Our Budget, PART 2
People ask us a lot about the nuts and bolts of our budgeting practice. We manage our household finances with a written (spreadsheet actually) budget every month and use the resulting allocation of cash to cover our expenses. Learn the whole process in detail in this multi-part series.
Recap
In Part 1, I covered the basics of budgeting (income and expenses) as well as the particular details of our situation (our income streams, our debt-free situation). In this post I’ll cover the specific practice of our monthly household budgeting meeting, which we have done every month since 2011.
In order to stay organized, I’ll explain the process chronologically, over the course of one month.
The 25th of the month
Dusty gets paid on the 25th of every month. His paycheck is the only one that occurs on a specific date, so we organize our monthly budget process around when his paycheck gets deposited into our joint checking account. Up until this point in the month, I’ve been sending invoices for projects I complete, transferring Venmo or PayPal payments online, walking in the door after a photoshoot with cash in hand (which I stuff in our cash jar), or depositing paper checks as clients pay me. Over the years I have babysat, taught yoga at yoga studios (who paid me with a paper check), taught fitness classes through Pepperdine University’s campus recreation program, and various other side hustles, in addition to my freelance photography and graphic design income. The point is, my income is quite variable. I’m not on salary or retainer with any clients. We don’t spend my income as it trickles in over the course of the month. My income stacks up and Dusty’s is deposited on the 25th, so on the 26th or the 27th, it’s time for…
The Budget Meeting
The Budget Meeting usually occurs mid-morning, over a cup of coffee. In 2011 when we started budgeting, the monthly budget meeting took us about 3 hours. Now we’re really fast and we both know what to do. We can crank it out in about 90 minutes. We both have our laptops open and I (Cecily) make all the notes in Excel while Dusty manages the online bill payments and transfers. We’re a well-oiled, well-caffeinated machine.
Our budgeting worksheet, which is an Excel spreadsheet you can download below, is a basic budget sheet that we’ve developed over the years.
In my laptop, I have Excel spreadsheets saved for every month that go back to August 2011. It’s pretty fun to look back through our files and look at what we earned and what we spent our money on.
The first think I do at the start of our budget meeting is open up last month’s budget, change the month name at the top to the current month and resave it. Then Dusty and I work through the sheet from top to bottom, updating the numbers to reflect the reality of this month.
So if you downloaded our budgeting worksheet using the button above, go ahead and open it up and I’ll explain each line item in the order that we would address it:
Emergency Fund (current bal in WF savings) ….. $1,000.00
Our emergency fund is just that: money for a rainy day. If something comes up next month that isn’t listed out as an expense below, we won’t have to rely on credit cards the way the rest of America does because we have a cash emergency fund saved up. The emergency fund isn’t really income, but it is an asset (a positive number), so it goes at the top. This month our emergency fund is at $1,000, which means we didn’t have any emergencies last month and we won’t need to rebuild it from our income.
Cash at Wells Fargo Joint ……. ……………………………… $7,500.00
This is the amount of money that has stacked up in our joint checking account over the last month. That’s Dusty’s income and my income combined. It goes without saying that we combine our finances because we’re married. This is the sum total of all our paychecks and this figure is used to calculate our giving (15% in 2016) and personal spending allowance (3%).
Cash remaining from last month + cold cash …………... $1,200.00
This is the amount of unused cash left over in last month’s grocery and gas envelopes plus the cash in our cash jar. Our cash jar is where cash goes when I get paid in cash (from photography or yoga gigs). The cash jar is also used as a proxy for the bank, and if we buy something for the house from Amazon (like $18 worth of dish detergent), then whoever makes the purchase immediately takes $18 out of the House envelope and moves it over to the cash jar. In this way, the proper cash envelope is always accurate.
TOTAL INCOME …………………………………………………………..……… $8,700.00
Total income is the sum of our paychecks and the cash remaining from last month. This is the total amount of money we have to address our expenses.
Quick note, all the expenses are reflected in parentheses because they are negative numbers and set up to be subtracted from the total income, which is a positive number.
