# Budgeting & Money Management



## phankinson (Oct 4, 2012)

For the past few years, I've been working hard to build up a nice net worth, but I'm starting to come to the realization I absolutely suck at budgeting. Just a brief background, I run two tech startups, own a few rentals... My budgeting skills don't just pertain to the personal side, but moves into my business and rentals too.

It seems I can never accurately predict my costs and as I become more leveraged I want to insure I don't end up in a situation that is hard to recover.

The last year has been rough on the old net worth, because of the huge amount of unexpected bills. Literally, in one month I had significant car repairs to my car which were not covered by insurance, had to completely renovate a bathroom at a property, remove a rotten deck at a property and this was one month after I just bought a new truck. Now, unexpectedly one of my business partners wants out on the real estate business, so I have to evaluate purchasing his shares.

This seems to be happening a lot this year. A series of unpredictable events. Is it possible to budget for scenarios like this? This year has to be the worse for unexpected costs, but it seems every year in one form or another I have a unexpected costs. How do self-employed people with random income, budget properly?


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## the-royal-mail (Dec 11, 2009)

It is my opinion that money management skills are learned early in life. Those skills were taught to me by my parents who both feel very strongly about the need to save your money. Especially when times are good, that is not the time to buy all sorts of luxury items.

There have been a lot of threads here in this forum about investing and real estate but precious few threads on money management. I believe this, and your situation are a product of our consumer-driven society that puts the consumption of goods above the basics. Everyone hopes for the best and goes through life starry-eyed and thinking that everything will be fine. Not a good approach. You have to hope for the best but always plan for the worst.

My sig file refers to a personal situation that differs a lot from yours but IMO the concept is the same. Save the money first, build up your assets and don't go into debt to operate. Always have cash in the bank, ready to deploy in case of emergency.

Operating with debt and no cash is very poor policy.


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## donald (Apr 18, 2011)

I struggle with this-having to be strategic(im @ a lower level than you,(i own a company,managing a significant sum of money,both personal,business)but constantly don't know the right-way or if im doing it right(ie:allocating say 80-100k a yr of ''new money" that can be used for growing)The answer might be:a financial advisor that can run numbers and help you create a strong plan?a mentor(who has been in business and can coach you,and you can lean-on them-hard to find though id think)maybe a ''life" coach?

That is one of the toughest things about being self-employed!!it's hard because your learning in real time and you constantly have to ''deal'' with all the un-expected(this is what i find i have a problem with and i run a small company,just a handfull of people and just a little under 500k a yr,but never the less its hard)I want to wade into leveraging like you but im ''to be honest,scared.

I think the answer is outside help-i toss and turn at night wondering ''when" if i need it....or at what level this comes into play!curious to see the answers to this thread.


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## phankinson (Oct 4, 2012)

the-royal-mail said:


> Save the money first, build up your assets and don't go into debt to operate. Always have cash in the bank, ready to deploy in case of emergency.
> 
> Operating with debt and no cash is very poor policy.


Agree - totally. That's why I do have my "Armageddon fund", lol. Basically everything I do, I have to have at least 6 months of cash on hand. If I buy a property, I have to have 6 months of everything involved (mortgage, property taxes, utilities, etc...). Guess my point was, I find it hard to grow my businesses / net worth, when I keep running into unexpected expenses.

As I wrote my original post, I thought about it a little more in-depth. I think a large portion of my problem, was not fully understanding how to budget for things I saw visually with our rentals beforehand. The deck was in OK shape a couple years ago when I first bought this specific property, I guess I should have naturally created a budget for a "deck replacement" because decks do rot...


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## Square Root (Jan 30, 2010)

There have been a number of threads here relating to budgetting, forecsting, expense control. Bottom line is there are almost as many approaches as there are members. 

We use a very well developed system(20 years) that gradually evolved to match our circumtances and meet our needs. Lumpy, unexpected, expenses do cause poblems. In our case this is minimized by holding a large cash balance (maybe 50-100% of total yearly spend) that could absorb any unexpected expense.

