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?
Our finances are pretty regular for the most part – rent, groceries, transport etc. We don’t have a lot of discretionary spending, so no, we don’t budget anymore in the strictest sense. Here’s how it looks: rent goes out, I put money into our bills account for utilities and other less regular expenses, we buy groceries, we spend a bit on fun (mainly eating out) and so ends a typical week. I’ve always been quite relaxed about this stuff as long as we are coming out ahead and progressing in the right direction. I definitely don’t have strict or particularly specific budget categories.
if it is a well oiled machine, you would notice the extra spending anyway, anything out of the usual stands out. You can decide to go for it or make a plan if it is a big expense.
I’ve never bothered with all that budgeting malarkey either. Ever.
However, for the last 20 years or so I always tracked my spending and the rough categories using Quicken, and then simply look in the rear-view mirror at what’s been going out over the last three months and the last year. It’s the changes in any category I look out for, and ask myself if I am getting value for any that increase, or if I need to pull them back.
Particularly once you reach F.I. that’s the only way IMO because unlike employment income your income doesn’t show up regularly every month, so you have to integrate it over a year, and some outgoings happen once a year.
Net worth is a difficult metric when you have a lot of it in investments, because the amount is so variable when represented as the mark to market value.
You make a good point about net worth, I don’t have much in the stock market and my other assets either stay the same, like real estate that I update only with the mortgage decrease or appreciate like cattle, unless an animal dies, they keep eating and weighting more. It doesn’t work for everybody.
Budget is necessary to control and monitor your expenses. What I observed is if you have a budget plan, there is a big tendency to have more money savings and extra money.
A budget helps you determine where you can cut some fat, that is for sure. But if you have a life plan, or a net worth goal, you could also thrive to achieve that instead of agonizing over small purchases.
Your are correct, we can look a better solution rather than agonizing everyday. We can increase our earning or passive income to cope up our cost of living or lifestyle.
Nice post. I don’t religiously budget either – I know what my standard flat-rate costs are and try to keep them down. Similar to you, if I receive extra money (or Mrs Scot received quarterly bonuses) we use it towards a fund (holiday / car repair etc.) and paying off our credit card.
All the income from SavvyScot is going into the stock market in an ISA wrapper… I guess I try to ensure that there is a plan for all money that comes in… that way there is not a temptation to splash on unnecessary things!
make it all disappear! how about a SIPP instead of ISA?
I make a budget as a general guide, then track all of my spending. I compare the two to see how I am doing. I may have to either adjust the budget or bring down the spending. After a year or two of living some place, my budget becomes a pretty accurate estimate of what I can expect to spend each month.
I think having a budget helps, because as I try to increase my savings rate it forces me to think about what areas should get cut in order to accomplish my goal.
I know it helps, it is just the whole tracking everything that goes against my nature. Although now that I share some expenses with the BF I have to track those and report to him, so the job is partly done.
We have budget items, but there’s no self flagellation if we’re over budget in one category or another. It’s mostly a check-in to see why we’re spending more. Is this an ongoing increase or one-time? Stuff like that. I think there’s a balance to it that sometimes gets lost in writing about budgets.
yes, it is about balance and making your own rules.
Good post Pauline! We love to budget, but you just have to be realistic. Things ebb and flow and whatever type of plan you have you need to be able to be fine with that. We’ve been budgeting long enough that we can pretty well know what we’ll be spending, making, etc. If we go over, we go over, but that generally is not happening.
this is when I don’t really get the point. If you are fit, why count the calories? I get that budgets can help spot and avoid bad behavior but once you are well trained you should be able to fly solo.
I can understand that Pauline, and I think it’s true to a point. Why we do it is because we have so many moving parts in our budget in terms of different things that our money goes to that we use it in order to keep track of everything. I view it as a way of having a well balanced plan and it actually makes it much easier for us as I am such a visual person. With running our own business and all the things our kids are involved with it helps us keep track of everything.
We also always pay our bills first. I think it is a good habit to get into.
you don’t miss the money, especially if they are automated and you don’t even see them other than a line on a statement
We don’t really have a strict budget. I don’t track it at all. As long as we are spending less than what we want to, I am happy!
sounds like a good plan!
Yes, for me I have to. I just haven’t found any other way to work. I will say I started and stopped millions of times, but I’ve stuck to it for almost a year now. I also don’t get fancy and use websites like Mint, or anything other kind of app. Just a simple excel spreadsheet.
