A Better Way to Budget
Yes, this personal finance blogger doesn’t really care about detailed budgets – but there is a better way to budget.
Don’t get me wrong, very detailed budgets can be great:
- They can help marry all incomes against all expenses.
- They can help prevent overspending.
- They can help develop sound, if not very disciplined financial habits.
- They help put “containers” around your spending habits.
- They help you communicate with your significant other about money.
- They can help you figure out how much debt you can take on.
Full blown budgets are great, allocating and spending X money on food; spending Y money on car expenses, the list goes on. This process of only spending certain amounts of money on certain things could work for many people.
I actually don’t monitor that stuff whatsoever.
Instead, we buy the food we like when we need it.
We put gas in our car for day trips.
We go out for dinner when we want.
Instead of detailed budgeting, we make many of our expenses including saving for retirement automatic and simply enjoy what is leftover. Let me explain.
1.We know our fixed monthly expenses. Most of our income is reserved for that.
Included in our fixed expenses beyond the mortgage, insurance, heating, hydro, cable bills are saving for retirement and building our emergency fund. So, fixed expenses to us are:
- TFSA contributions (i.e., a few hundred bucks per month)
- RRSP contributions (i.e., another few hundred bucks per month)
- Extra mortgage payments (another $50 or $100 as our salaries increase at work over time)
- Money to savings accounts to pad our emergency fund or for upcoming home improvements (say $100 per month)
2. We forecast our variable expenses and essentially spend all money that is leftover.
By doing #1 above, we can enjoy some discretionary spending on things like dining out and entertainment.
Essentially, we forego detailed budgeting because we’ve purposely put as many “pay yourself first expenses” up front as possible. This way, we can easily enjoy anything leftover for fun without guilt.
At the end of the day personal finance is personal but I think the more you can make saving and investing for your financial future part of your fixed expenses the better off financially you will be.
What’s your take on budgets? Do you use one? If so, what works for you?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
We have an excel spreadsheet that is loaded on our computers so we can input our information from any device in our house. It keeps my husband and I on track as we work on getting out of debt.
Sounds like your have your act together Michelle, nicely done. Whatever tool you use that keeps you on track is the right tool.
I’m trying to get my head around this to see how it could work for us, but I’m not really feeling it. We do detailed budgeting. What do you do about haircuts, pet supplies, alcohol, clothes, insurance, property taxes, charitable donations, gifts, cell phones? Are utilities in things for the house?
We have variable income and have debt repayment. We have a minimum target for debt repayment each month, but try to pay more if income allows for it.
Cheers
Here is a list of things we budget for each month, as an example:
Mortgage (3%) + lump sum payments
RRSPs
TFSAs
Car payment
Money to savings account
Money for Travel
Money for non-registered account
Property Taxes + Home Maintenance
Home Security
Home Insurance
Auto Insurance x 2
Term Life Insurance
Cable + Internet + VOIP Home Phone + Cell Phones
Enbridge Gas
Hydro One Electricity
Those are our fixed expenses.
Variable expenses are other things.
Basically, we pay ourselves first as much as we can, then spend whatever we want from there.
Make sense?
Mark
Even unpredictable things are predictable over the long term. I don’t try to predict specific purchases (unless they are predictable like phone bills, utility bills, insurance, property taxes, etc.) If a bill is something that varies seasonally, I might calculate an estimated amount based on last 3 years for month of July (eg. Electricity or gas bill). If I’m estimating property taxes, I might just look at last year’s value and add extra 2% for increases. The point is not to get everything absolutely right, but to have an amount in there that would approximate the actual bill. When the bill arrives, the estimated value get overwritten with the actual bill.
You mentioned some items like haircuts and gifts are unpredictable, and so are my credit card purchases, but the fact that they add up to $700-$1000 (on average) per month is predictable.
I even make a game out of my CC bill. I set a budget of $1000. If I spend only $500 a month, I split the “savings” in half and give myself $250 cash (for miscellaneous purchases) and the other $250 I send to investments.
Thanks for those extra details, and we certainly agree: “The point is not to get everything absolutely right, but to have an amount in there that would approximate the actual bill.”
We also play the same game when it comes to variable expenses, some goes to investments and some fun money. The latter is always nice 🙂
I consider myself a bit of a Excel spreadsheet whiz, so over the past 15 years or so I have developed pretty sophisticated spreadsheets to help me track and integrate my account balances, my projected and actual bills and my earnings.
Every year I extend my spreadsheet for another year. This spreadsheet references other spreadsheets like my work pay (which tracks and predicts my overtime and deductions), my spreadsheet with common bills (eg. mortgage, property taxes, utilities, etc.). It keeps track of my credit card expenditures and anything else that is financial.