This is difficult to do early in the accumulation phase. Some people use a sinking fund approach where they set aside a fixed amount every month to cover unexpected expenses. I think as long as you keep trying to budget and control your finances in some way,you will eventually hit upon a system that works for you. They key is not to give up.


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## slacker (Mar 8, 2010)

Find a way to turn unexpected expenses into expected ones.

Annual auto repair expenses can be estimated and predicted, break it down into monthly chunks, and save it ahead of time.


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## phankinson (Oct 4, 2012)

slacker said:


> Find a way to turn unexpected expenses into expected ones.
> 
> Annual auto repair expenses can be estimated and predicted, break it down into monthly chunks, and save it ahead of time.


I do have estimates on my car repairs and one year I could be at 50% of what I predicted and then the following year I could be at 400% more than what I predicted. One of the issues, I'm having with my car right now they have no idea what's wrong with it, maybe I just bought a lemon :distress:


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## brad (May 22, 2009)

All budgets are subject to uncertainty, which is why some people don't bother trying to keep a budget.

That said, one of the keys to successful budgeting is flexibility. Instead of thinking of a budget as a set of unchanging limits for each category, it's much more effective to view your budget as an iterative, constantly adjusting set of allocations. You start the month expecting to spend x on car repairs, but halfway through the month you discover that you need y. This forces you to figure out what other budget categories you must steal from in order to come up with y-x.

To me, that process is the key to effective budgeting, because it reveals your priorities. If you've allocated $500 to car repairs in October but you need $1,200, you have to look through the rest of your budget to find $700. Will you take it from the money you were going to use for your RRSP? Or your vacation? Or your groceries? The degree to which you're willing to "steal" money from your other category allocations to come up with the missing funds tells you a lot about what's important to you, and thus helps you fine-tune your budget in future months to reflect your true priorities.

I've become a big fan of the You Need a Budget approach, which is built around this kind of flexibility. Forget every stereotypic notion you may have about budgets -- the YNAB approach is based on flexibility. You take your income, and assign jobs to every dollar. Then over the course of the month, you roll with the punches, robbing from category A to cover unexpected costs in category B. Over time, you gradually build up a "buffer" that allows you to live on last month's income instead of this month's (or next month's in the case of people who charge expenses to credit cards). You can still use credit cards and pay them off in full the following month, but from your budget's perspective those charges are no different from those you make to a debit card: they apply to the month in which you charge them, not the month in which you pay them. That alone does a great job of keeping you living within your means and building up a safety net.


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## MoneyGal (Apr 24, 2009)

The way that I have managed this for myself is from a risk management perspective first, budget perspective second. Periodically, I review the things that could go wrong for us financially and then rate the likelihood of that thing going wrong (I'm not being very eloquent here; hopefully my message will be clear). 

Example 1: Part of the roof on my house is aging and will likely need replacement in the next 5 years. I estimate a cost and then estimate the likelihood I will need those funds in the next 12 months. 

Example 2: My car is aging and will likely need replacement within 2 years (this is a fictional example now; I did replace my car last month). I estimate a cost and then estimate the likelihood I will need those funds in the next 12 months. 

At the end of this exercise, you have a list of financial risks you think you might be exposed to, an estimate of the costs if the risk materializes, and your guesstimate of the likelihood of the risk materializing over the next 12 months (it is important to note this is a rolling exercise, not a yearly exercise; you can't just end December and think you can start fresh in a new calendar year - all those risks that didn't materialize in the last 12 months are theoretically "closer" in time now than they were at the outset of the year!). 

Once you have this list in place, you can then start to budget for the risks. If you think your car might need replacing, but estimate the likelihood of that happening in the next 12 months at (say) 30%, you could set aside 30% of the estimated replacement cost for this year. Or you could say, "this is a low-priority risk that I do not think will materialize this year so I am not doing anything about it" (these are kind of the two extremes of thinking about how to handle these risks). 

