September 2020

I once read that linking to a bunch of different articles in a post was the cardinal sin of online media, so I apologize for what I’m about to do – but if you haven’t yet, read How to Start Building Your Emergency Fund in 2020 as a baseline for this post.

This post isn’t intended to be the end-all, be-all guide to proper budgeting (How Much Does Your Life Cost? can probably help more with that). Instead, it’ll cover how you budget for the stuff that is infuriatingly hard to budget for.

You know what I’m talking about: Everyone’s fun stuff usually falls into the same few categories. Travel, dining out, shopping, expensive boutique exercise classes that require flying to other cities to attend (just me?), shows, and otherwise non-essential-for-life-but-essential-for-sanity expenditures that can leave you cringing as you try to reconcile the budget you set with the best of intentions on the first of the month with the credit card bill that comes at the end of the month.

First things first

If you skip this step, everything that comes after it will be useless to you. Seriously: Do this first.

We need to get clear on what your Big Four are going to be. The Big Four are the broad discretionary categories you’re going to commit to, and I’ve chosen four for a few reasons:

1. Big Four just sounded cool.

2. Isolating four things that give you joy when you spend money on them allows you enough freedom to explore new things without devolving into a spend-happy free-for-all.

If I told you to just make a list of every single thing you could possibly buy for fun, your budget would turn into a run-on expensive sentence. We don’t want that.

My big four

My big four are (can you guess based on the examples given above?) travel, dining out, entertainment, and (you ready for this one?) miscellaneous.

“Miscellaneous” was an addition to a more evolved version of my budget – the result of several months in a row where I found myself saying the same thing. “Yeah, I had to pay $200 this month for [insert surprisingly common yet still unexpected expense here], but that’s normal. I’ll just… write it off.” And I’d attempt to play fiscal Jenga with the charge.

Finally, I accepted that life has a funny way of almost-always introducing unexpected line items to your Mint transactions list every month.

One of the most fun and alluring leisures I could think to provide myself was the leeway to have a place to store my junk drawer expenses that were unavoidable and otherwise un-categorizable. Last month it was a new tire (thank you, Dallas potholes). This month it was a slew of apartment expenses to further cat-proof the place. Who knows what next month will bring?

How much should you be shuffling to discretionary stuff every month?

The short answer is, it depends. (Ugh, so annoying – I know.)

Here’s why it depends: the immediacy and urgency of your present financial situation will almost certainly determine how much you can comfortably piss away on trips to Mexico and DoorDash Waffle House. Let’s generalize a few scenarios so you can get a sense for what I mean:

The financial all-star: 25%

This person has no credit card debt, a fully funded emergency fund ($12,000 - $18,000 in savings, or more), is contributing at least 10% to their 401(k), and investing in their IRAs and general investing accounts at a moderate pace. This person can probably get away with 25% of their income going toward bullshit.

There is no hard and fast rule here. I’m probably on the slightly more conservative side of the spectrum, financially, but I’m definitely not as frugal as those in pursuit of true financial independence who save 80% of their take-home pay.

I’m all about guilt-free spending money, and to me, I’d (ideally) like to be saving and investing more than I’m spending on $65 virtual wellness seminars and $7 coffee with names like “Jet Fuel.”

The “well-on-my-way” saver: 20%

This person is actively contributing to a growing emergency fund, has little to no debt, and has begun contributing to their 401(k) up to the company match. For someone like this, I’d say you have to reign in the discretionary horses a little and keep prioritizing the behavior that’s going to skyrocket you to all-star status. You probably don’t want to exceed 20% of your take-home pay going toward fun stuff. Let’s look at a fake breakdown:

Monthly take-home pay: $3,500

Emergency fund contribution: 15%, or $525

401(k) contribution: 8%, or $280

Fun stuff allotment: 20%, or $700

Notice how the combination of your savings and 401(k) contributions still outpaces your fun money?

This leaves $1,995 every month for living expenses and – dare I suggest it – increasing the responsible contributions above, where possible. But hey: The primary attribute of a good budget is “realistic,” so we’ll start reasonably.

The catcher-upper: 10%

Decisions in your past may have put you in a position to be digging yourself out of a bit of a hole, Stanley Yelnats-style. This means it’s just going to take a little bit of discipline and sacrifice to get you back to baseline. “Well, well, well – if it isn’t the consequences of my own actions.” This person may have little to no savings, some (or a lot of) high-interest debt, and isn’t contributing to a 401(k).

We’ll reverse-engineer your budget because the bottom line is this: The needs of Future You are far more dire than your need for another to-go order from Sweetgreen.

This is what we call living “close to the edge,” because one big, unexpected expense could be the difference between getting by and falling off the fiscal cliff.

Here’s the good news: I promise the assurance and security of putting in the work to set up base camp several hundred yards away from the edge will feel infinitely better than a lifetime supply of whatever got you into credit card debt in the first place.