GIVE: 15% of last month’s paychecks ……………….……….… ($1,125.00)
Giving is first because it’s the most Important. Without the decision to be generous and think of the needs of others, everything else we do with our personal finances is pointless. We are blessed with the ability to work and the discipline to save in order to be a blessing to others. Period. Full stop. I would go so far as to argue that you cannot be financially literate without maintaining a practice of generosity. Dusty and I started giving 10% of our monthly income the first year we started budgeting (in 2011) and have increased it every year since then. In 2016 (the date of the budget worksheet we’re looking at), our giving percentage was 15%. Our total combined paycheck was $7,500, so 15% of that is $1,125.
Groceries ………….…………….……………….……………….………….….… ($600.00)**
We eat most of our food out of the grocery store instead of restaurants because it’s cheaper. We spend $600 per month, or $150 per week on our groceries.
Gasoline ……….……………….……………….……………….………….….… ($300.00)**
We have two cars. I work from home (driving to photo shoots and meetings as needed) and Dusty works on campus, where we also live. We don’t have huge gas expenses.
Water ………….……………….……………….……………….………..……….….… ($58.67)
Utilities. Not much to say about this. We pay it with a check by mail, so we write the check and transfer it into our outgoing checking account.
Electricity ………….……………….……………….……………….………….….… ($43.28)
We pay this one online and transfer it into the appropriate checking account (outgoing).
Natural Gas ………….………….……………….………………….………….….… ($24.14)
We also pay this online and transfer it into the appropriate checking account (outgoing).
Cell phone bill ………….……….……………….………………….……….….… ($169.27)
Also paid online, also transferred to the appropriate checking account.
Internet ………….………….……………….………………….………….…….….… ($39.99)
This one is set up as an autopay because it’s the same every month. All we have to do is transfer it to the appropriate checking account.
Life Insurance ………….……………….………………….………….…….….… ($52.93)
We started buying life insurance around 25 years old. We followed Dave Ramsey’s advice and we pay monthly for term life insurance. It’s true that paying for term life insurance is like paying rent (it’s money that disappears) and whole life insurance is like owning a home and building equity, BUT we would rather make our own investment choices with our money, like buying real estate and investing in passive income streams.
CrossFit Membership …….……….………………….………….….….… ($350.00)
Yep, we pay a lot for fitness. But here’s the thing: we didn’t always pay for this. When we were in debt, we didn’t pay anything for fitness. We worked out at the campus gym for free or went for runs. Now that we’ve paid off our debt, we consider our CrossFit membership an important feature of our lifestyle here in Malibu. It’s quality time together and it keeps us connected to community. Yes, we know we’re paying $4,200 per year for fitness. And no, we don’t think a gym membership is a wise use of everyone’s money. But it’s worth it to us and we have made it a priority.
Transfer to build Emergency Fund back to $1,000 ……..….… ($0)
If we had spent any of our Emergency Fund last month, we would have devoted some cash to rebuilding it back up to $1,000. But we didn’t this month so all good.
Health Care Visits (chiro, Kaiser, etc.) maintain $50 .… ($50.00)**
We have Kaiser through Dusty’s job, which is super cheap and only requires a $20 copay every time we visit. So we have cash in the envelope for that purpose, in the event of a doctor’s visit. We also use this cash to pay the copay for visits to the chiropractor, or for a massage (if there’s money in the envelope at the end of the month!)
Geico Car Insurance …………….………………….………….….….….… ($210.00)**
We pay our car insurance every six months, in January and July. But rather than scrape $1,260 together every six months, we space it out and save up the cash incrementally every month, so we have it already when it’s due.
Car Repairs (keep at $1000) .……….………………….………….…….….… ($0)**
One of the important lessons of responsible car ownership is that maintenance and repairs ARE NOT an emergency. It shouldn’t be a surprise when you need new tires or an oil change or a fan belt breaks. Cars need maintenance and repairs. We keep $1000 in our car repairs envelope, to cover general maintenance, and if something bigger than $1,000 comes up, that’s what we have the emergency fund for.
Next car purchase savings ….……………….….…………...….… ($400.00)**
Like car maintenance, the next car purchase also isn’t a surprise. We pay cash for used cars, but that doesn’t mean we drive the cheapest car we can find. We like cars and we enjoy our cars, so we save up for a couple years to pay for cars we like and will enjoy driving. $400 per month comes to $4,800 per year. That means every two years we save up almost $10,000 toward a new (used) car. That suits us just fine.