After all that typing I'm not sure my message is, in fact, clear. My point is that I try to assess the risks I'm exposed to, and then go from there - instead of creating a budget which is (in my view) full of guesstimates with no probabilities. I've been very successful with this approach and as a result I am very rarely surprised financially. In particular, I don't get surprised by a lot of things failing at once, as in your first message. All of those issues (perhaps excluding the car repairs) are foreseeable risks.


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## brad (May 22, 2009)

I followed pretty much the same approach as MoneyGal for the past 20 years and it worked well for me too. But I did discover early on that while you can estimate costs, estimating the risks is in many cases just as much a matter of guesswork as any other exercise in budgeting. I would estimate that my computer would need to be replaced sometime in the next two years, and then a week later it would die. My assessment of risk was accurate ("sometime in the next two years") but not precise enough to be useful.

As a recent convert to budgeting, I like the fact that I can see (and to some degree control) the consequences of every decision and every event whose probability I misjudged. I have a bunch of "rainy day" categories in my budget, under which I set aside money for unplannable-but-likely things like car repairs, home repairs, etc. And I have bunch of "Savings Goals" categories in my budget, under which I set aside money for plannable things like replacing my car, replacing my computer, meeting my RRSP contribution target, etc. So whenever a low-probability event turns into reality, I look at my budget and decide how I'm going to shift my allocations to cover the cost. In some cases it may involve dipping into the funds I've saved in a rainy-day category or one of my savings goals, or it may force me to look at my allocations to other categories and think about how realistic they are ("do I really need to set aside $600 for that four-day vacation?"). 

What I like about that process is the sense that I'm in the driver's seat, that every dollar has a job to do, and there's no unconscious spending. On the other hand, it forces me to think a lot more and it's more work than simply setting up a series of savings goals, sticking to those goals, and spending the rest however I like.


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## MoneyGal (Apr 24, 2009)

brad said:


> I followed pretty much the same approach as MoneyGal for the past 20 years and it worked well for me too. But I did discover early on that while you can estimate costs, estimating the risks is in many cases just as much a matter of guesswork as any other exercise in budgeting. *I would estimate that my computer would need to be replaced sometime in the next two years, and then a week later it would die. My assessment of risk was accurate ("sometime in the next two years") but not precise enough to be useful*.


Hmmm. We are each describing things that work well for us. But a computer has a useful life of not more than 2-3 years. Estimating that it needs to be replaced in the next two years is not sufficient. 

There is (in my world, anyways; we can argue about what the useful life of a computer is if anyone likes) there is a 100% probability the computer will need to be replaced in two years. 

This is totally different from an unplanned failure. 

What is the risk of a computer failure in any given year? I don't know, but I wouldn't say "100% chance of failure over the next two years" - that is not useful. I'd assess some probability (30% this year, 40% next year, 50% final year) and aggregate those in some way (didn't fail this year, so now my estimate for next year jumps to 50%). 

In my method, you budget as though the risk actually occurs. You don't say "in the next two years," because that isn't sufficiently helpful. You can't save the dollars you are going to earn two years from now; you can only save the ones you earn this pay period.


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## brad (May 22, 2009)

MoneyGal said:


> What is the risk of a computer failure in any given year? I don't know, but I wouldn't say "100% chance of failure over the next two years" - that is not useful. I'd assess some probability (30% this year, 40% next year, 50% final year) and aggregate those in some way (didn't fail this year, so now my estimate for next year jumps to 50%).


Thanks, that clarifies it nicely -- I was using the computer as an illustrative example (I actually have kept most of my computers for 5 years or longer, some as long as 8 years, with no major problems or compatibility issues), but your approach of course makes more sense.

However there's still quite a bit of uncertainty involved. For example, emergency planners often talk about things like "100-year floods," which sounds like a flood that may occur only once every 100 years but really means a flood that has a 1-in-100 chance of happening in any given year. But this does not preclude the possibility (however remote) that a 100-year flood can happen four times in the same year. 

Similarly, if you assume that a computer's probability of failure is 30% this year and 50% next year, but it dies next week before you've saved up even $100 to replace it, you're still stuck, and no better off than if you'd said "I need to start saving for a computer" and just setting aside a portion of the computer's costs into your budget each month starting now, until you've got enough to cover the cost.


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## Young&Ambitious (Aug 11, 2010)

Since we are all sharing our budget approaches, heck I'll share mine 

For me for savings I think of near term larger $ expenses that you know will be coming up and think of ones that could occur with some probability (ie. professional dues and tuition due in Sept is known and car accident or job loss unknown). Example major car repair $1,000 just because those things happen, 2 months living expenses $4,000, unexpected major vet visit $2,500, etc etc. That's how I come up with my savings budget. 

If you want to do a rental budget, I would calculate your known expenses first (ie. strata, monthly gardening, mortgage etc) and separately calculate the larger items. You budget based on the known but make allowances for the unknown.


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## MoneyGal (Apr 24, 2009)

brad said:


> Similarly, if you assume that a computer's probability of failure is 30% this year and 50% next year, but it dies next week before you've saved up even $100 to replace it, you're still stuck, and no better off than if you'd said "I need to start saving for a computer" and just setting aside a portion of the computer's costs into your budget each month starting now, until you've got enough to cover the cost.


No, it means (in my method, using this example), you buy the computer once you have (1) enough cash on hand to pay for it outright plus (2) 30% of the replacement cost.


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## brad (May 22, 2009)

MoneyGal said:


> No, it means (in my method, using this example), you buy the computer once you have (1) enough cash on hand to pay for it outright plus (2) 30% of the replacement cost.


Ah, now I understand!


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## MoneyGal (Apr 24, 2009)

Young&Ambitious said:


> Since we are all sharing our budget approaches, heck I'll share mine
> 
> Example major car repair $1,000 just because those things happen, 2 months living expenses $4,000, *unexpected major vet visit $2,500,* etc etc. That's how I come up with my savings budget.


My cat had radiation treatment for hyperthyroidism. It cost $1500. I admit I did not budget for "cat failure." This came out of general emergency funds. :cat:


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## Young&Ambitious (Aug 11, 2010)

MoneyGal said:


> My cat had radiation treatment for hyperthyroidism. It cost $1500. I admit I did not budget for "cat failure." This came out of general emergency funds. :cat:


Haha I think I've got everyone beat on unexpected vet bills: $5k in a 1 year period between 2 surgeries on my 1-2yo dog and this while I was in college. That was a pretty quick lesson on why to have cash savings available just because you just don't know.


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## kcowan (Jul 1, 2010)

And the unspent items for "planned" repairs get rolled forward and kept separate from the current period operating capital. That way, if you get lucky in a given period, you build your reserves to carry forward into the next period. With time you will get better at your estimates based upon your actual experience.

Our budget is alway pretty close in total but the specific line items are always off. Fortunately the overages and undershoots always seem to match. But we build in inflation too.


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## phankinson (Oct 4, 2012)

@brad Do you happen to have an Excel copy of your budget? Curious to see how you have it laid out.


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## Sampson (Apr 3, 2009)

I see two somewhat related but separate issues with budgeting.

1) personal finance - here you should rely on adequate savings, good cash flow balance and accurate budgeting. In the event of unforseen expenses, you don't want to bet out on the street or without food to eat.

2) business finances - I personally believe you have the luxury or using leverage and borrowing to smooth out problems with cash flow. Even if the business goes under, it should not impact your (1) if the co. is setup properly.

I think forecasting probabilities and impact of the risk events is a little too much for personal finance, although we may have some PMI certificate holders in the mix and this is certainly how it is taught formally. I won't knock it if it is working for others, but I would never write it out, only estimate the largest and most likely risks and plan for those events.


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## brad (May 22, 2009)

phankinson said:


> @brad Do you happen to have an Excel copy of your budget? Curious to see how you have it laid out.


No, I'm using the You Need A Budget software (after 20 years of using Quicken, which I have now abandoned).

With the YNAB software, whenever you receive income you have two choices for it: assign it as income for this month or as income for next month. This creates an amount "available to budget" and then you assign those dollars to categories in your budget until the "available to budget" amount is zero. (This is simply zero-based budgeting, nothing novel here.) This process is made easier in the software because it can automatically budget for any recurring transactions you have entered in your account registers, plus it can use the same values you budgeted for the previous month or your average values over the past 3 months, and then you can adjust and customize from that starting point. Setting up my budget each month takes me about 10 minutes.

My main categories fall into master categories like Monthly Bills (with subcategories for things like electricity, phone, mortgage, etc.) and Everyday Expenses (groceries, gasoline, clothing, etc.), Rainy Day Funds (general emergency fund, auto repairs, home repairs, etc.), Savings Goals (RRSP, new car, new computer, vacation, new camera lens, etc.). Then I have a bunch of "off budget" accounts for things that don't factor into my budgeting, such as my mortgage, my RRSPs, and an asset account for my house.

As I spend money each month, I enter my transactions into my account registers (exactly the same as you would with Quicken, for example), and categorize them so they're charged against the amount budgeted in each category that month. Any unused allocations get rolled over to the next month or I can zero them out with one click and apply that money to different categories.

Paradoxically I'm finding that I spend more since I started using YNAB, but it's mainly because I now have a clear view of my financial priorities and it gives me a sense of freedom to spend money on things that I might not have bought before because I was in a general "save and hoard" mode. Saving is all well and good, but there's little point in saving if you don't have a purpose for those savings. I don't have a "savings" category in my budget -- instead I am saving for specific things. When I reach my savings goals for those things, I buy them.


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## Barwelle (Feb 23, 2011)

brad, how much time do you think you spend in a month on budgeting using YNAB?

I tried to follow a budget using a program called GNUcash but lost interest because it took too long to manage. Manually entering every transaction was too much work for this lazy Gen Y'er, but I see YNAB is supposed to be able to import transactions.


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## brad (May 22, 2009)

Barwelle said:


> brad, how much time do you think you spend in a month on budgeting using YNAB?


Actual budgeting takes 10 minutes or so once you understand the system (the first couple of months will take longer) -- the more time-consuming part is (as you say) entering transactions. You can indeed import transactions and I think most people do that. I don't, but only because I ran into some glitches with Quicken years ago when I had my Quicken file directly connected to my bank accounts, and I decided I'd rather enter everything by hand. I feel like I'm more in touch (literally) with my spending that way, and it doesn't take me very long -- perhaps an hour or two total each month because I keep up with it every day and don't let it pile up.

YNAB has some very important limitations that you need to know about, though: it's useless for tracking investments, for example, and its reporting module isn't very sophisticated compared with all the reports you can get from Quicken. The fact that there are only two income categories (income for this month and income for next month) can feel restrictive, although you can use the Memo field to further categorize income and the search function is very powerful in YNAB so you can see at a glance how much you earned from a particular client, for example.

The biggest adjustment I had to make with YNAB was shifting from an accounts-based perspective to a budget-based perspective. YNAB's budget treats all of the money in your accounts as one big pool; you do have separate accounts for all your actual bank accounts, but your budget doesn't "care" where the money is physically sitting. That means it's possible to budget more money than you have in your chequing account, for example, so you have to be careful to monitor your account balances so you don't overdraw. 

Pre-YNAB, I just looked at how much I had in my accounts after I'd set aside money for my various savings goals, and spent based on that. With YNAB, you make those decisions based on what's in your budget, not your accounts. It's a different perspective, and it takes time to understand. Some people do crazy things like set up budget categories for each of their accounts, which completely defeats the purpose of YNAB. It does have a learning curve.


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## MoneyGal (Apr 24, 2009)

Sampson said:


> *I think forecasting probabilities and impact of the risk events is a little too much for personal finance*, although we may have some PMI certificate holders in the mix and this is certainly how it is taught formally. I won't knock it if it is working for others, but I would never write it out, only estimate the largest and most likely risks and plan for those events.


Them's fighting words!


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## kcowan (Jul 1, 2010)

MoneyGal said:


> Them's fighting words!


I think Sampson left of *his* in front of personal finance.

I think there is a wide spread in approaches to personal budgets. But once you have a plan working, it is freeing like brad said.