The How Much Does Your Life Cost? article addresses how to start paying off debt, but I’m beginning to think that topic probably warrants its own piece – stay tuned. Other than that, your order of priorities are:

1. Emergency Fund in tandem with credit card debt

2. 401(k)

3. Other investing

This means I’d be shoveling as much as humanly possible every month toward priority #1 until you take a few steps back from the cliff. I wouldn’t suggest spending any more than 10% of your income every month on fun stuff.

If you make $3,500 per month, that means $350 is your budget for whatever you want and the rest of your dollars need a more noble job.

It’s temporary, I promise – but we need to get you out of the hole first.

Now that you know how much you can set aside, how do you plan for “wants”?

In one word: Annualization.

Not every discretionary budget needs to be viewed on an annual basis, but for the inconsistent ones, this can be a handy trick.

Your “Dining Out” budget can probably be considered on a monthly cadence: Let’s say you’ve decided $250 of your hard-earned monthly income is earmarked for $8 vodka sodas and $12 party platters of things like fried jalapeños and otherwise batter- and cheese-covered kitchen oddities.

$250/mo. breaks down to approximately $62 per week, and if you mostly eat out on the weekends, you can consider it $31 for Friday and $31 for Saturday. That’s a pretty slick transition from an amorphous monthly amount to a more tangible idea: You probably know what $31 at a restaurant or bar will get you.

(This is the part where people are either like, “Oh yeah, easy!” or, “Oh shit, I spend $100 at dinner and drinks every single time I go out.” Now’s the time to ask yourself which category, the former or the latter, your income directs you toward.)

But what about categories like Travel and Home Improvement?

A $300 monthly travel budget or a $200 monthly home improvement allotment might be harder to conceptualize. After all, if you’re not entrenched in the travel rewards world, you can easily spend $300 on a single round-trip ticket (if you’d like to become entrenched in travel rewards and sit proudly atop a mountain of points, I direct you here).

And what happens when you don’t travel for 4 months then decide to throw COVID caution to the wind and fly to Europe on a whim?

You can think of your more inconsistent discretionary budgets on an annual basis. This way, the $300/mo. travel budget becomes $3,600 per year. If you want to take two major trips, you can think of it like $1,800 per trip. Or if you’re on a quarterly travel cadence, $900 for each of four trips. These numbers feel a little more aligned with travel expenses, but the “$300/mo.” framework still allows you to conceptualize what percentage of your take-home pay every month you’re setting aside for globetrotting.

Scaling up or scaling down

The TL;DR explanation for this is simply scale. It’s easier for us to wrap our heads around the idea of spending $300 per month on travel than it is to accept dropping $1,800 on two different trips, but if you’re setting aside that $300 every month, the money will be there for you when it’s time to use it.

I like to use something called “rollover budgets” to make that possible – every month, the unused money in any given discretionary category rolls forward to the next month. After a few months of low to no spending, you’re sitting on $1,200 in an unused travel budget, just begging to be guiltlessly squandered on a Main Cabin seat to Amsterdam (yes, Main Cabin, not Economy, because you’re a rich bitch now who benefits from money management and accrual of unspent funds).

In our dining example, we scaled down: We took a big number in the context of dining out ($250/mo.) and broke it down into a per-Friday or per-Saturday amount to guide us a little more clearly.

Of course, the fine print of these suggestions is that you’re more than welcome to go on one trip per month, spending $300 every time, or to go to two fabulous meals per month and drop $125 each – you don’t have to alternately let all your monthly budgets accumulate or disperse them evenly throughout the month. It’s up to you, and your behavior will probably change month-to-month, too.

But this scalability is (usually) the reason fun-budgeting is so difficult for most of us with human brains – it’s difficult to be told your limit is $250 then naturally spend it at a moderately paced clip throughout the month without some sort of scaled-down representation of what that looks like in practice (e.g., $60ish per weekend).

In summary

1. Decide on your Big Four.

2. Look at your take-home pay and assign yourself into one of the three categories above, then multiply by 25%, 20%, or 10% accordingly. Wiggle room is welcome – but use your best judgment.

3. That figure (25%, 20% or 10% of your take-home pay) is your fun money budget to be dispersed as you see fit across your Big Four. Nothing is set in stone, so if you aggressively overshoot or undershoot a particular category, you can always adjust later.

4. Decide which budgets need to be scaled down and which need to be scaled up. Here’s a rough guide:

Scaled-down budgets (e.g., break down monthly into weekly or daily, depending on how often you purchase)

• Dining out

• Entertainment

• Miscellaneous

• Gym/exercise/wellness

Scaled-up budgets (e.g., you may want to combine several months of budget together to more accurately reflect how you spend in these categories)

• Travel

• Home improvement

• Shopping

I wish you sincerely joyful spending.