Here's How We Do Our Budget

An envelope with US dollars in it. Image source.

So, I had always heard people give advice that "you should have a budget." And I've tried to do that, using various strategies, which had a lot of flaws- until I finally found a strategy that actually makes sense for us. So in this post I basically want to write about things I've tried before, why they didn't work well, and what my husband and I do now for our budget strategy.

In the past, there were times I attempted to make a "monthly budget" for myself. I wrote down all the categories that I spend money in, looked at some data from the previous few months, to estimate what numbers would be reasonable for each category, and set a limit for each of the categories. The intent being, in every category, I have to keep my spending under that limit every month. That's how budgets work, right?

There were a lot of problems with this.

For example, suppose I need to go somewhere, and I'm trying to decide if I want to take a taxi or take the subway. The taxi would be more expensive, and would mean I'm going over budget in my "transportation" category. But, if I take the subway, it takes more time and I'll be late. When I'm in that situation, I feel that it's worth it to me to spend the extra money in order to not be late. But, I can't suddenly change the budget, right? Isn't the entire point of a budget that you have to stick with it, even if it's hard? Otherwise it doesn't actually help you, right?

Also, the previous day, I had bought myself a piece of cake, which cost more than the taxi would cost, but that was in the "eating out" category where I'm not anywhere close to going over the limit, so that was fine. Uh, doesn't something seem kind of off here? Thinking about the "money to happiness" ratio, spending the money for the taxi would give me more happiness than spending the money for cake, but since they're in different categories, I can't trade them off like that. I already set the limits in each category, I can't change them- that's the whole point of having a budget, right? But something seems incredibly illogical about this.

I was giving myself more stress, over small amounts of money which didn't really matter.

And, here's another example, maybe there's some grocery item that I could buy in bulk- but if I do that, I would go over budget in the "grocery" category that month. But, uh, but doesn't buying in bulk result in more savings over the long term? Then why is my budget system telling me that's bad? There's too much focus on each month individually- the system doesn't have any built-in connection between this month and the next month. I mean, *I* can tell myself "oh actually it's a good idea to buy in bulk, even though my budget system says it's breaking a rule"- but I wasn't actually quantifying that in any way. It was just an intuition that I never gathered any data to actually evaluate, because my system wasn't designed to give me that kind of data.

Also, I was thinking about each category in percentages. Like, oh, I only spent 20% of the "clothes" budget this month, wow, only 20%, I'm doing such a great job, I'm saving so much money! And then in the "groceries" category of the budget, I went over by 10%, ah, well, that's not good, but at least 10% is a small-ish amount. I remember at one point I had an app which had a horizontal bar for each category, to show what percentage of that category's limit you spent each month- and every horizontal bar was the same length. This makes no sense. It makes no sense to feel good about saving such a "high" percentage in a small category- because the actual dollar amount is so low it doesn't matter.

And I couldn't understand what people meant when they gave advice like "you should save 10%." So... if this month I spend 90% of my salary, and save 10%, but then next month I use that 10% to buy a new computer or something... that seems like that shouldn't count as "saving 10%." The only reason I'm calling it "saving" instead of "spending" is because of the arbitrariness of where one month ends and the next month begins- that seems kind of illogical.

And there was definitely no way to accumulate long-term savings. Yeah, in theory, I put limits on all the categories, and the limits add up to *less than* my salary, so if I stay within the limits every month, then the extra will keep adding up every month, and that's my long-term savings. But there was no mechanism to ensure that this would actually happen. No way to tell if, when I go over budget in some category, is it fine, or am I spending all my "long-term savings" accidentally?

But the biggest problem with this "monthly budget" system was that it was not cumulative. Every month was treated like a completely separate event, which had no mathematical relation to any other month.

