Weekend Reading – The Better Way to Budget Edition
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!
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.”
Have a great weekend,