Part of the mission of The Family Money Mentor is to pull back the curtain on how families (well, my family at least) manages finances. And that includes the most volatile piece of family finances, how to stick to a budget. Or, in our case, a simple monthly spending cap (no categories!) using my burn rate budget approach.
I’ve described in another post why I believe categorized budgets fail people. Mainly, expenses aren’t that consistent, and having to plan ahead and control every penny for every stinking thing that comes up… well, I think it’s super inefficient and also ineffective.
Instead, we know what our monthly spending limit is. We watch our spending rate throughout the month and do our best to ensure we don’t go over that monthly cap. It isn’t always perfect (as you’ll see below for this month!), but on average, it works to control our day to day discretionary spending so that it fits into our broader financial plan.
Part of that broader financial plan is having layers of savings in place to handle emergency expenses (layer 1) and irregular planned expenses throughout the year (layer 2), so check that system out as well. It is a critical piece of tying together your day to day spending with the less frequent (unexpected & expected) family expenses, to ensure smooth monthly cash flow.
The purpose of these monthly posts on our spending is to show you the details so you can see how this burn rate budget approach works in real life.
What's In This Post
Our basic spending mode
First, we use credit cards for all spending. We pay each card off in full every. single. month. No exceptions. Learn how to get the most out of credit cards without falling prey to the pitfalls right here!
Currently we’re using three main cards:
The Amazon Prime Rewards card earns 5% back at Amazon.com. This is where we get our regular household supplies through Subscribe & Save every 2-3 months. And we tend to order most of the other ‘stuff’ we need at Amazon as well. So this card is our default payment there, and it’s also the card I carry for any spending I do out and about.
The American Express Blue Cash Preferred card earns 6% back on groceries. I don’t love the online AMEX interface and it has a $95 annual fee, but the grocery rewards on this card are too good to pass up and more than make up for the annual fee. So we don’t use it for anything else but grocery runs. And I don’t track the spending rate on this card throughout the month at all. It’s just the usual grocery bills and that’s it. No muss, no fuss.
The Costco Citibank card earns 4% cash back on gas so we use it for all gas (which we mostly buy at Costco for the lower price at the pump). It’s also the card my husband carries, so his out and about spending goes on this card.
Sticking to our monthly budget/spending cap
Our currently monthly spending cap is about $2,000.
This amount encompasses all our day to day life spending, including groceries, gas, eating out, kid stuff, etc etc, all those bajillions of family budget categories you could come up with if you wanted to. It does not include our monthly bills, like mortgage, utilities, cell phone, internet, insurance, etc. There are a few automatic regular charges, however, like monthly swim school membership. I don’t consider temporary things like that (even if they go on for quite awhile) to be my usual ‘fixed expenses’ to draw out of our checking account directly. So they bill to one of the credit cards and must fit into our monthly discretionary spending cap.
This spending cap also does not include any medical/dental/vision expenses because those (generally) come out of our HSA account. We benefit from an HSA account as part of carrying a high deductible health insurance plan. Part of the plan premium actually passes through directly to that HSA account so that is helpful.
Each of our credit cards closes on some date throughout the month, and then gets paid on its due date the following month. I pull money in from savings or my business funds (currently just money I pile up from my side hustle of part-time doggie daycare) to cover certain charges, as you’ll see in each summary.
July 2021 spend summary
July 2021’s credit card billings due for our family were $3,133.68 in total. But this month there was a pretty substantial chunk ($793.97) on my credit card of business related expenses covered from the doggie daycare funds. All the rest was family spending.
No emergency expenses this month again, so yay for that! I think there might have been a minor car part purchased at Autozone here that my husband installed himself. I could probably classify such things as an emergency expenses, but I prefer to absorb what I can into regular spending when it’s a small-ish amount.
So the table below shows the adjustments to the actual billings, which then reveals our effective spending total to check against our target monthly spending cap.
So total actual spending for the month… $2,339.71. 😱 We blew our cap! Ack! But never fear…
Because you know what? I’m not stressing. In my spending management strategy, the aim is to execute your best effort to stay below the cap each month. But sometimes you just screw up a little bit. It happens. A small degree of overspending time to time is totally normal.
The trick is to have a plan when things don’t go according to plan. Keep reading below for my multi-layered approach to absorbing a blown monthly spending cap.
As far as what fit into that $2,339.71 this month, we spent on…
- A birthday for our now 4-yr old. Nothing extravagant, but some cake, ice cream, gift, etc.
- Date night & sitter for our 10th anniversary! (We used our cash stash for the sitter at $20/hr, but still spent on our normal cards hanging out at a brewery for dinner and drinks). We also committed to looking seriously into getting a family camper in the coming year as sort of an anniversary milestone gift, so time to start working that into the savings strategy!
- Fourth of July fireworks splurge… personally I’m not much of a fireworks person, but my husband and the kids sure enjoyed them. For the record, all safe legal stuff!
- Concert tickets with friends for my husband’s favorite band returning to our favorite outdoor venue. He was VERY exciting to get these tickets after not being able to see them except on virtual concerts with awkward sound delays for nearly two years.
- Some streamed movie rentals for family movie nights, like usual.
- The regular obligatory Home Depot spending, which was very light this month! Just $32 🙂
- All our groceries on the AMEX.