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## Sampson (Apr 3, 2009)

Sampson said:


> I won't knock it if it is working for others, but I would never write it out...


M_Gal, you missed my recovery.
kcowan, you are putting words in my mouth. I meant EXACTLY what I wrote 

I'm not afraid to fight, especially a precise budgeter, they'll be too busy putting numbers into a spreadsheet and won't show up at the bike racks anyway.


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## MoneyGal (Apr 24, 2009)

...the bike racks? What kind of fight are we gonna have?!


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## Young&Ambitious (Aug 11, 2010)

It seems the fight turned into a bike race :tongue-new:


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## Plugging Along (Jan 3, 2011)

Sampson said:


> I see two somewhat related but separate issues with budgeting.
> 
> 
> 
> I think forecasting probabilities and impact of the risk events is a little too much for personal finance, although we may have some PMI certificate holders in the mix and this is certainly how it is taught formally. I won't knock it if it is working for others, but I would never write it out, only estimate the largest and most likely risks and plan for those events.


I was going to post that I do perform probability, impact assessments, and expected monetary value (light version) for my personal finances. That being said, I hold a pmp, and actually teach the certification, specifically in project risk.


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## Sampson (Apr 3, 2009)

I guess I don't see the 'intellectual debate' coming into play on this one, might as well see if mods will serve up detention.

Also joking aside, for the businesses, the OP probably should use some formal risk assessment tools to anticipate and deal with the business. I think to be successful, either the OP should do this him/herself, or find someone to help with planning.

As for personal planning, sure doing it at home will improve the budgeting at work and vice versa. I'll concede that budgeting is valuable. I suppose accuracy of estimates come with experience, and for most people, in their personal lives, month to month and unexpected events shouldn't be too difficult to determine, hence lack of need for to the dollar amounts.


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## Sampson (Apr 3, 2009)

Plugging Along said:


> That being said, I hold a pmp, and actually teach the certification, specifically in project risk.


At which institute? Maybe we have met before unknowingly


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## Plugging Along (Jan 3, 2011)

Do you have your pmp too? I teach at a few places, for private corporations and the local college here.


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## Sampson (Apr 3, 2009)

Plugging Along said:


> Do you have your pmp too?


Was working on it until 2 kids put an abrupt stop to it. It is totally out of my trained field, but one of the more interesting options to move beyond the heavily technical background.


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## Plugging Along (Jan 3, 2011)

I really believe that project management is really complimentary to any technical field. I have found that the framework skills apply to so many areas of life. Where else can I use risk management for personal finance. 

I hear you about the kids. Being a total type a personality, actually thought I would get my pp while on mat leave I my spare time when the baby slept. Sheesh, who ever came up with the term 'sleep like a baby' was really whacked.


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## Sampson (Apr 3, 2009)

Plugging Along said:


> Sheesh, who ever came up with the term 'sleep like a baby' was really whacked.


That's what mom's do when the fathers get home from work and take a turn at it. God bless moms/wives.


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## brad (May 22, 2009)

Sampson said:


> I'll concede that budgeting is valuable. I suppose accuracy of estimates come with experience, and for most people, in their personal lives, month to month and unexpected events shouldn't be too difficult to determine, hence lack of need for to the dollar amounts.


The funny thing is, though, that experience doesn't necessarily improve accuracy. The guy who developed the YNAB method and software, Jesse Meacham, has been budgeting for more than 112 months and has yet to have a single month in which he didn't overspend on at least one category. And in all those 106 months he has never accurately estimated his grocery budget for the month. That's why budgeting has to be flexible.

Even in the projects I manage, we're frequently shifting allocations to different tasks because nothing ever works out as you originally estimated. I work with seasoned project managers who've been doing this professionally for 30 years or more, and none of them have ever estimated their budgets accurately at the outset; they always have to make adjustments as they go along. Even one month ahead we're often wildly off, because something unexpected will come up. I've been managing projects myself at this job for 13 years and just last month I had the first month in which I perfectly estimated the number of hours we would bill on a project. I think that was due more to luck than skill.