I remember saying at one point "every month I'm only spending 40% of my income" and someone was like "wow that's pretty good!" but it turns out what I actually meant was "in a normal month I'm only spending 40% of my income, and then twice a year I spend THOUSANDS OF DOLLARS on international plane tickets." Yeah, every so often the "travel" category of the budget would just be so completely overwhelmed, when I bought plane tickets which were many times higher than the monthly budget limit for "travel"- but I told myself, "it's fine, it's not like I'm doing that every month." But I wasn't actually *measuring* if it was "fine" or not. It was just... most months I spend very little for "travel", and then occasionally I spend A TON, so, overall that's probably fine, right? Well, uh, you don't know if it's "fine" if you don't do the math with the actual numbers.

Sometimes I would scroll back through several months of data, and observe "oh this month I went over budget in this category, in this month I was under budget in that category", etc, but there was never any sense of ... like... adding up the actual numbers to see if a several-month-long period was over or under budget. I mean, sometimes I sort of added them in my head, but the results depended on what month I used as the cutoff point (ie, am I adding up over the past 3 months? 6 months?) so I didn't feel like that was a well-defined and concrete measure.

Sometimes I would go over budget in some category, and I would kind of feel bad about it... like a little bit of fear that if I continue like that, I'll have financial disaster in my future. Like I'm supposed to be sticking to my budget, and some months I am and some months I'm not, and ... am I deceiving myself by pretending that's fine?

It was just emotions, which didn't have concrete data to say if those emotions were reasonable or not. I was giving myself a lot of stress over small dollar amounts which didn't really matter. (Or rather, small RMB amounts, because I'm in China.)

(And maybe a lot of the emotional aspects of budgeting are my own weird quirks- this is sort of what I saw from my parents- like saying "oh maybe we spent too much money on that" or "we can't buy that because it's too expensive" but not actually having a literal budget to specify what "too much" or "too expensive" would mean, just vaguely feeling guilty about it. And also having a high enough salary that there weren't really any practical consequences from spending amounts that felt like "too much"- just guilt, never "holy crap we can't afford rent, what are we going to do?")

Eventually I came up with a new budgeting system, which doesn't have these problems. Here are the 2 key elements:

1. Everything is cumulative, from one month to the next 
2. Don't break everything down into such small categories

This happened when my husband and I moved from a 1-bedroom to a 2-bedroom apartment, just before our son was born. The reason we had to develop a new budget strategy at that time was that the rent was much higher, and we had to have a way to guarantee that the money for rent would always be there and ready to be paid at the right time. In China, typically you pay rent once every 3 months- so yeah, every 3 months, it's a HUGE amount of money you suddenly need to come up with. My husband is the one who handles the actual transaction, and when we were in a 1-bedroom apartment it was less money so it was less of a big deal- every 3 months he'd just ask me to transfer my half of the rent to him, and then he'd pay it. But the 2-bedroom apartment was so much more expensive- what if the time comes to pay rent, and we realize one of us doesn't actually have the money for our half?

We needed to both be transferring money, every month, into a dedicated savings account that my husband has access to. So that when it's time to pay rent, the money is already there, no issue.

So basically that was my inspiration for coming up with a new budget system for us. It was about large things we needed to pay for, but not every month. So the strategy was to calculate an average cost per month, and every month we'd transfer that amount to a savings account, and then when it was time to pay it, the money would be ready.

This is completely different from my previous system- my previous system also had sort of an "average cost per month" for each category, but it was like, if I went over that amount in a particular month, that was "bad," and if I went under, that was "good." Judging myself on how many months I was "good" or "bad." The new system is different- in the new system, every month we transfer that "average cost per month" amount to a savings account, and then if we don't spend it that month, that money is still there, accumulating every month so that it's ready when we need it. Each month just rolls over into the next month, in a straightforward mathematical way. Not like my old systems, where I just vaguely felt bad about sometimes going over budget, but didn't have any sense of whether it was actually a problem.

So we figured out what the big categories are for us, the categories where some months we spend a lot and some months very little. Or categories where both my husband and I have to contribute, so it makes sense for it to be paid out of a savings account that we both are putting money into. Here are our categories:

• rent and childcare costs
• travel
• health care
• Christmas
• child's college savings
• retirement savings

For each category, I calculated an estimated cost per year, and then divided by 12 to get a cost per month, then decided what proportion should be paid by me and what proportion should be paid by my husband (you can decide this based on factors like: whoever's salary is higher should be paying more money into the savings account, or if I bought an international health insurance plan for myself then my husband wouldn't necessarily pay for that because it's not for him, if one person is always buying the groceries then you should make sure they have more remaining money than the partner who's not buying the groceries, etc).

