As I have confessed recently, I am not a big fan of budgets. They don’t work for me. I lack discipline, consistence, and get overwhelmed by so many categories and numbers. Nonetheless, I need to keep my finances on track, maintain a healthy level of savings and make sure all bills are covered. So here is a solution for the budget averse.
Make a reverse budget.
A traditional budget considers your income and your expenses. You set aside $200 for food, $1,000 for your mortgage, $50 for your mobile phone, etc… Generally, you also budget for savings, in different categories, like a college fund, retirement account, or holiday budget.
And then you blame yourself or get yelled at by your spouse because the razor blade category is over budget by $0.30, re adjust the budget to buy more blades, then go through the stockpile of blades and leave that line at $0 for the next 6 months.
I go the other way around, it doesn’t have to be so complicated. Money comes in, in general at the beginning of the month. This is the regular part of my income, the rent money from my tenants, etc. I know roughly how much will come in, and have several automated payments to make most of that money disappear from my current account.
I pay bills first, then according to my financial goals channel the money into several investments. All the money that is left on the account is what I have to finish the month. How do I know it will be enough? Practice. At the moment, my budget is around $1,000 per month. So any balance on top of $1,000 will be invested in something. Currently house improvements. What if life happens? Well, you never know when you are in for a surprise. You can get an unexpected house or car repair, an emergency trip back home for a funeral, a medical bill… Those I would charge on my credit card and adjust the spending for next month in order to pay the balance in full. What if it is still not enough?
For that I have a quite liquid savings account, or if I consider investing in riskier/more rewarding projects, like my cattle investment, I may consider paying the interest on the card, since the investment brings more money.The interest rate on the card is certainly high, but it may cost more to take money out of an investment and put it back later at a higher price.
Make a plan for the extra money.
Every now and then, I receive extra money. This year, with the sale of my Paris flat, and another investment coming to an end plus the extra income from my online works, it has been quite a lot.
My plan for extra money is as follow: Anything under a certain amount, generally about $300 to $500, goes back to my main account and is extra discretionary income for the months to come. I splurge on something I have been wanting for some time, buy a plane ticket to visit family, upgrade my computer…
If the amount is superior, I try to make the money disappear as fast as possible. It is so easy to spend money if it is just sitting there. When I saw the $60K from the flat sale on my online statement, I immediately gave my mum the money back she lent me in between sales, wired the rest of my share of the house to BF and paid off a 7% loan.That was it, three operations later, the money was gone!
Anything on top of that $500 amount goes into investing. I review my financial goals once every quarter to decide where to put my investing efforts. Having a global amount for my monthly expenses allows me not to sweat the small extras here and there, and consider money as a whole. I am unable to have 25 sub accounts called the car repair fund or the toothpaste replacement fund. My money is one and it is all part of my net worth. As long as the net worth figure improves, I will keep budgeting with no budget.
How about you? Do you need a strict budget to keep your finances on track?