Travel fund savings ….……………….………………….………….…….… ($200.00)**
Even when we don’t have a trip coming up, we like to set aside a little bit every month in our travel envelope. Travel savings pays for things like plane tickets, car rentals, hotels, and eating out while we’re on the road. We ramp up our travel savings when we have a trip coming up and we have a fairly good idea of what the expenses will be, but $200/month is a good start.
Date fund ………….……………….………………….………….………..….….… ($100.00)**
Date night is Monday night! Sometimes we go out for doughnuts, sometimes we go our for pints of beer, and sometimes we rent a movie on Amazon Prime and stay in. Our date fund also goes toward dinners out with friends. $100 doesn’t go far, so it means we have to be creative with our entertainment choices.
Dusty’s Spending Allowance (3% of paychk) …………..… ($225.00)**
Cecily’s Spending Allowance (3% of paychk) …………..… ($225.00)**
Like our giving percentage, our spending allowance is also a percentage. We each get 3% of last month’s paycheck as fun money to spend on whatever we want (woooohoooo!!!) The spending allowance is seriously the best thing about our budget because it completely removes the very common tension around who gets to spend how much on what they want. If Dusty wants to spend $400 (and he does) on yet another Mystery Ranch backpack or if I want to save it all and invest it in the stock market (which I do), it’s all good because it’s ours to do with as we please.
House supplies (maintain envelope at $60) ……….……..… ($60.00)**
House is responsible for any supplies we purchase that aren’t food and aren’t for either of us personally. That’s dish and laundry detergent, kitchen supplies, camping gear, tools, stuff like that.
SAVE: Cecily’s Simple IRA (max $12,500 annually) … ($2,460.00)
Now that we’re out of debt, all our leftover income goes into savings toward retirement and investments. As self-employed worked, I am eligible to contribute to an investment account called a Simple IRA, which (in 2016) was capped at $12,500 annually (and we max it out).
SAVE: Cecily’s ROTH IRA (max $5,500 annually) ……… ($1,000.00)
SAVE: Dusty’s ROTH IRA (max $5,500 annually) ………. ($1,000.00)
If you haven’t started investing in a Roth IRA yet, you need to start. Like yesterday. Since you’re here on a FIRE life blog, you probably already know a thing or two about investments and you’re already thinking about the future, but just in case this is news to you, here’s a solid introduction to what a Roth IRA is and what you need to do to set one up >> And just in case you’re not convinced yet, here is a simplified explanation of the importance of starting as early as you can and making the maximum allowable contribution to your Roth IRA >> Dusty and I both have Roth IRAs and we contribute the maximum each year.
SAVE: Additional transfer to brokerage account ……………… ($0)
Once our expenses are covered AND our IRAs are maxed out, what do we do with the leftover money? Throw it up in the air!!! And then we transfer it to our brokerage account where it gets invested in mutual funds by our financial advisor.
On that note: Cecily’s Simple IRA, both of our Roth IRAs, and our brokerage account are managed by our financial advisor. She set these accounts up for us back in 2011 when we were still in debt up to our eyeballs. The MYTH that you have to be wealthy first in order to have a financial advisor is a load of crap and it’s almost as bad as the myth that you have to be fit first before you join a gym. Perhaps the single most important decision in our journey toward financial independence has been to retain the services of a financial advisor.
TOTAL EXPENSES …………………………………………………………..…. ($8,693.28)
Our total expenses line item is the sum total of all our expenses (giving, spending, and saving) and it equals (or pretty close to it) our income up at the top of the page. When your expenses and your income are equal, the budget is what we call BALANCED. (Please partake with us in a moment of silence.)
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After the Budget Meeting
We’re not quite done! Once the budget meeting is complete and the budget worksheet is all filled out and balanced, we hit print (so we have a paper copy to keep all month long) and then we go to the bank and withdraw ALL the cash that goes into envelopes. All the line items that are marked with two asterisks (**) are cash envelopes, to be withdrawn from the bank (or the cash left over in the cash jar helps cover this amount, because it’s a proxy for the bank, as I mentioned above).
Once the envelopes are stuffed with cash, we use that cash to spend on the appropriate category all month long. In this way, we have our spending planned out ahead of time before the month begins. So every month we’re spending last month’s paychecks. We’re never worried about how much money we have or whether we have the money to cover something. If theres cash in the envelope, we have money to cover it.
This is, as Dave Ramsey calls it, financial peace.