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## MoneyGal (Apr 24, 2009)

brad said:


> The funny thing is, though, that experience doesn't necessarily improve accuracy. The guy who developed the YNAB method and software, Jesse Meacham, has been budgeting for more than 112 months and has yet to have a single month in which he didn't overspend on at least one category. And in all those 106 months he has never accurately estimated his grocery budget for the month. *That's why budgeting has to be flexible*.


And why resources have to be sufficient. 

I know I am preaching to the choir here, but out there in the "real world" people seem to operate under the misapprehension that budgeting is some kind of special magic that will make insufficient resources stretch to cover a perceived desired lifestyle. If you have sufficient resources, you don't even need to budget, really.


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## brad (May 22, 2009)

True, and that's why I avoided budgeting for so many years; my finances are in fine shape and I have a big cushion to cover me for unexpected expenses. Plus I manage budgets at work so setting up a budget for my personal finances sounded a bit too much like work to me.

But the big surprise for me is that I enjoy budgeting. I don't need a budget, but I find that I like having one because it makes me feel like I'm managing my finances instead of simply monitoring them. My budget forces me to make conscious decisions about where every dollar of my income is going to go -- even the interest I earn on my savings account. Once my regular monthly bills and everyday expenses are budgeted for, the fun part begins because I then have a pool of money that I can allocate however I like. It's that process of actively deciding what those dollars will do that appeals to me.

In the past I just set aside money in my accounts for my various goals, made sure I had enough to meet my normal monthly expenses, and then as long as my outflows didn't exceed my inflows, I didn't pay much attention to the rest. That worked, and I never lived beyond my means, but I never quite felt that I was in the driver's seat. I feel that way now, and it surprises me how much I enjoy budgeting. I thought it would feel restrictive and would destroy my sense of spontaneity, but it hasn't turned out that way at all.

I should clarify that in my post above where I referred to Jesse Meacham "overspending" in some categories, what that means is that he underestimated, spent more than he thought, but then covered the overspending by taking money out of another budget category to cover it. He never spent more than he had, he just shuffled allocations around.


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## kcowan (Jul 1, 2010)

MoneyGal said:


> If you have sufficient resources, you don't even need to budget, really.


And one of those resources is a good line of credit! (Or an emergency reserve account.)


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## Four Pillars (Apr 5, 2009)

It's amazing some of the different approaches to budgeting in here.

I use a pretty simple method to handle unexpected or more likely, expenses which are too hard to estimate. I think it is good enough considering the incredible uncertainties involved.

I just keep a "float" amount in my bank account which will cover overspending and at least some increased expenses. 

So for example in my account I have to keep $1,500 to avoid fees, I like to keep another $1,000 on top of that and I also need money to cover any upcoming expenses. So the float amount is up to $2,500 if necessary. 

This isn't a huge amount of money, but we have a decent amount of extra cash in our budget, so if we have a really bad month - we can always suspend debt repayments/investment contributions and quickly cover any deficit. If we had a tighter budget, a larger float would probably be required.

As the op noted, estimating car expenses is a fool's game. I've had years where the total repair bills were $200. I've also had $3,500 of repairs in 2 months.

I suspect that if I were to take a probability approach to estimating future costs for things like cars - I would end up with a similar amount to my current float amount. As inaccurate as the individual estimates may be - if you have enough expense categories and they don't all go into the red in the same month, you will probably be ok for cash flow.


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## Square Root (Jan 30, 2010)

MoneyGal said:


> And why resources have to be sufficient.
> 
> I know I am preaching to the choir here, but out there in the "real world" people seem to operate under the misapprehension that budgeting is some kind of special magic that will make insufficient resources stretch to cover a perceived desired lifestyle. If you have sufficient resources, you don't even need to budget, really.


I agree. 20 years ago I really needed a budget. Just started a very messy divorce, cash was tight, and I had to plan for 2 households really. Fast forward 20 years and probably don't need one now since resources are sufficient to support our very expensive lifestyle. However, things can always go wrong and having very good financial control over my life is something I have grown to like. Now it is more a tracking and reporting system rather than an actual "budget" that we have to keep to. Anyway, I will always have something like it- it's actually fun for us. Crazy, I know.


