditures (above and beyond monthly recurring costs such as utilities) will drop to around $815 or $820. Distributing these expenses among several payment tools, some of which (such as payment cards) are finite, might force me to stay within this restricted budget.

As a practical matter, of course other expenses will arise: veterinary bills and medical copays, for example, and the unending repair bills on the house. But those will just have to be paid from emergency savings, since Social Security plus teaching income won’t provide enough cash flow to cover such costs.

And also as a practical matter, some of these costs don’t happen every month: I rarely go out to eat, and when I do I certainly don’t spend fifty bucks. I don’t buy clothes often, and in any event, I obviously will have to cut expenditures there—I can’t afford to spend $600 a year on clothing.

I suppose I could take out the $190 a month—the amount to be spent by checks—for a total finite cash budget of $260. But I really dislike carrying cash around. It only took one theft from my purse to demonstrate that carrying cash is a fair way to lose it. That and the fact that cash runs through my fingers like water have always been my objection to the much-ballyhooed envelope system.

It’s an obvious idea: abandon the single, amorphous monthly credit-card budget and allocate costs to finite, tightly defined “envelopes” to be used for specific costs might limit total expenditures. The question is, with less flexibility can one stick to these straitened categories over time?

Microbudgeting: A new refinement

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Expense after crazy expense keeps pouring in. I’m having a heck of a time staying on budget, not good during the summer when power and water costs run very high. My microbudgeting scheme, whereby I break a month’s budget into four roughly week-long periods, is feeling the strain. The ticket for blowing through a photo-speed trap at 45 mph on a seven-lane highway threatened to break the camel’s back. Faced with a week without enough cash left to buy groceries, I came up with a little strategy that may represent a real, permanent refinement on the microbudget.

Each month-long budget represents an American Express cycle, since I charge almost all my expenses and then pay off the bill at the end of the month. Dedicating $1,200 to cover all costs except regularly recurring monthly bills such as utilities, I allocate $300 to each of four “weeks” within each monthly cycle. If I can stay in the black for all four of these microbudgets, bully for me. If not, I can see at a glance when I’m slipping into the red and put the brakes on before it’s too late. Thus if I overspend in one week and underspend by the same amount or more the following week, I stay on budget without having to pinch pennies for the entire remainder of the month.

Last month I ran up a series of expenses, some of them unexpected: the chair from Pier One, the gutter installation, a forgotten air-conditioning bill, the surprise Costco membership renewal, the pool repair bill, the cost of three locksmith visits after the painter couldn’t figure out how to get the lock off the door he was refinishing, the speed trap ticket, and, more recently, the cost of the bargain landscaping bricks. Last month I ran $253 dollars over budget, and that was without the speed trap ticket, which got charged against this month’s AMEX bill. It was also after The Copyeditor’s Desk reimbursed me over $800 for costs related to the business.

Charging the $188 speed trap gotcha against the first week of this week’s $300 microbudget wouldn’t leave enough to buy gasoline and groceries. Even riding the train to campus, I can’t do without gas: I have to drive to the train stop. And by the end of last month, I needed to replenish the larder.

It occurred to me that if I divided the speed trap ticket by four and spread the cost over the month’s four microbudgets, it might leave enough in each week to buy necessities. The effect is to cut each microbudget by a relatively small amount but leave plenty to live on in each week.

In theory, it should work. In practice, the cost of the bricks (which included $18.68 worth of sales tax) overran the first week’s microbudget by $206.16. However, when that amount is subtracted from this week’s cycle, I’m still left $46.84 in the black.

Forty-six bucks will be enough to buy my lunch and my exiting RA’s (at our office, the boss traditionally buys lunch for an employee who’s leaving…and the university doesn’t reimburse any expenses related to food). Since I restocked food and filled the gas tank last week, I shouldn’t have to buy anything else this week. That will leave $253 to diddle away next week.

What happens if you spread all extraordinary costs over the month, instead of just a single unexpected large bill?

If I divided the $243.68 bill for the bricks in four, to get $60.92, and subtracted that amount from each week’s microbudget, the result would look like this:

The result is much more positive psychologically: now I’m only $23 in the red at the end of the first week, and instead of barely enough to get by in the second week, I’m left with a relatively generous $168 budget.

Is this a more realistic way of looking at monthly spending? It may be. It’s telling us that there’s plenty left for this month in spite of two extraordinary expenses. On the other hand, knowing that might lead the budgeter to relax her spending habits, which really could run the overall budget into the red.

Best month on budget so far!

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Well, here’s a nice surprise: As this month’s budget cycle draws to a close, I’m $47 to the good in spite of having diddled away $275 on a swell leather purse. With five more days to go, all the food the dog and I need is in the house, and I shouldn’t need to buy gas or anything else for another week.

budgetapril09

Last November, I cut the month-to-month discretionary spending budget (i.e., all costs other than regularly recurring bills and utilities) from $1,500 a month to $1,200, planning to put the extra $300 into savings. At first, staying within the new parameters was a challenge. Most months ran into the red. Last month was the first success, but with only $11 to spare.

In microbudgeting, a month’s budget cycle (here based on the American Express billing cycle, ensuring that enough cash will be available to pay that bill in full each month) is broken into four approximately week-long chunks. Thus if you run in the red one week, the budget overrun can be made up in the following week.Theoretically.

budget2april092The last week of this month’s budget slipped into red ink because of an unexpected $177 bill: Greg the Handyman had said he would install a houseful of blinds and then backed out, so I had to arrange for Lowe’s to do it. Greg’s hourly rate is a lot cheaper; had he done the job as agreed, week 4 probably would have been in the black. But because two of the other three weeks are deep in the black, the month overall is also in the black.

I’d planned to pay for the handbag extravagance out of monthly savings, which just now contains more than enough for an indulgence. However, because this month’s budget is so fully in the black, ordinary cash flow actually will cover the cost and still leave the budget $47 in the black!

Ordinarily, a month with two large extraordinary expenses would put a $1,200 budget into the red. That’s why I put $200 to $400 a month into savings: to cover overruns. Had I not purchased the bag this month, the budget would have been $322 to the good. That is with a trip to the mechanic’s for car maintenance!

And—hallelujah, sisters and brothers!—that is an all-time record. It means that in ordinary expenses (as opposed to a certain wild extravagance), I spent only $878 this month.

What accounts for such a wonder?

Well, first, because of the train I won’t have to buy another tank of gas before the end of the budget cycle. Ordinarily, gasoline runs about $75 for three fill-ups. This month, I’ve spent $41 at Costco’s gas pumps. If I ride the train to work Monday, Tuesday, and Wednesday, trips to the Great Desert University will take all of $3.75 out of the remaining $47 next week.

Second, except for the handbag, I haven’t had any really large extraordinary expenses: no serious repair or veterinary bills. When you own a house and occupy it with a dog, some hulking budget-buster comes along almost every month.

Otherwise, I’m not sure. I haven’t gone into full ascetic mode at any time. The only explanation is the freezer + stockpiling, which has hugely cut the number of grocery-store runs. It’s the miracle of staying out of stores! The theorythat going into grocery and big-box stores, even with a shopping list firmly in hand, leads to untold numbers of impulse buys seems to be true.

If this isn’t a fluke and I actually can cut discretionary spending to under $1,000 a month without much pain, I may just be able to get by in unemployment retirement.

Microbudgeting: Keep costs under control with a baby-steps budget

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I’ve come up with a name for the week-to-week budgeting plan that I invented to keep discretionary costs (if you call food “discretionary”) under control: microbudgeting.

As readers who follow Funny know, I set aside $840 a month to cover recurring, nonoptional bills: utilities, once-a-month yard care, insurance. These represent the highest possible figures for the utility bills, which occur in three summer months here.

Then I set aside $1,200 a month to pay all other living expenses,including food, household goods, yard goods, gasoline, clothing, repair and maintenance on the house and car, vet bills, insurance copays, and on and on and on. This amount represents the microbudget: I divide the $1200 into four $300 “chunks” roughly corresponding to weeks, and coordinate those with the American Express budget cycle. All of these costs are charged on AMEX, and the bill is paid in full at the end of each cycle.

Some weeks, I’ll run in the red. But if I manage to stay in the black in one or two weeks, it usually evens out.

Here’s how this looked last month:

Week by week
Week by week
Whole month
Whole month

As you can see, even though even though I ran in the red three weeks out of four, over the course of the month I just broke even. Costs were high last month because of the new stockpiling scheme: I’d just bought a freezer and was stuffing it with one to three months’ worth of food. I’d planned to take money out of savings to do this, but as you can see, that wasn’t necessary.

Because I can spot, week-to-week, when I’m running in the red, I know when to cut back. Didn’t do the greatest job of that in February, but things are looking better in March. So far.

Microbudgeting turns out to be an effective tool for helping yourself to stay on budget. Except for extraordinary expenses that needed to be paid out of emergency savings anyway, the week-to-week strategy for staying on budget has worked to keep spending under control pretty well. It breaks a longer period, during which you might be tempted to overspend on this or that activity or impulse buy, into smaller pieces that give you an opportunity to climb out of the red without feeling like you have to pinch pennies the entire. grinding. month. It’s a lot easier to economize for one week than for two, three, or (if you’ve overspent early in the budget cycle) four weeks. Once you’ve got yourself back in the black, you feel a lot more confident that you’re coping.

Notice that I carry forward the red ink into the following week. This prevents “cheating” by pretending to start over with the full amount budgeted for that week, despite having spent more than desired the previous week. I ended up $11.13 to the good at the end of the month, because even though I overspent in three weeks out of four, I managed to stay enough in the black in week 2 to cover the excess spending.

Normally I try to stay in the black at least three weeks out of four (ideally, four weeks out of four!). February was stressed because of the food stockpiling, and because I chose to pay for it out of cash flow instead out out of savings. Had I taken some money out of savings to cover the hoarding scheme, I would have ended deeper in the black, and probably would have stayed in the black at least one extra week.

This scheme requires some OCD tendencies: it demands that you hang onto every receipt and enter it in a spreadsheet or hard-copy account book. But I don’t find this onerous. I stick the receipts in my wallet and then sit down and enter them about once a week. It takes maybe 10 minutes a week to accomplish.

To build habits that keep you in the black without leaving you feeling blue, it’s well worth the time!