Everyone needs a budget.
Recently I wrote a post You Need A Budget where I explained why you need a budget for every month for the rest of your life.
A couple of weeks ago I had an after lunch conversation with my colleague about money, budgeting and investment. I love this type of conversations as you can learn a lot even from broke people too. When I asked him about their groceries budget his answer was, “I don’t know yet. I have to check”.
“What do you mean you have to check?”, – I asked him back?, “Don’t you budget for groceries as well?” After a series of questions and answers the picture became clearer. It turned out that by the end of every month my colleague launches his Mint account and checks how much money he has spent on groceries, housing, transportation etc*
There should have been one of these “In Soviet Russia…” jokes, but I couldn’t come up with anything.
I do understand that every person can have his own way of budgeting – whatever works the best. But at the same time, I think checking your spending afterwords and calling this budgeting isn’t right. Why? Just because you spent it already, the money are gone, what’s the point?
Budget like Russians.
Mrs. FR and I decided to share with you our way for budgeting: lets do it the Russian way. Are you ready?
In Soviet Russia you don’t mess up with budgets. Budget messes up with you.
In our family we live on a previous month income. What does it mean? It means that for May budget, for example, we used our April income. For this June budget we’ve used money we earned in May. Why is that? There are two reason why we budget this way:
- It makes our emergency fund even stronger.
- Nobody knows what’s going to happen, and nobody knows how much money you’ll take home this month. You could be fired and instead of bringing $4,000 you will bring $2,000 only and your budget will become a mess.
Budgeting this way a little bit harder, because in the beginning you have to save up enough to cover your future expenses for the whole month. But after you’d got that money saved, it becomes much easier and more convenient.
June 2017 Budget.
Before you read further I have to tell you that in this example I am going to showcase our real numbers, it’s going to be our real June 2017 budget that we are going to use and, -which is the most important part, – stick to. Please note that your numbers, in both categories, – Income and Outcome, – may vary.
May 2017 Income.
In May 2017 we brought home $11,889 which was great. We were definitely blessed with this income.
June 2017 Outcome.
Our goal is to “spend” or assign all the money, al $11,889 and have Zero, Nada, Ноль [Nol’] at the end. By saying “spend” I didn’t mean to actually spend all the money, I meant to give every $ a job, every dollar has to do something instead of sitting idle or wondering where it is going to be spend.
First things first. Before the month begins, before you start spending, you want to assign your money to 4 major categories you have to take care of. They’re known as “four walls”:
You can oppose me and say, “Hey, Russian, if you want to retire early you have to invest first”. But I will tell to you this Russian wisdom:
If you want to retire, sooner or later, you have to eat. You have to keep your lights and water on, you have to have a place to live and you need to take care of transportation.
Without taking care of these four walls I don’t care about your saving rates. If you want to be alive, you need to eat and take care of your basic needs first.
- Food – $850 – Food is one of the biggest expenses for us. We don’t eat outside and my lovely wife is a great cook. But every months we still spend $800-900 for groceries what is quite a lot. A week ago we discovered some tips & tricks that might help us to save on this category. I will write later about this our experiment.
- Utilities – $50.
- Rent/Mortgage – $0**.
- Transportation – $90.
And certainly we do remember very well and don’t break the most important personal finance commandment – Pay Yourself First.
Total = $990 | 8.3%
Great, so far we spent nine hundred and ninety dollars and there are $10,899 to go.
Now, when we have food to eat, place to live with lights and water on, and a car, or another type of transportation covered, we can take care of investments. In addition to our pre-tax investments, Mrs. FR and I try to invest at least 50% of our net income.
- Mrs. FR Roth IRA – $1,500
- Child #1 529 – $175
- Child #2 529 – $175
- Downpayment (VSTAX) – $5,000
Total = $6,850 | 65.3%
Awesome! After taking care of basic necessities and investments we’ve spent $7,840 = $990 + $6,850 and we have $4,059 yet to “spend”.
In addition to our 4 walls we have other monthly spending categories, or as I call them “our wants”. Well, not all of them are pure “wants” but I categorized them this way just for convenience to distinguish them from 4 walls:
- After school – $450 – usually we pay $600 for after school program, but because of the end of school year, we are to pay less in June.
- Internet – $30.
- Cellular – $30.
