It’s hard to believe it’s only been around a year and a half since I started budgeting and rigorously tracking my finances. It’s truly been life-changing. But, with the end of my Ph.D looming, my financial situation is soon to change. I can expect both my income and expenses to increase significantly, and I have my doubts that my current system will scale.
So this is a post about how I plan to manage my finances in 2018, with a YNAB (You Need a Budget) inspired approach. But first, let’s talk about budgeting in general and how I’ve done it in 2017.
Budgeting for Dummies
A budget is a model of your financial situation and how it changes over time. A budget is an abstraction which doesn’t need to exactly match reality. For example, your bank account is one big pot of money, but in your budget you might divide that pot up into different categories for different expenses: rent, bills, food, and so on. Those categories don’t really exist—your bank won’t stop you from buying a sandwich if you’ve still got money in your account, just because you’ve exhausted your food budget—but they help you to think about your finances.
Creating a basic budget has three steps:
Recording: it’s essential to know where your money is going before you can try to change your habits. So for a month or two, just note down every transaction you make. Round to pounds or tens of pounds if you don’t care about being exact: the level of detail is up to you.
Categorising: now that you have a month or two of transactions, go through them and assign them to categories. How you break things up is up to you, but here are some categories you’ll probably want to start with: rent, bills, food, and social.
Planning: now look at how much you spend on each category in a month. Is there anything surprising? Does your daily sandwich from the café near work add up to more than you were expecting? Pick an amount for each category: this is your budget. This is also the time to think about changing your behaviour. Perhaps you should try making lunch once or twice a week to save some money that way. Perhaps you should start putting some money aside every month for an upcoming large expense. What do you want?
Most importantly, don’t beat yourself up when things go wrong. You will go over your budget on occasion. Just accept that, adjust the budget, and try not to do it again. If you’re regularly going over, perhaps you didn’t allocate enough to that category in the first place.
You’re just starting out, it would be strange not to make mistakes!
The Poor Postgrad System
Let’s talk about my 2017 system. It’s worked pretty well for me, and is a significant modification of the system I came up with when I first started in mid-2016. I use hledger to manage everything, but this should be transferable to any double-entry accounting system.
I have a number of accounts, grouped into four categories:
- Assets: what I have or am owed.
- Liabilities: what I owe.
- Income: money moves out of here and into assets.
- Expenses: money moves out of assets and into here.
The assets category is then broken down into three subcategories:
- Cash: normal bank accounts, my PayPal account, and my wallet.
- Investments: my Stocks and Shares ISA.
- Reimbursements: money people owe me.
Let’s have some examples. hledger is a plain-text accounting tool, so transactions are described in a simple text file like so:
2017/09/28 Overleaf assets:cash:santander:current £1783.40 expenses:tax:income £257 expenses:tax:ni £195.60 liabilities:slc £74 income:overleaf -£2310
This transaction is recording the pay I got from Overleaf in September. The first line has a date and a description. The indented lines are called postings, and each adjusts the balance of an account. Overleaf paid me a total of £2310, of which I saw £1783.40. The rest goes to tax (£257 in income tax and £195.60 in national insurance) and the Student Loan Company (£74).
The income amount is negative because transactions need to balance: the postings must sum to zero. Plain-text double-entry accounting uses signed amounts rather than the traditional debit and credit system. I found it pretty intuitive to get started with, but someone from a more traditional accounting background might need to mentally adjust.
Here’s how I record investing some money in my ISA, which is provided by Cavendish Online and managed by Fidelity:
2017/08/01 Fidelity assets:investments:cavendish:s&s 31.19 MCOUA @@ £50 assets:investments:cavendish:s&s 65.15 MCMEA @@ £100 assets:investments:cavendish:s&s 7.15 MHMIA @@ £50 assets:investments:cavendish:s&s 2.56 VADEA @@ £800 assets:cash:santander:current -£1000
Here I’m removing cash from my Santander current account to buy commodities in my ISA. I’m buying units in four different funds (“MCOUA”, “MCMEA”, “MHMIA”, and “VADEA”) for the listed amounts. So, I’m spending £50 of my £1000 total to get 31.19 units of MCOUA. Account and commodity names are arbitrary, they are created when first named; there’s no need to declare them up front.
Finally, here’s how I record an expense:
2017/11/26 Amazon expenses:books £12.98 assets:cash:santander:current
A single amount can be omitted, hledger can calculate it because it knows transactions must balance. For transactions with more than two real-world accounts involved, I like to include all the amounts to make sure I haven’t made a mistake.
Budgeting: ok, that’s the basic workflow, so now on to how I budget on top of this. Well, firstly, I don’t have transactions to or from
assets:cash:santander:current, I have a bunch of subaccounts. These aren’t real accounts, they don’t correspond to anything Santander knows about, they are just to help me manage things.
I have four subaccounts:
- Accum: “accumulating” budgets, I add a fixed amount of money to each subaccount of this every month, and any unspent rolls over.
- Month: the normal monthly budgets, I top each subaccount of this up to a predetermined amount every month.
- Saved: money put aside for specific purposes.
- Unallocated: money not budgeted or saved yet.
My income goes into the unallocated account:
2017/09/28 Overleaf current:unallocated £1783.40 expenses:tax:income £257 expenses:tax:ni £195.60 liabilities:slc £74 income:overleaf -£2310
current defined as an alias for
assets:cash:santander:current, because typing that out would be tedious.