- Gas in the cars at Costco on the Citi card.
How to manage going over your cap?
I feel like I need a separate post on this topic, but this is a great opportunity to cover what happens when you go over your budget.
Because it will happen!
Going over your monthly spending cap messes up your spending bucket alignment for that month and could throw off your monthly cash flow plan.
But in brief, the strategy for managing overages on your monthly spending is to rely on your financial buffers (read this post all about buffer money!).
What you do not want to do in this situation is skip your monthly savings or leave part of your spending on a credit card. Build up your buffers, friends, because this is where they become your secret weapons. I keep many in different forms.
Here’s a list of ways to buffer unwelcome hits to your monthly cash flow, including going over your spending cap:
- Being one month ahead (i.e. paying this month’s bills with last month’s income). In this way, when your spending bucket cost (i.e. your credit card bill) is a few hundred higher than it should be, you already have income coming in to buffer that situation until you can either bring in more money or spend less to compensate. For example, our June income is sitting there to cover all of July’s bills and spending. If I’m $340 over in my expected spending that’s due to pay in July, well, at least July’s paycheck is also landing in the account before the credit card bills are all due so I’m not at risk of overdrawing. You can’t use this as a means of completely absorbing overspending (or you won’t be a month ahead any more over time!). But it does create the space for you to create an intentional plan to compensate. Make sense?
- Extra money in your checking account to absorb normal variation. $50-100 ain’t no thing, some months are higher, some are lower. Small variation like this is normal in your spending and cash flow, so don’t sweat it. Our past few months were a bit under, actually, so that helps us naturally absorb a month that is a little over. By aiming to be below your cap more often, it gives you a bit of a pass for those months that go over.
- Tap the cashback bonus pool on your credit card accounts to pay part of that month’s spending bill instead of paying it from your bank account. At the moment, I have $200-$300 in the form of accessible cashback rewards across our cards, so could easily pull from that to help cover our overage with this approach.
- Temporary borrowing from savings. I label a transfer like this from savings as “float from savings” and transfer money into the checking account to cover the overage as needed, with a commitment written down (a line item in my spreadsheet for the following month) to transfer it back the following month. This is a nice way to use your savings without really using your savings.
- Use money from savings earmarked for “overspending.” Wait, what? This one might sound a little off. But instead of micromanaging every possible unforeseen expense, I’ve gotten in the habit of aiming for a relatively strict monthly spending cap, and just planning on $1,500 per quarter to be transferred out of savings labeled as generic “overspending.” It’s not usually the case that we’d actually use all that. But this way when we don’t overspend, I can reallocate that money elsewhere in our savings plan. It’s sort of a plan for preparing for the worst (extra spending money standing by in savings), but aiming for the best (sticking to your monthly cap without touching the backup money). In a sense, I could say our concert ticket opportunity we had this month was an unforeseen expense that was definitely worth using money from savings. So that line item specifically set aside for “overspending” is ideal for that kind of stuff. Still, I’d always rather use buffers that don’t involve permanent draws from savings, but I like to have multiple layers of backup!
Related reading: Financial cushions: 5 types of buffer money that help you rest easy
Using these different buffers, you can easily spread the pain across multiple modes of backup when your burned past your spending burn rate.
For example, here’s how I could handle my situation this month of going $340 past our target monthly spending cap. First, just let $100 chill as normal variation in the checking account (especially since we’ve been ~$50 under the last few months), use $140 of cashback rewards, and borrow $100 from savings. That would cover the full credit card bills and I’d plan to pay back the $100 temporarily borrowed from savings the following month after tightening up our spending a tad.
Or maybe I’d elect to just use $100 from savings towards covering part of those special concert tickets, without worrying about paying back savings for this “high value” spending choice (i.e. something important to us!). It’s your own judgement call how to handle those things. But with this general approach, overspending by $340 does not mean sacrificing $340 of money from savings automatically, nor does it drain 100% of your credit card rewards.
It’s more about riding the wave a bit, dipping into a few different buffers and then keep on going!
Key Takeaways
So not a month where I can check the box of sticking perfectly to the monthly spending cap. BUT a couple fun spends in there, including tickets for an outdoor Avett Brothers concert we’re looking forward to in September, celebrating our daughter’s birthday, and going out for our 10-year anniversary. So with some strategic use of buffer money, we handle the extra $340 beyond our cap and keep on going!
Like usual, I didn’t plan out and I can’t tell you what we spent on toiletries vs gas vs clothing vs entertainment vs dining out… That’s just not the point. And all those details are on my credit card statements to analyze in aggregate once or twice a year.
Bottom line is we managed our money intentionally even in a situation where we spent more than planned. And still without the stress and minutia of a categorized budget.
It’s all about customizing the system to work for you. Make your choices, watch your burn rate, stick to your limit… and manage it when things go a little over. Repeat the next month.
I hope this helps you take a fresh look at your own spending management. And especially not feel like a failure and give up when things aren’t perfect. Because spending control is almost never perfect!
Now, get yourself started with a simpler spending system with a free quick start guide to the burn rate budget (form below), check out the Perfect Budget Secrets Digital Tutorial (major bundle deal!), and read these most popular posts: