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How do I actually budget, taking into account variable expenses?
July 30, 2014 3:31 PM   Subscribe

I have been using Quicken to track my expenditures for more than ten years. But I'm stuck on how to use the information for budgeting, because every expense category is so variable. How do I do this? For the sake of this question, assume I'm trying to calculate the minimum salary I'd need from a new job.

The expenses that are fixed seem to be only cell phone, trash collection, and health insurance. Everything else varies widely. For example, an extra cold winter creates a higher heating bill, as does a hotter summer and the electricity bill (A/C).

Then there are any number of one-time unexpected expenses, like someone breaking their glasses or having cavities or a crown break. If a child grows a shoe size in the middle of winter, that's another pair of snow boots. Four inches in the summer and that's a new bike. The car or the furnace or the fridge could break.

Then there are expected expenses that you know are going to come, but when? Like the roof needing repair/replacement, exterior housepaint, the driveway repaving.

So, how do I create a budget that allows for these variables?
posted by xo to Work & Money (11 answers total) 11 users marked this as a favorite
 
I use a 60-40 budget plan. You can simply adjust the percentages to fit your needs. I like it a lot.
posted by jgirl at 3:37 PM on July 30


YNAB has been super helpful to me in budgeting for the unexpected expenses you mention. Basically, you learn to budget small amounts out of every paycheck for those things you know are coming down the line, even if you don't know when or how much. (I would argue that your unexpected expenses of medical/dental care, clothing, and emergency home repair actually should be expected expenses).

It's not the most intuitive program, but if you take advantage of their free trial and tutorials it all starts to make a lot of sense. I absolutely love it!
posted by lakemarie at 3:41 PM on July 30 [3 favorites]


A budget is a framework generally for saving.

Generally I'd pick a window (3/4/6/12) months and set a monthly budget based on an average. Then track spending similarly.

For example, in the past year take your food expenses for the year, divide by 12, thats your monthly budget. Now in some months you may spend more in others you may spend less. When looking at how well you've budgeted look at the last 4 month average to see if you on average spend more or less than your budget and adjust accordingly.
posted by bitdamaged at 3:43 PM on July 30 [1 favorite]


For expenses that do happen every month but the amount changes, I overestimate in my budget and then pocket the difference* when my actual ends up being less. So, for your heating and AC estimate the maximum amount it has ever been in the past year. Budget assuming the worst case scenario.

For the one-time and unexpected you really need to have a savings fund that you contribute to each month. How much? Basically, as much as you can after you cover all of the monthly expenses and leave a little fun money for yourself.

* By this I mean put it into savings. Save everything!!! If you can, get two savings accounts - one that is easy to access (like at your bank) for emergencies where you keep a modest amount of money, and another like a Capital One 360 account where the bulk of your money lives and which takes longer for funds to transfer, which will reduce your chances of spending it stupidly.
posted by joan_holloway at 3:43 PM on July 30


As noted above, I look at it in larger chunks of time than a month. It is the same concept as when the electric company offers to have you pay the same amount each month. They do an average and at the end of the one year period, they adjust it accordingly.

As for repairs, lets say your roof has a life of 20 years and costs $10,000 to replace. That would be $42 per month. I would put into a savings account that money each month. As you pointed out, with kids, if it is not one thing it is another. Figure some dollar amount per kid for unexpected expenses, say $1,200 and put aside $100 in your monthly budget. If the expenditure happens in January, you pay it and continue to put $100 per month back into savings.

I think the best way to look at it is that your budget is not simply cash accounting. It is accrual accounting. It is also, a guide. Assuming you are salaried and know your income each month or each year, you know how much you can spend. Then you allocate it to things like savings, groceries, reserve, oil, etc.
posted by 724A at 3:53 PM on July 30


You should set up accrual estimates. I accrue money every month in my savings account for car repairs, contacts, new tires, etc, etc, so I'm not in a bind when they happen. I subtract the total I should have accrued each month from my savings, and what's left over is my ACTUAL savings.
posted by Hermione Granger at 4:50 PM on July 30


I find it helpful to think about different kinds of variable expenses.

1. predictable (more or less) but lumpy such as property tax, insurance, utilities. This can also include optional expenses like vacations or holiday shopping. Some of these can be easier to estimate if you set up meta-categories, combining some of the variable expenses and looking at them over the course of a year helps even out the variation. For example "Kids" includes summer camp, clothes, gifts from Mom & Dad, allowance, music lessons etc. "medical" might include glasses, dental work, surgery - probably not going to get all in the same year but at least one "emergency" most years.

2. planned, long term expenses for repair or replacement of expensive, depreciating assets like cars, furnaces and roofs. This can also include good but expensive things like a trip to Europe, a Bar Mitzvah or a new deck. As people said, you need to put a chunk of money aside every month and plan your spending to match your savings.

3. truly inexpensive, usually castrophic events such a media-vac helicopter or the $30,000 deductible on your earthquake policy.

My approach is to have different accounts for different expenses. First a regular checking account for regular expenses. Second a bank money market account for the bigger lumpy expenses - that lets me see that I have the money and makes sure that a big check doesn't accidentally bounce. Third I have a mutual fund money market account where I save for the really big expenditures like a new car. Money left over in the bank MMF goes here to help pay for something else we are trying to save for. Finally, we have our mutual funds which are strictly savings - for college, retirement and big catastrophic events. Money goes into this real savings accounts (as opposed to the MMF which are being saved in order to be spent) every month. Interest and dividends stay in the saving account and we do not ever (hardly ever and only after much soul searching) use this money to pay for regular living expenses.
posted by metahawk at 5:15 PM on July 30 [1 favorite]


Seconding YNAB - their methodology is really, really powerful and the software is great. It's really powerful mainly because it focuses on looking ahead (rather than reviewing things that have already happened) and it anticipates and helps you to prepare for the common pitfalls in getting started with budgeting (big unexpected expenses, underbudgeting categories, knowing what you have to spend and so on). Also they have very helpful forums.
posted by Happy Dave at 2:03 AM on July 31


If you've got Quicken data for the past 10 years and it's been in categories all this time, you've got a gold mine of data to use for calculating the averages and accruals that folks are talking about.

If I were going to do this, I would want to see a huge lump sum for each category over 10 years, divided by month to see the average. Then I would run 10 separate reports - one for each year - for each category and divide by 12 to see the average per year to see how it is growing (is your rent increasing every year? then the 10-year average is not the right amount to set aside for next year).

Then (because I am this way) I might also figure out how to get a report per category for the same month over the 10 years (I would expect Kid category to be higher in back-to-school months rather than other).

Given all that data, you should be able to come up with a monthly amount per category that you want to put in your budget. It can fluctuate: put more in the Kid category in August. If it were me, once I had the number, I would raise it by about 10-20% and put that sum in the budget, just because I would rather be wrong on the side of having too much money set aside rather than not enough.
posted by CathyG at 9:45 AM on July 31


I also do what everyone's saying above. Pick an amount that I think is a reasonable average monthly spending for a given need -- say, car maintenance, or kids' clothes, or medical bills -- and put it in savings in a month where I don't spend it, and then keep track of how much I've got in these separate little "accounts." It's just a bookkeeping thing, it's not like I have ten different savings accounts, but that way I know I'm budgeting for everything I expect to come up in a given year.

Also, if you use YNAB (I don't, but everyone I know who uses it is in love with it, so it might be something to consider), they're a little flexible on amounts. You have your budget as written, but if you spend extra on going out and less on groceries one month, you can move things around to make your budget work out.
posted by gerstle at 1:40 PM on July 31


This question boils down to 'how do I convert a variable stream of expenses into a less variable one.' Which is essentially Finance 101. There's three tools, which I'll explain now and then show how they fit into your story.

Insurance does careful actuarial analysis to try to charge people a low fixed price for a infrequent but pricey event. They have to strike a balance between insuring the things you expect, and the things you truly did not plan on. The best example of that would be my High Deductible Health Care Plan which covered expenses above 3.5k. I budgeted 3.5k in medical expenses, had it deposited into an HSA directly from my paycheck, and the HDCP covered the crazy outlier events.

Insurance markets don't cover everything. Some events you need to self-insure with savings. You get a small benefit in that your various events are likely uncorrelated; a new bike for the kids doesn't cause your A/C unit to fail. So you can technically save a bit less than if you earmarked money for every possible event happening simultaneously. Probably.

They still might happen anyways, and credit is another tool available for income / expense smoothing. Loans convert an expense (often unexpected) into a series of equal payments amenable to budgeting.

xo: "The expenses that are fixed seem to be only cell phone, trash collection, and health insurance. Everything else varies widely. For example, an extra cold winter creates a higher heating bill, as does a hotter summer and the electricity bill (A/C).

Most electric utilities allow you to set up even billpay. They essentially charge you more during the spring / fall, so you can pay less during the winter / summer. They also usually require you to have a usage history to estimate the bills with. If the estimates are too high, they credit you over the next billing year, and if they're too low, they charge you more next year. This is an example of credit offered to you by the utility.

Then there are any number of one-time unexpected expenses, like someone breaking their glasses or having cavities or a crown break. If a child grows a shoe size in the middle of winter, that's another pair of snow boots. Four inches in the summer and that's a new bike. The car or the furnace or the fridge could break. Then there are expected expenses that you know are going to come, but when? Like the roof needing repair/replacement, exterior housepaint, the driveway repaving."

Your children are going to grow. And you're going to be spending money on them, one way or another. You'll have to set aside savings for this. How much? Various government agencies measure and publish what Americans spend of raising children, and break it out by household income. IIRC, the average was around $130k for 18 years. Most of that is just extra rent (or rent equivalent), so you probably need to find the data in question (I think it was USDA, of all places).

If you have a bad year on the budgeting child expenses, you may end up having to carry credit card debt. There's nothing particularly bad about credit card debt, other than the frequently high interest rates, and that once you start carrying a balance, new purchases accrue interest immediately.

There's similar savings heuristic for home repairs. The first google hit I found suggests 1 percent of the home value per year. If you're struggling to build up savings earmarked for this, a Home Equity Line of Credit can be used to finance big ticket home repairs. But you need some surplus equity, and they typically aren't free.

I take easy mode and just rent an apartment; the landlords kindly figure out the actuarial side of things for me and give me a round number to pay monthly.

One final tip: make some predictions. I use GNUCash for personal finance, and a set of scheduled transactions predict what I'm spending from where, and when. And what I'm earning when. I run 90 days out, so I have ample warning that a lump sum payment is due on web hosting, car insurance, etc.
posted by pwnguin at 10:29 PM on July 31


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