So every month we both transfer money to the savings account, and then when we have to pay for something that falls under one of those categories, we pay it from the savings account. 

[Or rather, that's how it works theoretically but actually in practical terms it's not exactly like that. See, the way I handle this is I have a big excel spreadsheet, and it says the amount of money in the Chinese savings account and the US savings account (see we have 2 different currencies so it's complicated for us), and how much of that money is allocated to each category. And we also have categories "Perfect Number's extra money" and "Hendrix's extra money"- ie, not everything in the savings accounts is allocated to those 6 savings categories I mentioned, some of the money is actually just mine or just my husband's. And in practical terms, when I pay for something that comes from one of those savings categories, I actually just pay from my own bank account, not our savings account, and then I just adjust the numbers in the excel sheet- ie, if I spend 200 RMB on something related to vacation, I spend it from my own personal bank account, and then on the excel sheet describing the contents of our savings accounts, I subtract 200 from "travel" and add 200 to "Perfect Number's extra money"- see actually joint bank accounts aren't a thing in China, so I actually can't spend money from the savings account, I don't have access. Actually I don't transfer the full "average monthly cost" for each category into the savings account every month, because when I pay for stuff from my own account, that mathematically functions the same as a transfer. As long as I write down all the amounts in the excel sheet correctly, it doesn't matter that I didn't literally transfer the entire amount. Okay those are just some details about the practical implementation of this.]

One really cool thing about this system is that, whatever is left over from your salary (after you transfer money into the correct categories) is totally yours and you can do whatever you want with it. You use it for whatever costs you have in your daily life- stuff like buying food, clothes, birthday gifts for family, donating to charity, etc. And your spouse can't judge you for any of that spending! Sometimes I feel like my husband spends money on things that he shouldn't, but, actually, as long as he's paying the right amount into the savings account every month, it's fine! Like mathematically it actually is fine. If I truly calculated the "average cost per month" in each category correctly, then he can do whatever he wants with his leftover money and I know it won't affect our family's financial stability. (I also spend money on things that he wouldn't...)

And the category that you use for your daily expenses and/or extra money isn't subdivided any further than that. It really doesn't matter if I spent a lot of money on clothes one month, and no money on clothes in a different month, or if I took a taxi or bought a piece of cake or whatever- all of that is just summed into one category, for my daily expenses (or, as I referred to it earlier, "Perfect Number's extra money"). You just look at the total in that category, and as long as it's always a positive number, then you're fine. (Or, if you're also conceptualizing that category as your own personal "emergency savings" then as long as it's always higher than whatever you think you need as your "emergency savings" then you're fine. Yes, you should have an "emergency savings"- whether you make that its own category or lumped in with another category is up to you.)

And another really great thing about this system is that, because it's cumulative, you can make corrections for things that happened in previous months. For example, suppose we spent more than we expected on vacation. Maybe this means the "travel" budget has a negative amount of money in it. (That is okay, temporarily, as long as it's in a bank account that is summing it up with other categories which are positive enough that the total is still positive.) So, there are a few different ways we could handle this:

• We could not make any changes, continue transferring money into the "travel" account like normal every month, and after a few months the amount will be positive. But next time we go on vacation, the amount available in the "travel" category is less than what I planned it to be, so we go on a vacation that costs less. Or wait a few extra months before taking our next vacation.
• We could transfer money from a different category, into the "travel" category. For example, maybe we found that we spent less on childcare than we expected, so we move money from the "rent and childcare" category to the "travel" category.
• For the next few months, we transfer more money (from our own salaries) into the "travel" category than we did before.