Actually I quite like Mint because it does so much for you. Getting your statements automatically and putting it into ”groceries” when it sees a supermarket bill saves a lot of time if you want to budget. I used something similar in the UK and it was cool to see the graphs and pies just by importing data.
The closest extent we come to budgeting is a list of our household expenses and when they are due, most of the rest of our expenses are too variable to properly budget. I few days ago, I realized that I bought gas 6 times in January! I’m anticipating twice this month.
with seasonal employment and a move, budgeting your life would be a nightmare!
My finance approach is simple and straightforward: a certain percentage into savings, then all bills must get paid, and the rest is discretionary spending. Go all willy-nilly, who cares at that point.
it is much easier this way. what about the fancy peanuts?
We have a loose budget for right now, but I hope to reign it in a little bit. We are paying off some bills this month, and it’s been a bit crazy. Also, I use just regular pen and paper to track it.
I can’t even be trusted to update a spreadsheet let alone keep a pen and paper without losing them!
I only kept up with my budget when I was dealing with my credit card payments. I use something very similar to you. I know how much is coming in and my bills are very consistent. I treat my savings and investments like bills, so those get paid into each and every month. Anything left over is mine!
I like how you consider savings as bills, they should be, payments to be missed only when you have no other option.
You may not have a strict penny by penny budget, but you still have a financial plan, and that is the important thing.
Our budget isn’t setup penny by penny either. There are the typical monthly expenses, and then broad categories for entertainment, groceries, pet food, etc. Sometimes the groceries cost more sometimes less. Sometimes we go a month without spending the entertainment portion and put that towards any excess spent elsewhere. At least now we have something to follow, versus the way we use to do things. And yes it is an Excel spreadsheet 🙂
Yes, at least I know roughly where I am going. Budgeting is vital if you don’t. What my brain has a hard time getting is that reallocation of money from one virtual category to the other. I get that if I have $100 left and spend it on grocery I can’t go out but for me it is not dipping in the fun fund to allocate to the grocery, it is just overall spending.
I do not use a budget in a traditional way. I normally set my savings through a payroll deduction and live on what is left. I watch my expenses for trends and constantly look for ways to reduce them. I keep our spending within certain parameters and this woks for us. It helps that I am a former CFO and business owner to maintain control.
I am sure it does!
Having a budget never worked for me either. I did develop for us a budgetting tool though – it track expenses at the level you think you need to do it so is not very time consuming to do. For sometime, we also used to take out cash at the begining of the month for our ‘pocket money’ (yep, I seem to be stuck in this developmental stage), food and other small expenses. We will go back to this probably from March on again – at the moment it is all in a bit of a flux (the trauma of adjustment).
Adjustment for the good at least! I like cash, to control where it goes, but here it is a safety concern and I occasionally lose some, then get paranoid someone stole it, so I try to pay by card whenever possible.
We have a mostly automated system. Most of the money goes to our targeted savings account via direct deposit. We only get what we need in the checking account. We do have a spending plan (not a very strict budget, but a general idea on when to stop spending to avoid transferring money from our savings to pay the bill). Right now, we are concentrating on only in the area of food. The rest of the categories we are quite happy with our spending, paying attention to multiple categories never worked for us anyway. The main motivating factor is as we only have enough in the checking, if we over spend I have to choose which goal we are stealing the money from and it hurts. So we are extra careful not to go over what we have in our checking.
you learn to live with what you see on checking. This is a great option, because you never see the rest of the money to tempt you.
I have finally learned how to stay in budget. Since last May. I have had to because of the Chapter 13. You have to be very careful. I am afraid that I still have some bad habits, like unwarranted trips to Costco, etc. that will kill me, but I am slowly learning that these are the things that got me in the mess I am digging myself out of.
Its funny though. Now that I have to pay cash, I am sure stingy with it! Its easier to hang onto it!
cash hurts more, that’s for sure!
Pauline, My hats off and a deep bow to you. I think I would be absolutely lost without a budget to at least give me a guideline. I do like the reverse budget approach though. It’s intriguing and I have to give that one some thought.
I like the freedom it offers. If you take an average of your last 12 months’ spending, and arrange to have only that in checking, you should be fine living on that without worrying about where the money goes. Of all the bills and savings you make ”disappear” before that, you can keep some in an easy access savings account in case you need to rectify for the first months.
