I’m starting to prep for my silly month of spending no money, and was going to ‘update my budget’.. however, full disclosure here, I don’t have one and I think they don’t work in the way most people rely on them.
I feel that budgets are analogous to a diet. In my opinion, diets don’t work (I don’t follow one of those either) as they are a veneer on bad habits. Unsurprisingly most diets seem to fail, and when they do the person tends to put on more weight in the process.
My approach to spending and saving is different. Firstly I take out as much money as I can from the inflows and assign that to deferred savings plans (401k, SEP IRAs, and a Roth if we can) stripping down our income gives us a ‘balance’. We then use that to pay our bills, and whatever is left over is left over. I have a strong debt aversion, so if we aren’t bringing in enough to cover lifestyle we will reduce outflows, unless there is a very specific reason and goal to consider debt such as a major purchase, quitting job to set up a new business, etc.
I’m not afraid to say ‘I can’t afford it’
I can’t afford a good steak dinner (you know, the ones with the Bone In ‘Cowboy’ Rib Eye, a bottle of good Napa Cab and some seafood appetizers). I’ve had many of these, but I’ve never done so on my own coin barring a one off at NYC Restaurant Week. My fix for this tends to be when a Casino comps me, or on a Cruise when it is a $20 upsell.
I can’t afford status. We travel a fair amount, but I can’t afford to pay my own money as a leisure traveler. I can’t afford to pay for hotel rooms or flights. That’s why i’m a big fan of points and miles.
More accurately, I’m pretty shameless
I do have some fancy touches in my life. I enjoy high end booze, the nicer clothes I wear tend to be decent, and I’m happy to spend when I think it is necessary. However, I don’t have an attitude where everything must be the finest. I think about 99% of my casual clothes come from a discount store like Marshalls, if its good enough I’ll use it. I’m a bit of a contradiction like that, I do splurge on things I want, but I don’t splurge all that often.
Macro vs Micro Budgeting
I guess you could say the difference between me and someone totally irresponsible with their money is that I have some ‘sort’ of budget. I do say that the first $18K of a paycheck must go to 401(k), and then I say we must pay our bills. But after than it become fuzzy. I think a great tool for making this work is to consider your saving goals as obligations. Rather than looking at what is left over each month and saving, just pull out X from the paycheck and spend what is left over.
In a ‘proper’ budget this would go on to break down for all things, bills, groceries, etc and have a bit of wiggle room at the end of it all for ‘discretionary spending’. Instead I pretty much have just three categories:
- Savings
- Bills (Tax, Insurance, Utilities)
- Discretionary
Because you can’t just say ‘ I have $100 for groceries this week’ when your heating bill doubles if you name everything. Instead, I pay my heating bill, and if I have only $30 left over I would be less inclined on some level to dine out or have other high expenses.
That’s a theory of course, because I don’t live that close to the wire in terms of spend. But that’s where the term ‘I can’t afford it’ kicks in. And if we can say that comfortably, we believe it. If we get a heating bill that is 3x what we expected this month, we are going to ‘think poor’ for a bit. We are also going to brainstorm ways to reduce the bill, exploring insulation, better heating systems, lower via ESCO and so on.
Tracking is critical
Despite not having a budget, I do recommend that people look at what they are spending and seek to optimize wherever they can. Indeed, I might recommend a budget for someone for a month to see how it makes them feel. IE we track in month 1, then we change habits in month 2. But ultimately, I wouldn’t say you live on one every month because it’s just too restrictive and miserable. The value of a budget and tracking would be to show a framework to someone, but it still requires internalizing.
Conclusion
It really comes down to being internally driven vs externally guided. Budgets are tools, but they are no replacement for learning, at a core level, your inflows and outflows. Personally, I don’t think the time it takes to set one up, or the rigor it takes to follow one, are worth the effort.
Agree. Never done a budget in my life (although have done rough back of envelope calcs to see how much we spend – it’s always more than I think). We get that rough idea of our costs and dump the rest into savings/401K. That money isn’t touched unless there’s an unusual need (like helping relatives with big budget purchases). No frivolous spend is allowed – no vacations, no boats or other stuff that is the equivalent of burning cash. About the only time I touch that savings is when I’m moving it around to get brokerage bonuses or find a better interest rate that makes it worth moving.
But if you’re younger (30s-40s), you need to be more aggressive. It’s okay to deplete your savings to build (not buy – only schmucks pay retail for real estate) your home or start a real business (and not something ridiculous like opening a restaurant or curio shop). It’s okay to take on debt, but you better have a realistic plan of paying it off – wishful thinking has been the ruination of way too many.
And finally, you need a spouse who thinks like you do – you’ll rue the day you get involved with someone who can’t control their spending.
I think we are similar here. I personally put 401k/savings above costs because that forces me to either earn more, or spend less when it comes to costs (since otherwise I might be inclined to throw in discretionary spend with the important stuff.
I’m inclined to agree with you about real estate, I’d love to build my own but found doing so from scratch a bit daunting with the mix of permits/regulations etc and how many builders will take advantage of people. I’ve found just doing renovations that there is a very wide spectrum of people out there and how much they think they can get away with charging you for the work.
My current job has me being paid a good chunk in incentive comp, which happens at predictable times (stock and bonus paid annually in different months). So I do budget those windfalls into their respective categories, even modelling out a few years. My big categories are: Mortgage pre-payments, taxes on bonuses, Roth contributions, 529 plan contributions, House projects, Car replacement and Big trips. The last one has been eclipsed by points/miles. So, some spending (house projects, cars), but mostly savings.
The rest of my pay I pretty much spend it. Max 401(k) and HSA come off the top. I’ll tinker around with category budgets but they were always hilariously wrong, even though I build them off PY actuals. I pretty much stopped doing them, though I feel I need to re-emphasize them when retirement starts to become a real consideration (early is the hope).
I do spend an obscene amount of time focused on pet peeves and finding ways to cut them (e.g. cable/telecom lately) or offset them. In truth, these are small parts of the overall budget, but I am who I am.
I also spend a lot of time on my net worth statement. Which I have actuals to 2004 and I project the future 3 years (stock vesting period). The future projections are essentially a LT savings budget. These are always wrong too, not in the amounts to be saved, but the market churns.
I’ve been working without a salary now for the past 8-9 years so I know all about windfalls 🙂
One thing I don’t understand with your plan is that you take 401(k) and HSA off the top, but 529 and ROTHs are ‘big categories’ shouldn’t they all be in the same bucket?
Personally, I don’t look at Net Worth very often, I know I am ahead of the curve but that is about it. I may revisit all that again in the future to refocus.
401(k)/HSA come out of the salary, which is paid weekly.
529 and Roth are paid from the bonus/stock money (or were, 529’s are now paid via evolve, 1 payment per account per month).
Like any attempt to bucket your sources, its all an illusion when you step back and look at the big picture. Your post has me doing just that, and instead of doing a budget I am going to produce an income (and expense) statement for 2014. Then I can annotate the outliers while I can still remember them.
Totally agree about the illusion aspect. Sometimes we need to trick ourselves in order to feel right..