- Kids Activities – $200 – music classes for our older one and some activities for the younger one.
- Eating out – $50 – usually we don’t eat out, but we keep this category in case we go with friends or colleagues.
- Medical – $100 – in addition to our HSA money, which we use as another investment vehicle, we budget $100 every month for medical supplies or vitamins that we may need.
- Clothing – $50.
- Mr. FR allowances – $150.
- Mrs. FR allowances – $250 – you get the idea who’s the spender in our family ;-).
- Miscellaneous – $50 – every month we assign $50 for this category in case we missed something, or if we have small unexpected spending such as broken heel.
Total = $1,360 | 11.4%
Irregular Spending Fund.
Every household in addition to monthly expenses has other, irregular expenses like car or life insurance, car registration, or Christmas/Birthday gift giving and others. Basically, this fund is for events that don’t happen regularly but still requires some money.
- Car & Moto Insurance – $80 we own one car and one motorcycle. This month is going to be the last month when we assign money for this fund, because we already have $600 set aside for insurance replenishment.
- Rent Insurance – $10 – our rent insurance is $120 per year; every month we set aside $10 for this fund.
- Car Repairs – $150 – cars do break, cars require some maintenance and occasionally new parts: tires, brakes, blades etc. Every month we set aside $150 for this category until it has $1,000 in it. So far we’ve got $803 in “Car Repairs” fund.
- Moto Repair – $50 – The same as car repair, but I keep $300 for my motorcycle. This fund includes not only motorcycle part but motorcycle camping fees and related activities as well.
- Christmas and Birthdays – $150 – Christmas is every 25th of December, people tend to have birthday the same day each year. You have to be prepared. Summer usually is high season in our family. We have one birthday in June, two in July and two in August.
- Car & Moto registration – $40.
- Life Insurance – $40 – I have $1M 20 years term life insurance on myself. It costs us $425 a year.
- Vacation fund – $250 – My wife is planning to visit the motherland this October, so we’ve been saving for this trip for a couple of months already.
Total = $770 | 6.5%
Monthly specific spending.
Sometimes we may have one-time spendings that are specific to this particular month. You could never spend money on this anymore. Summer is usually hot time for this kind of spendings in our household.
- Mrs. FR’s bicycle – $400 – Our family is moving to more green and body fat powered vehicles. We have one bicycle already, which is mine and too big for Mrs. FR but she’s been riding it everyday for almost three years. It’s time to buy size-appropriate bicycle for her. We are planning to use both bikes every day for commute, light weight grocery shopping etc.
- In-law’s medical insurance $450 – my mother is visiting us this summer and she’s going to be great help and support for us. But not having a medical insurance is too much risk. That’s why we are buying 3 months medical insurance for her.
- Web Hosting – $156 – yep! time to pay for this blog 😉
Total = $1,006 | 8.5%
That’s it for June 2017, but so far we’ve assigned $10,976 out of $11,899 that leaves us another $923 yet to spend. So we decided to add this money to our downpayment investment and we will get $5,923 going towards downpayment instead of $5,000.
Hooray, we did it, we created a budget! We “spent” every dollar on paper, told every cent where to go and what to do. We covered our basic necessities, we invested, we also assigned money on “wants” and extra stuff. And certainly we added whatever has left, – $923 in our case, – to our investment.
That’s basically it. You can do it on a lined paper, or use a spreadsheet, handwrite or electronically. It doesn’t matter. Whatever works for you. I draft for discussion using a electronic spreadsheet (you can do it as well). After Mrs. FR makes some changes and we both agree on them I enter all the numbers in our YNAB account.
So, we had $923 after we “spent” everything. It’s still a lot of money, isn’t it? Remember it’s a little bit more than my first paycheck in the States. What can we do with this chunk of money?
<sarcasm>We could simply spend this money</sarcasm>. Look above – we’ve already spent more than enough. We are not frugal in no case and still have some room for improvement.
Every time I draft a budget I feel bad because of how much money we spend. Despite of the fact that we invested almost 65% of our after tax money I feel that we could do a bit better. Mrs FR and I have something to think about***.
*My wife recently told me the new meaning of etc – End of Thinking Capacity. Don’t know about you, but I LOVE it.
** We are not paying rent because we prepaid for the whole year upfront.
*** Mrs. FR and I are working on reducing our groceries budget and we will write about experience later.