At a glance I can see how much money I will spend and how much money I can invest. If any unforeseen expenses pop up, it will alert me to make sure I keep sufficient cash to pay those bills. This allows me to keep minimal amount in my chequing account and keep majority of my cash in savings or transfer it to investments.
Another nice thing about this system is that I can schedule payments into the future and it is never a surprise when the time comes to pay for it. This also works with changes in income.
Sounds like impressive stuff Mark!
I try to keep things simple – basically using a forecasting spreadsheet and nothing more. We also keep a minimal amount in our chequing account and whenever possible, transfer money to investments in cash, ready for a new purchase.
We also, schedule payments into the future, this way, they are earmarked and we can forecast better.
It seems you’re doing some great things, thanks for sharing.
Mark
I have a budget that I update every few months, and it kind of just shows me what I should have left over each month after spending and saving for extra savings or investing or discretionary spending. I don’t follow a budget in a very detailed way. I agree with you. They can be helpful, but a detailed, strict budget isn’t how we work.
Yes, I ignore the details but I do forecast expenses every week. That’s very important for us.
Love this! Very timely too as the significant other and I have been recently tracking our expenses in a very detailed manner. After reviewing my expenses, what was the conclusion? I’m very frugal! Not news to me.
Think your approach will be one I should look into… personally feel there is no need to be so cheap when there’s money that can (and should) be spent. Saving for retirement is great, but one should also be given the flexibility to spend and enjoy life at the same time.
Thanks for writing this!
Prasanna
Thanks for the comment Prasanna….happy to hear from passionate readers like yourself.
Our approach wouldn’t work for everyone but so far, it’s working for us. I’m trying to evolve from my cheapness and save more money where it makes sense. My wife’s love of nice wine is helping open the wallet now and then. I’m sure she’ll read this 🙂
I have been using a weekly cash flow spreadsheet for 7 years that I set up out of fear for how I was going to pay off my OSAP when I started my first job. Once I got into the habit of it it just became part of my daily routine. I do input every dollar spent. I just quickly enter my receipts at the end of any day that I’ve spent money. At the end of each year I average out categories like groceries etc and forecast that as my weekly amount for the next year. Bills are pretty easy because they generally remain the same, or you know in advance when they are going to change, and my general expenses, again, fairly consistent across time so generally easy to forecast for a year.
Similarly, I decide what the savings goals will be for year and I have another sheet where I track those – aside from the more important ones – downpayment for a house, emergencies, and retirement – there’s one savings account for “stuff I want to do or have” so there’s always a little something for a rainy day, so to speak.
Even though I track every dollar, I don’t consider it to be a budget in particular, because as you said – I buy the food I want when I want it, I go out to eat when I want to, I put gas in the car when I need to. But it’s good to know after all the expenses are out and savings are made, what’s left over to play with or fall back on.
Mostly it’s just a habit I’ve gotten used to that is a help not a hindrance, so, why not? 🙂
I think whatever gets you in a great habit, is likely a great thing Mel and the right thing to do. That might not work for others. Sounds like your approach is really detailed.
I think savings goals are great things to track. I need to write a post to update ours for 2014. I hope you come back and comment for that.
I do budgeting for my efund and savings for retirement. I do always think of the future especially for my child. I don’t want her to be just like me that grew up poor.
Great stuff Hannah, sounds like you’re very focused.
Interesting post, as I have been thinking about this topic lately.
We have never had a budget; I am just careful about spending and we never had any debt aside from our mortgage. Waited to buy a car until we had enough money, that kind of thing.
I must admit that I cried when our washing machine broke down in early December one year, the same time as my husband got two expensive speeding tickets (it was a tricky, unfamiliar area, he is NOT a speed demon).
We have lived on one income since the birth of our second child, almost 23 years ago. Not a really high income, I received Child Benefit payments. Medical expenses can be high, even with good insurance, when you have 3 kids. The first year that we claimed medical expenses on income tax, I was shocked that they added up to almost $10,000…..braces are expensive! No wonder I felt that we were always broke.
I’ve enjoyed reading your columns/blog. It has encouraged me to get serious about financial planning. At year end, I finally sat down and did an updated net worth—I was too bummed out after the last crisis to want to calculate it. I was pleasantly surprised at the amount, but realized that retirement is not that far off.
So this year I decided to track spending. Not a budget, but to see where the money went. I have no clue what we spend on groceries for example. How I am doing it is to try and put most all spending on Visa and then when the bill comes I can categorize the expenditures. There are quite a few categories. It is a bit of a pain, but I think it will be worthwhile at the end of the year to add it all up.
