Don't budget; microbudget
By Matt Alderton
March 17, 2015
Lark Ismail and her fiancé, Matthew Broderick, are juggling a lot of financial goals: college debt, a growing business and a wedding in Matthew's native England.
“Because we have so many of them, to reach our goals we need a very specific and clear budget that makes it easy to avoid mistakes,” says Ismail, who is based in Los Angeles.
Enter a form of extreme budgeting called “microbudgeting,” which the couple started using after traditional monthly budgeting didn't work.
“Microbudgeting is breaking down your budget into smaller categories,” explains Kelly Whalen, a Philadelphia-based mother of four and founder of The Centsible Life, a website dedicated to family budgeting. “While many experts recommend using broad categories, microbudgeting is a useful tool if you're trying to assess the weak spots in your budget or if you are struggling with debt or making ends meet. In those cases, every dollar can make a difference, so microbudgeting can help you find money where you thought there was none.”
Like Ismail and her fiancé, Whalen and her husband use microbudgeting to help them achieve both near- and long-term financial goals.
“Microbudgeting allows us to make small wins that add up to reaching those goals sooner,” continues Whalen, who began using microbudgeting in 2008 to eliminate debt. “When I woke up to the fact that we were deep in debt and spending more than we earned — a slippery and endless slope — I started with microbudgeting. I had always budgeted in earnest, but the fact of the matter is my husband and I are both spenders. Budgeting with broad categories had never worked for us, so we started with the small stuff. Anytime I slip into the traditional budget pattern I find our spending goes up. Microbudgeting helps me focus on the details — and that's where the money is.”
How it works
Most budgets begin and end with a few broad “buckets,” such as housing, food and entertainment, each of which is filled with a monthly allocation. With microbudgets, those broad categories are just the starting point. From there, the destination is any number of smaller, more narrow categories allocated over a shorter period, usually a week instead of a month.
“Microbudgeting gets past broad categories like groceries, utilities, rent/mortgage, auto, insurance, taxes, etc., as well as broad time periods like a year, a quarter or a month,” says microbudgeter Jack Beacham, owner of IT and management consultancy Aventure Works Inc. “The immediate drawback is that it does take time and trouble. However, if you want to get out of cash flow trouble or avoid it in the first place, it's well worth the effort.”
“Just by going through this exercise of breaking your spending down to the — yes, ridiculous — you start to see where at least some of your spending is … well, ridiculous.”
–Jack Beacham, Aventure Works
To get a feel for how microbudgeting works, Beacham recommends an exercise his family performed, based on the “5 Whys” approach to driving quality improvements in a business.
“You might call this the '5 Whats,'” he says. “We took a look at each category [in our budget] and asked: 'What's that?' First: What, for example, are groceries? Food and non-food expenses. Second: What is food? Fresh, canned, frozen, boxed, etc. Third: What is fresh food? Meat, vegetables, fruits, dairy, etc. Fourth: What is meat? Beef, pork loins, chicken, fish, etc. Fifth: What is beef? Pot roast, ground beef, steaks, etc.
“Just by going through this exercise of breaking your spending down to the — yes, ridiculous — you start to see where at least some of your spending is … well, ridiculous,” says Beacham, who recommends using software like Quicken to create and track categories and microcategories. “You start to notice that some spending is (a) expensive, and (b) unhealthy. In our case, we realized that not only do we enjoy cooking together, but buying fresh food saves money.”
Similar exercises can be performed for categories such as clothing, transportation, entertainment, travel and even utilities.
“If 40 percent of your monthly budget is for utilities, break that down into each utility bill and figure out what the pro-rated daily spend on each utility is,” Beacham says. “Tear apart your gas bill and figure out what you use gas for. A few reality checks will tell you whether you're washing too many loads on 'Super Hot' and taking 40-minute hot showers. It may be cold outside, but do you need the thermostat on 75? Do you own socks? A sweatshirt?”
Less confusion, more cash
At the end of the day, microbudgeting is like saving a sinking ship: Only by looking for leaks can you find the holes and plug them.
“We were really struggling at first with budgeting, but [microbudgeting] has made it so much easier for us,” Ismail says. “Once we have the specifics and rules — how much we spend on vegetables a week, how much we spend on meat each week, how many times we can eat out per week, etc. — we know right away if we've broken the budget. There isn't any confusion.”
For Ismail, Beacham and Whalen, less confusion in their budget has netted more cash to put toward their goals.
“Microbudgeting has helped us pay off over $100,000 in debt, spend thousands on home improvements, invest more, save more and spend on things that are important to us, like family vacations,” Whalen concludes. “It has definitely helped us achieve our goals.”