At the start of every month I distribute some money to my budget accounts:
2017/12/01 Budget underspend current:month:household -£14.30 current:month:servers -£3.94 current:unallocated 2017/12/01 Budget current:accum:fun £25 current:accum:other £75 current:month:food £250 current:month:household £30 current:month:servers £39.50 current:unallocated
As you can see in the first transaction, I clear out any unspent budget from the month accounts first. I don’t bother including the amount for
current:unallocated as the postings here all refer to the same real-world account (my Santander current account).
I also include every future transaction I know about: rent, tuition, dentist appointments, and so on. I can forecast by assuming I spend my entire budget every month, which is a pessimistic assumption (the best sort of assumption to make in financial planning). If the balance of
current:unallocated is always nonzero, I have enough money.
The Employed Programmer System
The 2017 system is simple, and works well because I have a low cashflow. I don’t have much income, but I don’t have many expenses either. But the way I use the saved and unallocated accounts leaves much to be desired.
Savings: I have a
current:saved:rent account, which is always enough to pay the next rent instalment. When I do pay rent, money comes out of there (and goes to
expenses:rent), and I top it up again from the unallocated money. Because my rent is not monthly, but rather in four instalments across the year, it’s been easy to be lazy and justify not bothering to save for multiple instalments at once.
Purpose: the unallocated account serves at least three purposes at the moment: it’s where income goes to, it’s where my budget and savings come from, and it’s where cash I withdraw comes from. Again, this works because my cashflow is low, but if I’m dealing with a monthly cashflow in the thousands rather than the hundreds, having everything go through a single account sounds like a recipe for error.
The 2018 system: so to manage my money next year, I’m using a YNAB-style allocation of cash to categories. The four YNAB rules are:
- Give every dollar a job: allocate money as soon as you get it.
- Embrace your true expenses: budget for uncommon expenses before they happen, not when.
- Roll with the punches: be flexible and update your budget as you need to.
- Age your money: only spend money that is at least 30 days old.
Rather than have a catch-all account which income goes to before being distributed elsewhere, I’m just going to distribute income directly. Pay day looks something like this:This is an estimate assuming I get a certain job. There’s some slack in the budget so I can manage making a bit less than this. When I have a job offer, I’ll update everything and see what adjustments need to be made.
2018/06/29 Job current:saved:household £50 current:saved:invest £200 current:saved:monthly £500 current:saved:rent £1500 current:saved:utilities £200 current:saved:web £50 income:job -£2500
By saving a little more than a month’s expenses in each category, I will gradually build up a buffer so I’m not living paycheck-to-paycheck. When I hit three months expenses saved, I’m going to adjust this income allocation and put the excess towards something else. For things that aren’t a fixed monthly expense (like healthcare: medicine, dentist trips, and so on), I’m going to maintain a minimum balance which gets topped up when I spend some of it.
I still want to limit my monthly spending on things like food, while also building up a savings buffer. I’ve opted to handle this with separate accounts. A savings account for monthly expenses, from which I draw a fixed amount for my monthly budget categories:
2018/07/01 Budget current:month:food £225 current:month:fun £50 current:month:other £75 current:saved:monthly
I’m also switching all my monthly budgets to accumulating budgets, rolling over any unspent money. After doing it for a while, I don’t think there’s much point in not allowing extra spending in a month if I underspent previously. The average monthly expenditure is still limited.
Finally, I’ve set aside an amount of money to withdraw as cash. This account is going to start at £100, and I’ll top it up every time I budget a cash expense, like so:
2018/01/01 Withdraw assets:cash:hand £50 current:float ; ... 2018/01/12 Morrisons expenses:food £32 assets:cash:hand 2018/01/12 Cash spend current:float £32 current:month:food
This limits the maximum amount of cash I can withdraw without spending it in some budgeted category. Needing an extra transaction may look tedious, but I currently do the same thing with
current:unallocated, so I’m used to it. In practice I buy most things with my debit card, cash transactions are infrequent enough such that it’s not much of a pain.
Isn’t predicting the future bad? A standard piece of financial advice is to not try to predict the future. And here I am, with my plan for all of 2018, when I don’t even have a job offer yet. Pure speculation!
The point of budgeting is to introduce artificial scarcity into your finances. Scarcity makes us better at planning. Introducing abundance by assuming favourable things happen defeats the point.
I think predicting the future can be fine, as long as you’re aware that that is what you’re doing and that things may work out worse than you’d like. If you can still afford everything with pessimistic assumptions (expenses are large and early in the month, income is small and late in the month), then you’re probably in a good position. I admit, I’ve assumed a good income. So, here are my assumptions:
- A one-time moving cost of £250.
- Monthly take-home pay of £2500 (after tax and pension contributions).
- Monthly rent of £1200, with a £1600 one-time deposit.
- Monthly council tax of £100.
- Monthly utilities bill (total) of £185, with a £100 one-time set-up fee.
- Monthly living costs (food, entertainment, etc) of £350.
- Monthly server costs of £40.
The living costs and server costs are based on my current budget, but everything else is a best guess based on the evidence I could find. If we ignore the one-time costs, my monthly expenses come to £1875, which is rather below my income. This is based on living by myself. If I live with a housemate, rent and bills would roughly half. So there’s quite a bit of room.
The most dangerous time is the first six months of the year. I’ll get my first paycheck at the end of April, but before then I’ll have to pay all the one-time costs and one or two months rent, depending on what the timings are. Furthermore, my £2000 overdraft goes away in June so I need to have the spare cash to pay that off. I’ve worked out two forecasts with different rent timings, to make sure I can afford both.
So while there is a lot of speculation, and money allocations will undoubtedly change as I progress through next year, doing this exercise has given me a lot of peace of mind.