Of course there is a lot of spending that is one time only, for instance we will need a new roof on our house in a couple of years and I want a tile roof. No idea what that will cost. And clothing. I haven’t bought anything this year, I don’t need or want any new clothes. So this year’s spending on that will be low. But we did have to do an emergency water heater replacement–much easier than I expected.
Ongoing medical expenses cut into our savings. I have committed to paying for necessary medications and supplies for our youngest child (who is now 20) for as long as she needs them (ie. until she has a job with good medical benefits but could be forever). Cost is at least $500 per month. It seems a lot, but then some people spend that much going out for dinner a couple of times.
We tried to do it the way you do it and we did save and invest but it wasn’t until we used the detailed budget that we realized how much better we could do. I think budgets are one of those things that either work for someone or they don’t.
Not many people care to track every dollar they spend rather they have different methods like yourselves which is great if you feel that’s what works for you.
All I know is we are debt free and whether it was the budget, our persistence or both that got us there, we’re happy. Now the hard part is figuring out what to do moving forward.
Thanks for the detailed comment Mr. CBB. In the end that’s the thing I think, whatever you’re doing to make progress is a good thing. You’re debt free and that’s VERY good. Moving forward being debt free is much easier than having lots of debt 😉
I’m glad to know that I’m not the only one not to do detailed budgeting. That article was written for me by one of my writers, Christopher Warner. However, I think I’m even less strict than you or him. I simply focus on saving as much money as I can on everyday expenses, make a small effort not to overspend while enjoying my life, and put a focus towards paying down debt. Then, I just let the rest take care of itself.
If I see my account balances shrinking too fast, then I attempt to put on the brakes a bit more to help. I used to do a detailed budget and it was kind of fun at first but it quickly became a chore and ate up a lot of time with questionable benefit. I much prefer to a quick net worth snapshot every so often to make sure things are headed in the right direction. Calculating net worth is much easier than budgeting I find!
Yes, I noticed it was Chris’ article. I also make an effort not to overspend on everyday expenses but some expenses in life are worth it. I like buying nice wine now and then. Same goes with beer. I can’t imagine buying the budget stuff all the time to save money. Kinda defeats the purpose of paying for something you can’t enjoy.
The detailed budgets are great if you can follow them but suspect most cannot.
I think a lot of people confuse keeping a list of expenses and knowing
Your cash flow with “budgeting” . To me budgeting is when you have
A very strict $ amount, say for food, you have to stick to it or debt goes
Up. Many people have enough wiggle room they don’t have budget to the
Penny. Feel busy . Then do not watch cash flow at all.
I agree have fixed and variable and pay yourself first.
Kathy @ http://www.eurekainvestorguidance.ca
Same Kathy, a budget is having set quantities to spend. When the money runs out, the money runs out. I prefer not to live that way but I realize this is not for everyone.
Budgets are for when you don’t have good or habitual habits ingrained yet… So since we have those habits to spend less and save more already all I do is track our spending. We forecast larger spending’s to time when they should occur. If I know we have a major expense forth coming like a trip or major house repair, we make mental note that we might want to pay forward things a little now (maybe purchase extra food this month so there is flex in our income to cover these known future expenses, or hold back on other discretionary spends like, dining out or entertainment, as we know we have a spike expense to flex the income for. Currently I know I have a re-shingle job this summer, so we have been staying closer to home and entertaining in these past few months knowing a spike in spending is coming. all that said when we were first starting out, with a new house and life, we did use a budget to allocate our life’s direction. There are definitely phases in our lives that they can support us to keep us on track. – Cheers, nice post.
Always appreciate your comment Phil…
We do the same, “a major expense forthcoming like a trip or major house repair, we make mental note that we might want to pay forward things a little now” and dial back the spending accordingly.
I just hope we can increase the fixed expenses over time, re: RRSP, TFSA, non-registered savings. This is where financial freedom will really become possible.
I use a detailed budget because our expenses and income have varied so much over the last five years that I found it was impossible to come up with an accurate spending and savings plan going forward. A career change, my wife’s maternity leave (followed by the decision to stay at home), plus two kids added to the mix and our budget was anything but predictable.
I suppose I could cut down the 63 spending categories into 5 or 6 super categories to make it less time consuming to track it all 🙂
63 categories… nice 🙂
I don’t blame you Robb for having a detailed budget, you gotta do what you gotta do. I know for our situation, no kids, it’s much easier to have a handful of categories after the “pay yourself first bucket” and just spend within reason from there.
Good to hear from you.
Mark