I hate budgets. If you’re like me, the word “budget” doesn’t exactly get you fired up. We all can agree on the importance of knowing where your money is going and proactively setting goals which require limits in certain areas of spending. But that doesn’t make it fun to do.
Once I got a “good” job (after that whole going broke in Las Vegas thing) and began contributing to my 401k out of every paycheck, I fell into the trap of thinking I made enough money to not NEED a budget (LOL). Yes, that sentence was embarrassing to type.
My perspective on budgeting changed when I read Millennial Money’s $50 a day early retirement strategy post. That piece is an awesome testament to the power of time and compound interest, yet what I loved the most was the simplicity of the concept: a daily target number to strive for. Waking up every morning with a particular number in mind might really help me connect with my goals and stay motivated to achieve them. Even though Grant’s post was referencing saving for retirement, I figured I may be able to use the same concept when thinking about my own budgeting and spending. Sure enough, it was just the inspiration I needed to get serious about budgeting, and it may help you too.
This process has 4 key steps:
- Calculate necessary monthly living expenses
- Add in any financial goals for the month
- Subtract the total from your monthly income
- Divide the remainder by the number of days in that month
There are certain expenses that I view as unavoidable, especially at this point in my life. For instance, my mortgage payment and cost of day care for my 2 year-old son aren’t going away anytime soon. Similarly, I’ll always want TV, wifi, and other utilities. Of course, it is important to periodically evaluate the things you spend money on each month to make sure they aren’t getting out of control. There are also some expenses that may be “regular” but aren’t exactly predictable (gas in your car, etc.) which you may need to average or otherwise keep a placeholder for. But overall I consider these items as my “baseline” of recurring and unchanging expenses each month. To keep things even simpler, many of these expenses are on contract (fixed amount each month), and automated so I don’t even have to think about them.
The difference between my monthly income and my baseline expenses is obviously all the wiggle room I have every month. This is where time-specific financial goals come in. Whether I’m looking to add to my emergency fund, or to put some extra money toward student loans, or start saving for a trip, I will allocate some amount toward that specific goal. As a real-life example, my goal is to set aside $500 this month towards a new HVAC unit before things get too cold around here. It doesn’t really matter what you might be saving for, the idea is to be mindful of big expenditures and to exercise some forethought and planning to make them less of a burden.
After baseline expenses and specific goals, we are now (hopefully) left with some amount of income remaining. From this amount I dedicate all my spending related to food, shopping, entertainment, etc. I call these my discretionary expenses because they aren’t recurring or automated, and they can be adjusted from month to month as necessary with some simple tweaks. I like to think of these expenses existing on a continuum, where I can throttle up or down the luxury and expense on a moment’s notice. For instance, I can make sandwiches at home or I can go out for a steak dinner. I can take my wife out to the movies or we can stay in and watch Netflix. The category of the spending doesn’t change, but the amount sure does.
Finally, to bring things full circle, I divide my total discretionary amount by the number of days in the month to arrive at a daily discretionary spending target. Depending on the variables of your monthly income, baseline expenses, and financial goals, this daily number could be anywhere from $0 to hundreds of dollars.
The critical piece of implementing this strategy for me was tracking all expenses. I use Mint for all of my transactions and accounts, but I have a separate app on my phone devoted to recording my daily discretionary spending (It’s called Daily Budget, for those interested). I can set my daily amount (as well as change it from month-to-month), enter transactions, and then instantly see how much more money I can spend today, as well as how much I can spend 2 or 3 days from now.
This strategy has two big benefits for me:
- Forced awareness – knowing I have $10, let’s say, to spend every day means that I can hack my subconscious to help reduce frivolous expenses
- Flexibility – continuing with a $10 per day example, I know that if I don’t spend anything today, I can spend $20 tomorrow. This is a simple reminder of the benefits of delayed gratification. If I don’t spend recklessly during the week, I have more to play with over the weekend. Similarly, if I mess up and spend too much today, I can make up for it tomorrow or later this week. Keep in mind that this number daily number is only an average.
What do you think? Would this strategy work for you? What would you need to change about it?