It might be odd to hear that a Financial Advisor doesn’t budget. Kind of like hearing that the butcher doesn’t eat meat. It makes you pause for a second. Do they really believe what they say? Do they eat their own cooking?
And it’s true, I don’t budget. At least not in the traditional sense of the term. I used to have complex spreadsheets in Excel that tracked everything that I spent. And I looked at it every month to make sure my spending in each category was in line. I would only spend a certain amount on housing, food, entertainment, etc. Everything was tracked to the last penny.
Today, when you listen to personal finance gurus, they all extol the virtues of a carefully crafted budget, something that you’re supposed to work on every month and if you don’t you’re being negligent.
But after awhile, I realized a few things. First, my spending didn’t really change on a month to month basis. Sure, it did initially when I started budgeting, but once I got into a groove, I consistently spent right around the same amount of money.
Second, I realized that I didn’t care how much I spent in specific categories on a monthly basis. What I really cared about was how much I spent overall, and whether that left me with enough money to fulfill my financial goals (like saving for retirement).
And third, I realized that there were more important things I wanted to spend my time on more than crunching numbers about whether I spent 13% or 15% of their income on food. We are obviously only able to juggle so many things in life, and our time is precious, so why not spend it on things we truly enjoy and spend less, or zero time, on things that don’t really move the needle for us.
I have also found that the people I work with, by and large, don’t want to engage in this exercise on a monthly basis in perpetuity, and they will lose steam doing it after a few months.
So if we aren’t going to take a fine-tooth comb going through our spending every month, does that mean it’s okay to spend whatever you want and hope for the best? Absolutely not!
INSTEAD OF USING A TRADITIONAL BUDGET, HERE’S WHAT YOU SHOULD DO INSTEAD
First, if you don’t know already, find out exactly how much your family makes per month, after taxes.
Second, if you’re still working, find out how much you need to save in order to hit your financial goals. Things like retirement, saving for college, saving up a down payment for a house, etc. What do you need to save, per month, to hit each of those goals?
Third, set up your bank accounts so that every month, money is automatically sent to accounts that will fund your financial goals. So if you need to save $1,000/month for retirement, have that amount go straight into your investment account every month, without you having to manually do a thing, without you even having to think about it. This includes an IRA, 401K, and non-retirement investment accounts.
Fourth, take your total income per month, and subtract from that the total amount that you need to save/invest on your financial goals. The amount of money that you have left over is your spending money.
So let’s say you and your spouse take home $6,000 per month, and need to save $1,500 per month to hit your financial goals. That means you can spend $4,500 per month.
And the best part is, you can spend that money however you want, regardless of what percent you spend in certain categories. Because you’ve already accounted for your future financial goals, so there’s no reason to drill down on how you spend that remaining $4,500.
The one disclaimer I will give you is if you’re spending too freely right now, or outright spending too much money, then yes, you’ll have to drill down on the specifics of your budget to see where you’re overspending and make the necessary adjustments. But if you can get that in control in 3-6 months, and get it to the point where you have adequate money to save for your future financial goals, then I really don’t think you need to engage in that type of budgeting for the rest of your life.
Once you get to that point, after you’ve allocated your money for your goals, you shouldn’t spend time worrying about whether you’re spending 29% of your income on housing or 7% on utilities or 23% on restaurants. It’s too restrictive of a model, and frankly, most people don’t have the willingness to do it forever for it to be fully effective anyways.
So once you know what you need to save and invest for your future, forget that extreme level of budgeting details, feel confident that you’re on track to hit your goals, and enjoy your life and your money.