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## phankinson (Oct 4, 2012)

brad said:


> No, I'm using the You Need A Budget software (after 20 years of using Quicken, which I have now abandoned).
> 
> With the YNAB software, whenever you receive income you have two choices for it: assign it as income for this month or as income for next month. This creates an amount "available to budget" and then you assign those dollars to categories in your budget until the "available to budget" amount is zero. (This is simply zero-based budgeting, nothing novel here.) This process is made easier in the software because it can automatically budget for any recurring transactions you have entered in your account registers, plus it can use the same values you budgeted for the previous month or your average values over the past 3 months, and then you can adjust and customize from that starting point. Setting up my budget each month takes me about 10 minutes.


Brad, I love the idea of YNAB. I downloaded it yesterday and played around with it, but I personally like my own spreadsheets and playing around with numbers. I realized based on what you said one of my core problems was I had basically one budget for all 12x months. It was hardly reliable because I was always stealing from one category to move into another category. So I rebuilt my spreadsheet to show 12x months upfront so I can see possible issues way before they happen. Now, if I have a month where my expenses end up higher than usual I can move things around easier.

Would love to get your feedback on my spreadsheet:
https://docs.google.com/spreadsheet/ccc?key=0ArE8l42n3soadFhCMHFPYUFnanNWQS13NUNtSXp3T1E&pli=1#gid=0

It's purely fictitious numbers, but you get the point.


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## brad (May 22, 2009)

phankinson said:


> I downloaded it yesterday and played around with it, but I personally like my own spreadsheets and playing around with numbers.


Apparently the YNAB software started out as an Excel spreadsheet and they even sold it as a spreadsheet for a few years. I think it would be pretty easily to replicate much of its functionality with a spreadsheet.

YNAB only looks one month ahead; there are ways to work around that limitation, but they've found it's too easy for people to get into trouble when they give jobs to dollars that don't exist yet. You can enter recurring transactions into your budget, and one-time future transactions (e.g., income tax instalments), but YNAB forces you to work only with the money you have at hand, not money you expect to have in the future.


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## phankinson (Oct 4, 2012)

brad said:


> Apparently the YNAB software started out as an Excel spreadsheet and they even sold it as a spreadsheet for a few years. I think it would be pretty easily to replicate much of its functionality with a spreadsheet.
> 
> YNAB only looks one month ahead; there are ways to work around that limitation, but they've found it's too easy for people to get into trouble when they give jobs to dollars that don't exist yet. You can enter recurring transactions into your budget, and one-time future transactions (e.g., income tax instalments), but YNAB forces you to work only with the money you have at hand, not money you expect to have in the future.


Am still a little confused. 

How do you budget for an expense that you know is going to happen in 6 months from now, using YANB, if they only focus on this month? For example, each year I know I'm going to have accountant fees. Let's say the fees are $6,000 but I only make $2,000 of income that month?


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## brad (May 22, 2009)

phankinson said:


> Am still a little confused.
> 
> How do you budget for an expense that you know is going to happen in 6 months from now, using YANB, if they only focus on this month? For example, each year I know I'm going to have accountant fees. Let's say the fees are $6,000 but I only make $2,000 of income that month?


You can add a category for it now and start saving for it.


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## phankinson (Oct 4, 2012)

brad said:


> You can add a category for it now and start saving for it.


Ok that makes sense. I need to play around with the software some more I guess.


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## brad (May 22, 2009)

It lets you carry over and build up amounts from month to month. So if you have some distant expense that you need to save for, you just divide it into monthly instalments and keep funding it until you reach the amount you need. I have a bunch of those set up.


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## the-royal-mail (Dec 11, 2009)

phankinson, I'm happy to help but it is not necessary to quote everything you reply to so specifically. In a threaded view the most you should need to do is address the person or use ^, otherwise just type and that will save a bunch of needless scrolling. Thanks for understanding.


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## phankinson (Oct 4, 2012)

^ noted.


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