When Trying to Stick to a Monthly Budget Just Doesn't Make Sense
The idea of keeping a monthly budget sounds reasonable at first blush.
Most people have a fixed monthly income. And most of our major unvarying expenses recur on a more or less monthly basis -- rent, the amount spent on gas and utilities, the cable and phone bills. Subtract those constants and near-constants from your monthly income, and it should be a fairly straightforward matter to budget your remaining income across categories like groceries, drugstores, clothes and entertainment. What's left over (because we hope there's something left over) goes into savings.
"We set budgets every month because most of us get paid every month, and that natural instinct is to budget it out," says Mint.com's Hitha Prabhakar.
But there's a problem with that traditional approach: Not all purchases happen on a predictable monthly schedule.
Take drugstore items, for instance. I haven't purchased soap and shampoo since June -- not because I've stopped showering, but because back in June, I made a trip to Target and bought a 34-ounce jug of shampoo and a bulk package of soap. While I was there, I also grabbed some cleaning supplies, which should last me for several months more.
If I'd set a monthly budget for household care items, I would have well exceeded it in June, and then barely touched it in the following months. Smart buyers buy in bulk, but bulk purchases tend to muddle any attempt to budget on a month-by-month basis.
Other examples abound. If you're a parent, you probably spent a whole lot on clothes in August and September as you prepared to send your kids back to school. Now that you're done buying shoes and jackets for your children, you've probably dialed down the clothing purchases for the foreseeable future. Once again, monthly budgeting is insufficient: You would have blown clear past it in August, then stayed well within it in subsequent months. Simply determining your annual clothing expenses and then dividing by twelve doesn't make sense.
Prabhakar says she encounters the same issue with her own clothing expenditures.
"In the summertime, people tend to spend less on clothes -- because, quite frankly, you're wearing less," she says. "But without fail I wind up spending $2,000 [on clothes] in September and October."
A standard monthly budget simply doesn't account for such wild fluctuations in spending patterns.
That's why Lauren Bowling of the personal finance blog L Bee and the Money Tree takes a quarterly approach to budgeting for irregular expenses like contact lenses and veterinary care. She determines how much she's going to spend in a given quarter on each item, and then sets money aside every month just as she would when saving for a vacation or other big outlay.
Rather than simply leaving that money as leftovers in the checking account, or putting it in her long-term savings account, she says she keeps it in a separate account dedicated to such medium-term purchases.
"A lot of times with a checking account you also get a savings account, and that's where my money goes," she says.
Personal finance sites like Mint can help with this process. While it only allow you to set monthly budgets, not quarterly ones, it does have a "Goals" tool; while it's usually used for big purchases like vacations and cars, it can just as easily be repurposed for quarterly expenses like holiday gifts and back-to-school spending. Just put in how much you need to save, when you need it and which account it's going in, and Mint will help you keep your savings on track.
That makes sense if you're dealing with a large expense, like $500 for holiday gifts or $1,000 to refresh your wardrobe. But for smaller quarterly expenses -- say, shampoo and cleaning supplies -- it might be easier to just adjust your monthly budget at the beginning of the month if you know you've got a big trip to Target or Costco coming up.
Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.