I have a very similar program Pauline. What I do is pay myself first, typically anything over a certain dollar amount out of my weekly paycheck will be put back for emergency fund and my business fund.
I also allowance myself $50 in cash for frivolous spending and that’s it. Everything left over goes towards the bills, and the best way to check myself to see if I’m staying on track is if I run short.
For example, if I realize I couldn’t get my entire credit card payment paid off I dig into the reason why and adjust accordingly just like you do. Personally I don’t need to see all sorts of fancy graphs to know that’s I’m on budget or track every single penny I earn and how I spend it. I find keeping a simple system in place has the best chance of keeping me on track with my finances.
I find graphs fun! I am just waaay to lazy to enter all the data myself!
This is similar to how I budgeted my money when I was a server. I paid bills and at the end of the month I put the money into various savings, investments ect… We don’t really splurge on ourselves, so self control wasn’t an issue. Plus I always made sure there was at least $500 in the checkbook for the bills that came due before my wife’s first paycheck of the month.
hehe that’s one of my money mistakes, not leaving enough in checkings when bills are due.
I don’t keep a strict budget. I make sure I hit my savings & investing goals and then anything that’s left over gets spent wherever I feel like spending it. I do track my spending with mint.com just to keep tabs on where its all going and to see what the areas I could cut back in are. But I don’t have a strict budgets for different spending categories.
I wish I had access to Mint, it would be so nice to have something download all transactions and order them for me!
Pauline, I totally need a strict budget at this time in my life (debt payoff, etc.). I never had a budget of any kid EVER before this, so that doesn’t even count. I think when I am totally debt free and making good money I can go without it. Can’t wait to see! Thanks for the post!
Yes, a budget is needed to get back on track, like a diet is to get fit. I hope you get there soon!
We’ve only had a budget for a few months and it seem to be working great. We are not super rigid, but it is in place. We did horrible without one, so it only makes sense to go down a different route now that we are more responsible with money. You have made such smart decisions with your money that I would continue to do what works for you.
thanks Kim. Like anything it is not a one size fits all but it works for me.
We love to budget and know where our money goes and we do have a plan and we do know where we are heading with our money. I’m not one to care much what others choose to do, all I care about is what’s happening in our bank account. If someone wants to choose another way to track their expenses whether it be your way, in their head or another way that’s great, doesn’t mean it’s right or wrong it’s just works for them. If your way is what works best, then don’t stop, right! What’s that saying, “whatever helps make you sleep better at night”. Cheers!
well said mr CBB! whatever works for each individual.
I am also not a big fan of strict line item budgets. I have taken the approach of paying into retirement funds, paying bills, and then figuring out the rest. I need to be a little more deliberate and am planning to track progress on debt a little more closely to see how aggressively I need to budget.
I am not truly in favor of budgeting my money and the reason is I ain’t got much.
I readily admit I’m a budgeter (is that even a word?) but in my defense, I’m financial advisor. We have to drink the budget kool aid before they let us start helping people. 🙂 While I probably follow the more standard budget that you dislike, I think what’s most important is that you have a plan in place that works for you. It sounds like you stay on top of your finances and know where your money is going – and that’s what really matters.
Interestingly, I don’t really budget either, in the traditional sense. Every pay (weekly), I pay my mortgage, sock away some for bills (and pay off anything on the credit card, yes weekly), and save. Then I have what’s left. Right before the next pay day, I put anything leftover into either the mortgage or savings (whichever I deem more important – imminent holiday savings sometimes win!).
This week, this went a little awry, as there was less for the second savings pass. This worried me. Even though I’d still come out without a debt at the end of the week (so no credit card to pay with next pay), I didn’t like the feeling, so did a quick mental review on ‘why’. Helped me realise I had a medical claim to arrange!
You seem to be on top of things which is a must. The weekly mortgage payment must save you tons on interest, although it seems like a lot of money movements, I hope some are automated!
I’m crazy, I do the mortgage ones manually – cause sometimes when I’m overseas it’s better than being overdrawn etc. The bills etc are all automated. As to the interest savings, I have no idea, cause I’ve never done anything different to this (and never taken the time to look at what I’d save, I should do that!)
I have tried to keep it simple, always save 20% of my earning for savings and investments, then give priority to the utility and other important bills and regular expenditure and whatever is left, goes on entertainment.