Weekend Reading – The Better Way to Budget Edition
Hey Everyone!
Welcome to a new Weekend Reading edition: the better way to budget edition.
First up, a few recent articles in case you missed them!
Sadly, our healthcare system is on life support in Canada. It is my hope things will improve but I would encourage you to fund as much as you can to help you age in place – on your own.
All signs are pointing to a recession. So, how are you going to navigate that?
I recently announced at least four (4) dividend increases in my portfolio over the last few weeks – raising some juicy dividend income I will need soon for semi-retirement:
Weekend Reading – The Better Way to Budget Edition
Is there a better way to budget?
I absolutely think so…
First up, a bit about budgets and why I believe they are flawed for many to work.
Budgets are flawed for the most part because budgets require some work. Not many people I know enjoy tracking what they do – at work or at home. Tracking what you do is tedious, it involves time, and it’s somewhat insulting in that you might find some major flaws in your expense behaviour. You might find out you’re spending money on things you don’t value or that don’t add meaningful value to your life.
Budgets can help for some, here are some simple budgeting methods to choose from:
1. Traditional Budgeting: This strategy defines all income sources and all expenses and maps them out in a spreadsheet or app to see what you need to allocate where to stick within a certain threshold.
2. Container Budgeting: Each month, allocate a certain amount of cash to each area of your budget. Ensure to keep some money in savings just in case some spending categories get out of hand.
3. 50/20/30 Budgeting: This method/budgeting rule was popularized by U.S. Senator Elizabeth Warren who suggests most individuals or families divide after-tax income into three categories: 50% for needs, 30% for wants, and 20% for savings. Needs include obligatory expenses like rent or mortgage payments. Wants are your basic pleasures of life, like travel. You then allocate the final 20% towards setting up an emergency fund, or paying down any high-interest debt, and when debt is gone, ideally 20% is plowed into investing.
The reason I bring this subject up, this weekend, is because there is so much advice about budgeting and personal finance in general – you could argue you don’t need any more budgeting advice ever again.
This is because I believe money management is not just about spending or overspending. It’s about changing your behaviour and relationship with money.
My better way to track your money
I’m going to take this Weekend Reading edition to remind readers whether a recession is coming or not – my budgeting process doesn’t change. In fact, I don’t run a detailed budget at all. Never have.
How does my process work?
1. The first thing we do is write down how much money is coming in each month from all income sources and then forecast all expenses expected to come is as well – those go into a spreadsheet. In that spreadsheet we define all our fixed monthly expenses. (Most of our income is reserved for that.) So, I tally our fixed expenses with the small mortgage we have, include our insurance, heating, hydro, cable bills, base grocery costs, etc. each month. I also include these fixed expenses every single year:
- Annual TFSA contributions (i.e., a few hundred bucks per month)
- Annual RRSP contributions (i.e., another few hundred bucks per month)
- Money to savings accounts to pad our emergency fund / grow the cash wedge.
2. Once #1 is done, we forecast our variable expenses and essentially spend any money leftover after that as we wish.
Essentially, we forego detailed budgeting because we’ve purposely allocated as many fixed expenses including “pay yourself first” expenses in as much as possible – those fixed expenses align with my/our priorities and values. This way, we enjoy any leftover money guilt-free.
Instead of obsessing over fixed savings rates, money containers, or other budget methods – consider your relationship with money first, what you value, and then determine how much of that money is truly going to your priorities in life.
Instead of making a budget, consider savings like any other fixed/mandatory expense as a bill payment to You Inc. or Your Family Inc. Your present self and future self will thank you for it.
More Weekend Reading…
Part of the inspiration for this Weekend Reading edition came from the following articles this week:
Here are some tips to curb your inflation impacts, from our Deputy Prime Minister, Chrystia Freeland (subscribers only).
Some funny items void of any deep journalism here of course. From the article:
“And remember: the little things count. Roll down the windows instead of turning on the A/C in your Tesla Model X if you happen to be driving on one of these unseasonably warm November days. Pick up your dry cleaning instead of having it delivered. Ask your nanny to take the bus instead of paying for her Uber. If we all heed the advice of our Finance Minister to reduce our household expenses, we’ll surely find that, in time, we won’t even miss eating lunch.”
Bridget Casey also wrote about her personal term of “unbudgeting” (subscribers only) – to have unlimited spending in one small category to make it emotionally easier to impose limits elsewhere. I don’t follow this approach but if that works for you – go for it.
“If you’ve had to give up a favourite hobby, sell your car, or move home with mom and dad, chances are you’re unhappy about downgrading your lifestyle. But leaving a small area of your budget as a place where you can still enjoy money will bring you a ray of joy.”
From that perspective, on biases, I would encourage you to check out our post at Cashflows & Portfolios:
What’s your take on budgets? Do you use one? If so, what works for you?
Love it – thanks to Vibrant Dreamer for including yours truly in a long list of amazing dividend income investors doing some amazing dividend income things!
Source: https://vibrantdreamer.com/combined-canadian-dividend-income-sept-2022/
How should you confirm your asset allocation? A Wealth of Common Sense has some ideas of which I remain very much aligned with Ben’s thinking. From the article:
“I don’t have the right answer for every investor because there is no such thing as the perfect portfolio.
The right asset allocation is the one that offers you a high probability of achieving your goals while balancing out the potential emotional strain of gains and losses or unexpected life events.”
For us, fyi, this means:
- We hold a mix stocks and bonds within our respective workplace pensions.
- We are 100% equity in our personal portfolios.
- We have a growing cash wedge (see link above) for up to $50,000 in cash savings to start semi-retirement with.
Your mileage may vary!
Dividend Growth Investor shared 13 stocks that recently rewarded shareholders with some dividend raises. I own two in that very list.
From one of my favourite blogs and podcasts: on progress…
“Everyone looks for the miracle moment – the moment when success happens. We are drawn to these moments because we want to know the secret. We want to know the ingredient that we are missing. The ingredient that makes the recipe.
The problem is … there is no miracle moment. If you want to understand success, you can’t focus on what’s visible.
Results are simply one more step in a long chain of steps that led to that moment.
Nature offers a great example with bamboo, which takes ups up to 5 years to develop its roots. For years, to the outside observer, no visible progress has been made. Meanwhile, the bamboo grows below the surface, developing its roots and storing energy. Then, all at once, it starts to grow. Years of stored energy result in exponential growth, sometimes reaching over 50 feet in a matter of weeks.
That’s how results happen. Slowly and then all at once.
Everyone wants the results. No one wants the process that leads to them. That’s boring.
There are two main lessons to take away:
Not all progress is visible. Don’t beat yourself up when things aren’t visible. One workout won’t make you fit, but it is better than no workout. A small deposit in your bank account today won’t get you to your goal, but it moves you closer. The daily grind is part of the process.
Consistently doing boring things well leads to extreme outperformance. Most of the time, we know what we need to do. The problem is because we don’t immediately see the results, we stop. It’s as if we tell ourselves, “I ate healthily and went to the gym all week, and I’m still not as fit as I want, so what’s the point?”
You have to be smart enough to know you’re making progress without any obvious signs of progress.
Rome wasn’t built in a day, but it was built one brick at a time.”
Get your weekly dose of inspiration and brain food here.
Have a great weekend,
Mark
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.
I have a spreadsheet for budgeting, for 25 years now. It has the same structure, but has been revised many times. It has income, fixed expenses, variable expenses & extra cash. Very valuable. Never overdrawn & helps one organize their finances. Similar to yours, I think?//
Very similar to mine 🙂
I have line items in spreadsheet like this every few weeks:
1. Mortgage = x
2. TFSA and RRSP contributions = Y
3. Groceries and other related items = Z
Whatever is leftover, we spend and have fun. Pretty simple but effective!
Thanks for your comment.
Mark
Good post! Any type of budget is so so important. Thank goodness my wife got me on board when we were starting a family. Set us up nicely for our retirement.
Thanks, Paul! I think once you find whatever works for you, keep doing it.
Cheers,
Mark
I hate to dumb down your blog Mark but here is a small sample of how I started. When we were kids, we would always ask dad for money for candy, so he put us on an allowance. The next time we asked for money he would say that you have your own money. Oh! that was different, so when I bought a chocolate bar I would eat half and put the rest in the fridge. Dad saw it in the fridge and asked if I wasn’t going to eat it and I would say that I was saving it for later. These habits stick with you and when I got a job, since my wants were few, I would keep 1/3 of my paycheck and bank 2/3’s. This added up and when I got enough, I invested it. Now with the power of compounding it has added up to a lot. I don’t really bother now with budgeting as my largest bills are instalment payments, property taxes and house and car insurance. I still divide up the checks that I get at home. I read the article on bias’s and have decided that I have some. Especially a bias to dividend stocks as I have learned the hard way that the only place for bonds is in a registered account.
Good stuff.
I have a bias to dividend stocks for sure, Ronald, but no bonds at this time. I might own some GICs eventually but we’ll see…
Mark
We never had a budget, never feel the needs to have one. I began to track our expenses though few years back when I plan for retirement.
Our incomes have increased quite a bit last couple years. Now our savings rate is higher than 50%. I want to reduce that and spend more for a higher quality of life. Spending habit is quite difficult to change though.
Well, you have a good problem to have, May with some good paying jobs. Continued success to you since your retirement years are getting close!
Mark
Budgeting or knowing your cash burn prior to retirement is primordial to a sane retirement. If you are not aware of your expenses prior to retirement you might find yourself up the creek without an oar.
I was trying to calculate my living expenses, including allocations for trips and entertainment, several years prior to my retirement. The basics , fixed items, were fairly easy, taxes, hydro, etc, but all the rest were assumptions on my part as i was a road warrior with company car and obviously all related expenses paid with a small benefits charge added to my salary at the end of the year. What was harder was i had to guesstimate pretty well everything else – food, gas, car maintenance & insurance, entertainment, travel, etc, etc.
Having guesstimated all that I then proceeded to up it by between 10% – 20% to cover inflation. Happy to say that while I underestimated a few things like the cost of groceries & travel, I also overestimated several other items so at the bottom line I was OK. Once I had that to my liking, I then went to see the bank financial advisor (not the local bank rep but the big gun from head office) armed with what I thought was my basic net income needs. As well I also had all relevant income sources (RRSP/RLIF) there and relevant tax information. He congratulated me on having all the detailed and relevant information for him to punch in to his spreadsheet. He said that saved another one or two visits as I knew what I needed and what I was getting. He said that usually clients had little to no idea as to what their spend rate was nor what their revenue was or would be. This was all ore-retirement. One visit and he basically said I was goo to go. So this was approximately 2-3 yrs pre-retirement. I had felt I had enough but always nice to have someone who works in this aspect of finances to confirm your assumptions.
So all that rambling above to say you should know, or a close approximate, your cash burn pre-retirement and post retirement as well as having a pretty good idea of your income sources and the amount you can get from them. Again, I took my guesstimates for cash burn and boosted them up. Don’t regret that as I am still running below my estimates.
As to tracking your cash burn I run a really simplistic spread sheet (copy previously sent to Mark) to track where the money is going. I believe in the KISS principal. Compare it to asset allocation. I don’t need to know where I spent the money, just on what. Restaurants comprises all eat outs whether it is McDo or a five star. Entertainment is a cinema as well as concerts. So it is not a big task to track where the money is going. I was overspending on my “cash” allocation for a while. Didn’t take long to figure out I was at the bar ( i like Rum & Coke) too often where I paid cash. LOL Sometimes it is a good kick in the butt to see just how much you are spending rather than asking where the money is going.
At any rate, figure out what you need to live the life you want and then sit down and see if you have the where withal to live it.
All the best. Stay sane and healthy
RICARDO
Excellent, and the way you went about it answered that all important pre-retirement question “have I got enough”.
That seems to be the main question people ask.
If you haven’t taken the time to look at your present pre-retirement spent rate and then figured out what else you would like to do post retirement and budget it in you may be setting yourself up for a fall. AND you need to know where your revenue and how much will be coming in. Put the two together and you have a good approximate to the question everyone wants to know: DO I HAVE ENOUGH”
RICARDO
Totally – you need to know what you intend to spend, per year, on average, with some buffer to figure out your “enough” number.
As you know from my site, it is our hope the combination of “living off dividends” + part-time work in a few years is “enough” for us to ease into semi-retirement. Hopefully those days are 18-24 months away.
Mark
Thanks for the detailed comment!
Ya, we’re similar: I hope to guesstimate our needs and then add a 10-15% buffer.
“As well I also had all relevant income sources (RRSP/RLIF) there and relevant tax information. He congratulated me on having all the detailed and relevant information for him to punch in to his spreadsheet.”
You’re well organized!
Ultimately, knowing your average spend is critical for any retirement income planning.
“At any rate, figure out what you need to live the life you want and then sit down and see if you have the wherewithal to live it.”
I like it!!
Mark
For people in full retirement i.e. all income is coming out of your own investments, it’s useful to know how much you need to pull annually from said investments, else you’ll have more sitting in cash than you need, likely missing out on investment gains. The same goes for knowing how big a cash wedge you need; not too big, not to small, but just right.
Tracking our spending, (which is the basis for the following year’s budget) helps us to optimize the cash requirement in the following years(s). Our tracking isn’t super detailed, but it does capture almost every penny spent. The goal is not to waste cash by not having more out of the markets than is necessary. And, I do actually get satisfaction from tracking and optimizing our spending. Weird, I know, but it takes all sorts to make up this world.
“The same goes for knowing how big a cash wedge you need; not too big, not to small, but just right.”
I think so, Bob.
I figure 1-years’ worth of cash is enough, as to keep $$ on the sidelines just in case and also to avoid too much opportunity cost as well whereby I/we could be investing that money.
That’s the sum we want as we enter semi-retirement while working part-time. We should have that saved up in another year.
I’m not sure how much cash/cash and GICs I will keep when I’m not working any longer. At least 1-years’ worth of expenses for sure but I’m not yet convinced I’ll need too much more since I’ll also have fixed income coming online when done work in my 60s via OAS, potentially a pension as well, LIF income, etc.
“And, I do actually get satisfaction from tracking and optimizing our spending. Weird, I know, but it takes all sorts to make up this world.”
Ha, I like tracking our spending and forecasting as well. Very weird here back 🙂
Cheers,
Mark
While I can see and to a certain extent agree with the “cash wedge” principle, I also like to have my $$ working for me. So while I have set aside $24K for any surprises I also went and invested it in some stocks. So my $24K now varies between $20K – $32K in value and pays me approx $229 per month averaged out. It’s a risk but one, as a dividend investor, I am willing to take. Any extra monies get shoveled into this non-registered account so, at present, it keeps rolling right along.
RICARDO
Ya, my form of a cash wedge is really just a buffer between a modest emergency fund and 100% staying invested. I sleep better at night knowing I/we can absorb any small costs without any debt.
Mark
A little correct to my “cash wedge” value above.
It varies between $29K and $32K. That is better than the typo!
No “emergencies” have arisen that I am not able to take care of through normal cash flow. Just have to keep in mind that this is an “emergency” fund and so is subject to sale if the funds are needed.
The TFSA is also generating >$1.2K monthly so that is also available if needed
Put the Non-registered monthly divs and the TFSA divs together and I have approx $1.5K of ready cash every month if so needed. So far they are getting re-invested so the snowball keeps on rolling along.
RICARDO
P.S. Last year the TFSA generated just under <$1K monthly
This year (YTD) it is just under <$15K – all tax free YUPPIE
Excellent work!
We hope to eventually earn about $30k per year from x2 non-regs + x2 TFSAs in a few years.
That should be a nice base to start semi-retirement with we hope after that milestone is reached!
Keep you and 5,500+ subscribers posted! 🙂
Mark