The Baglady Budget

The motto of the Baglady Budget is: Eliminate your past and maximize your future. I consider the past to be the total debt you have accrued. Since you already spent money you did not have in the past, you need to pay it off in the present. The future is long term savings, a retirement fund for yourself or a college fund for a child all qualify as the future. The goal is basically to live every month with less debt and more savings.

So it actually works more like a savings plan or debt elimination system than a budget. First, you write down your total savings under “future” as a positive number, and then write down your total debt under “past” as a negative number or 0. Then, you can categorize your spending into three basic categories: needs, wants, and gifts. Needs include things like housing, food, automobile expenses, and healthcare. These are things you absolutely need to spend money on. Wants include all types of entertainment, including games, new clothes when your old clothes are fine, or a new car. These are things you don’t need to survive, but would like to have. Gifts include donations to charity, or gifts for special events such as birthdays and Christmas. The total of the needs, wants, and gifts categories should hopefully be less than your monthly income. If you spend more than you make, it is still helpful to see how much you are spending in each category, and you might change your lifestyle to accomodate your income.

Next, record your actual spending and saving at the end of the month. If you are under budget in the wants,needs, and gifts categories, the money saved can be rolled over to the next month in the same category, applied towards your future, or used to eliminate the debt of the past. If your debt has a higher interest rate than your investment accounts for your savings, generally you would want to pay the debt first. So eventually the absolute value of your past should get smaller and the absolutely value of your future will grow. Sometimes you do want to keep the categorical budget rolled over to the next month so you have a mini savings account for that category of expenses. For example, if you don’t give gifts every month, you can still budget 50 dollars for it every month, and at the end of the year you will have a nice Christmas fund.

So what happens if you overspend in any category? Your savings would be smaller or your debt grows, which may not hurt you at all in the short term, but in the long term, too much debt and too little savings could definitely kill you when you no longer have enough to satisfy your basic needs. I think of the Baglady Budget as a financial weight loss plan. Too much debt, just like too much weight, can crush you. Just like any diet, you need some personal discipline to stick to the system.

The Baglady Budget in Action!!

This is our current budget breakdown without revealing our actual incomes. The percentages are in terms of gross income:

Needs: 28% including housing, food, automobiles, insurance, utilities
Wants: 2% includes entertainment, games, movies, gaming peripherals
Gifts: 10% donations & other gifts

Past: 0 We are currently debt free
Future: about the same as 1 year gross income so far, and contributing around 30 to 40% of gross income to it per month in various accounts like 401ks, 529s, bonds, money market, and individual investment accounts. The rest of the money goes to taxes.

My fiance is always responsible about his money and balances his accounts regularly and managed to pay off his car and school loan completely and buy an engagement ring. So I am very proud of him. Yet, he hates my budget because he feels it’s restrictive to his spending on games and other entertainment. In actuality, I think it gives him more purchasing freedom in the long run. So far we have recorded our combined entertainment spending for 5 months now, and we didn’t go over the budget once. The Baglady Budget allows roll over of unused funds in a liquid fund, so now we have enough in our “entertainment fund” for something bigger than just a single game or movie.The Baglady Budget basically creates guiltless spending because the money is already earmarked for entertainment. The Budget definitely changed my fiance’s purchasing decisions. He looks for things on sale instead of buying it at full price, and is more patient in his wants, though he still complains that I dampen the shopping experience for him.

For us, life events such as having a child or purchasing a home could change the budget dramatically, but at least we are saving as much as we can right now. I think people of any income can adapt this system to their situation.

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