The following items have made the biggest difference in our lives, with respect to day-to-day finances. Some are obvious, some maybe not so! In order of impact:
Budgeting used to feel like a chore that created feelings of "lack". Over time, we've learned how to view budgeting as a reflection of how our family wants to be spending money, rather than how we're limited in our spending. That, in addition to the rest of these items, helps us feel in the driver's seat financially, with flexibility and joy. The keys here for us here are shown in this spreadsheet and are, namely:
- Try to think of everything!
- We buy new tires every 3 years. We used to not budget that and get stressed when it was time to buy tires. Now, we accrue $300 every year and when it's time to buy tires -- great, no stress!
- An incomplete spending plan is death by 1000 paper cuts. 20 in tolls, 10 for spotify, 20 for coffee, etc all adds up -- all the little things, when combined, are usually what stops you from leading from ahead instead of behind with your finances.
- Coming up with a detailed spending plan without looking at "how much money is left"
- When we decided how much to budget by looking at how much was left un-budgeted, as we went, it changed our answers and left us with an inaccurate plan that we didn't like or feel committed to. Now we wait till the plan is done, compare the plan to our income, then adjust appropriately from there.
- When cutting spending, work smart, not hard
- It's natural to think of cutting the more "superfluous" categories in a budget first, but we've found that may destroy more freedom than it gains. Cutting 50% of 1% is sometimes much more painful than cutting 10% of 10%. Before we cut now, we start by looking at the percentage that we're working with and logically process what makes the most sense instead of emotionally reach for the first thing we think of.
We used to have 1 bank account for all cashflow. Money could just never seem to grow over a certain amount, even though we seemed to be sticking to the budget. Now, we flag certain spending categories as 'set-aside' and transfer that much to a separate 'set-aside' bank account each paycheck.
With this, now it's just math, and it just works. When it's time for vacation, the right amount is waiting for us. When it's the end of the year, we have the amount of liquid savings that we planned at the beginning. Small change, big results!
We've actually expanded this idea and, for us, the "sweet spot" is 4 accounts:
- A primary checking account where all our monthly cashflow happens
- paychecks go here
- credit card payments are from here
- bills are paid from here
- A tithe-holding account
- automatic transfers are set up to dump our tithe amount 2 days after each paycheck hits our primary checking account
- We tithe from this quarterly. Sometimes we skip a quarter to be able to give larger during summer when typical giving to our church drops off
- A set-aside account
- The amount we have flagged as "set-aside" automatically transfers here 2 days after each paycheck hits our primary checking account
- When it is time for the spends that we set aside for (vacation, new tires, etc), we transfer the amount back to the primary account and spend it as if it had always been there.
- A tax holding savings account
- We are self employed and have to cut a large check every quarter to the IRS
- We pay our own property tax (no escrow)
- The amount we have flagged for federal tax + property tax automatically transfers here 2 days after each paycheck hits our primary checking account
- When it is time for our quarterly payment or annual property tax payment, we transfer the amount back to the primary account and spend it as if it had always been there.
If the budget isn't maintained, it is useful for maybe 12 - 18 months, in our experience. We regularly (every 6 months, at least) compare spending in the top-level categories of the budget to the planned budget, and adjust the budget in the areas where are consistent and significant overage or underage in spending.
One of the most important parts of this, for us, is having a mental perspective that the budget is there to accurately represent our spending, not the other way around! If we're consistently (e.g. over a 6 month window) spending more on dog food than we originally planned, we don't reach for guilt, we simply adjust the budget for dog food to match reality and then adjust from there if the budget doesn't balance with the change (find cheaper dog food, cut another expense, or plan for more income).
Tracking by grouping/generalization is error-prone (it's basically guessing). Tracking spending transactionally and then categorizing each transaction is the only way we've found of being able to successfully review the budget. Trying to do this manually (e.g. without an automatic import or categorization memory) is extremely onerous.
We used to use Quicken to keep a transactional ledger of all credits and debits, and categorize them into our budget categories. Now, we use mint.com (it has come a long way) to do this with very little friction. Once you get 3 months of data, the reports you can generate are extremely helpful.
Every 1-2 weeks we spend 15-20 minutes categorizing spending. This helps us avoid having to do a huge categorization of 3 months worth of transactions at once, and helps us be more accurate, since we remember the specifics ("was that clothes or a gift that we bought at Target?" is easier when thinking about last week than thinking about last month).