See? When we go over budget in one category, that is reflected in the number that the excel sheet says is allocated to that category. And it will always be reflected in that number- that number is the cumulative sum of every month, and that "over budget" incident will always be reflected in the history that goes into calculating the current amount. It is mathematically completely quantified in the numbers- you know exactly what it is, you don't have to vaguely feel bad about it and vaguely fear that it's going to cause problems in your future. And then you make a decision afterward about how to correct for it, and then you do that- you correct for it, and you move on. No reason to feel guilty. If, for example, you spend $200 more than expected on travel, but $200 less than expected on utilities (which I also put in the "rent" category), you simply mark in the excel sheet that you're transferring $200 from "rent" to "travel", and then all is good. The problem has been solved. No need to vaguely feel bad about it, or to tell yourself "well we don't spend that much money every month, so it's okay" and wonder if you're just making excuses to fool yourself.

Anyway, like I said, I made an excel sheet myself to keep track of all this, because I didn't find a budgeting software that I liked. Our situation is, we have accounts in the US and China, and both my husband and I are paying in to the Chinese account monthly, and we have other accounts that are our own personal accounts and not related to these savings categories, and my other accounts are my own business and aren't part of the excel sheet- yeah the reason I wrote my own excel sheet is because it's complicated and I didn't find software that did exactly what I wanted. (I also have an app on my phone for all my personal accounts in China, where I record every single transaction but I don't do any higher-level budget stuff, and a different one on my computer for all my personal accounts in the US. Those apps are just very basic money tracking apps, nothing special, I just got them from the app store or wherever. I am one of those very organized people.)

But anyway, if you want to look for a budgeting software tool that does something like this, I'll tell you that this is basically the envelope system. Search for "envelope budget" or something along those lines- there are some software programs that you can get that do this.

I have also seen some banks which allow you to categorize the money in your account into different "savings buckets"- yeah, that's basically the same as the system I'm describing here. 

Overall, my system is about categorizing your expenses, over the course of an average year, into a few big categories, and then making sure that you are putting enough money into those categories monthly. If not, then you need to make changes to your life, like going on less expensive vacations, or living in a less expensive apartment, etc. It's about those big things- I found that there's no benefit to subdividing everything into small categories and giving myself stress about the exact amounts.

The main function of my system is making sure that each big category is funded enough that I don't have to worry about it, and we can have the kind of lifestyle we want to have. Now, there are other benefits to budgeting, which my system doesn't really address- for example, comparing the amount spent on different everyday things and identifying places where the amount you spend doesn't really give you as much happiness as you should be getting for that amount of money (ie, if you regularly spend $X on something, but you find out that spending $X on something different brings you more happiness). My system doesn't really help with identifying those kinds of things, or small everyday things that add up to a big amount that could be reduced, etc. My system is just about the really big things, to answer big questions like "can we afford to go on an international vacation" or "can we afford to move to a more expensive apartment" etc. We are lucky to have a good enough income that we don't need to stress about the small everyday things.

(But also, you can totally use an envelope budget system for everyday things subdivided into smaller categories! Instead of updating an excel sheet once a month, and then making corrections afterward if you spent more than expected in some category, like I do, you could have an app on your phone so that in real time you can check how much you have available in a certain category, and if it's not enough for something you want to buy, then you make a decision right then about either not buying it, or transferring money from a different category before you buy the thing. That's also the envelope system, but being used for a different purpose than how I use it.)

Anyway, that's the overall idea we use for our family budget. I wanted to post it here on my blog because, like I said, I've tried other budget strategies in the past and they just caused me more stress without any real benefit. The current system we use, which is basically the envelope system, is designed mainly to make sure my husband and I are always prepared for large expenses that we can sort of predict but they don't happen every month. I found that the most important thing I need from a budgeting system is it needs to be cumulative- ie, we allocate money to a certain category this month, and then if we don't use it, that money continues to exist in that category and simply rolls over to the next month. This way, there's no need to wonder about "well sometimes we spend more and sometimes we spend less, so... I guess that's fine overall?" It's all right there in the math- you simply look at the numbers that say how much you currently have in each category. 

No need to feel guilty or wonder if it's bad that sometimes you went over budget. It's all right there in the math. If the math says you're fine, then you're fine.

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Readers: Do you have any useful budgeting strategies?

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