I have been running a personal finance site for many years now, but I have a dirty little confession: these days, I don’t budget <insert crowd hush and record scratch sound effect>.
“Woah, hold on a sec – a personal finance author who doesn’t budget? That’s sacrilege!”. Let me explain. I still track our spending. And about once per year, I’ll review and look for ways to cut back. It’s a great use of time and I actually enjoy it.
Setting an arbitrary budget to be managed on a monthly basis after years of personal finance optimization? Well… it just seems like overkill.
Why? Here’s my thought process…
I know what our static monthly/annual expenses are:
- term life insurance (static over length of term)
- student loan (static over length of loan)
- mortgage (static over length of loan)
- telecom (static per month)
- health insurance (static per month)
- property tax (low year/year fluctuation)
… and they’ve all been optimized.
Then there are utilities:
… monthly costs do vary, but I’ve done everything I am willing to pay for to keep costs low – CFLs/LEDs, low flow showerhead, insulating pipes, identifying standby appliances through using an energy meter, etc. (check out my money saving products page for some ideas/suggestions). The result is that costs have actually declined each of the last few years in each area. Yes, there will be market price fluctuations that are out of our control, but I feel like we’ve done 95% of what we can do to limit our costs outside of a huge installation project like solar or replacing our furnace and water heater (when that time comes, we will buy highly efficient versions).
What’s left is really only 5 areas where we need to focus our attention:
- home/auto insurance: consistent monthly, but larger annual increases than I’d like. The challenge/solution is to periodically review through quotes across multiple providers.
- grocery/household goods: we live pretty extravagantly here – buying mostly organic and high quality food – but we still try to keep costs down through bulk purchases – and we use a 6% cash back grocery rewards card to cut costs.
- restaurant: we spend less than $1,000 annually per year and only go out on special/social occasions and some while traveling.
- auto fuel: these days 90% of our use is from my wife’s twice-weekly commute (one of the benefits of choosing a part-time job). I ride a bike to work and take a bus (with a pass subsidized by my employer) when polar vortexes hit, so no costs there. We could cut this expense further though.
- other: less than $1,000 annual, and includes entertainment, vacation (minus restaurant), clothing, etc. Some back of napkin math tells me that we’ve actually sold enough stuff to completely offset this expense category, the last few years.
There is still room for tweaking each of those five areas – but I have a fairly good handle on it just through reviewing my expenses annually and looking for room for improvement. If pressed, I know where I’d focus my attention. After all has been calculated, we spend only about 40% of the average 2-person household.
Is it beneficial for me to set and micro-manage a budget every month? Probably not.
Do you Need a Budget?
Let’s lead with this – everyone, at a minimum, should track their spending on a monthly basis. Simply add up everything you’ve spent through check, cash, and debit/credit card. If you’ve never done this, it will be enlightening. You can’t get to a level of minor tweaking without having a good pulse on what your spending is.
While everyone should track their spending, there are those that need to actively micro-manage a budget every month.
I’m talking about budgeting for real, by literal definition of the term:
- tracking recent spending averages per month
- setting a monthly spending cap per category (ideally less or far less than current spend levels)
- staying under the cap
- actively monitoring progress and holding everyone accountable
- wash, rinse, repeat
If you fall in to one of the following categories, just tracking spending is not enough, you need to budget:
- If you are living paycheck-to-paycheck and have little room for error or emergency
- If you have debt with high APR (5%+) that needs to be paid off aggressively
- If you have aggressive savings goals and are not happy with current spend levels
- If you take a huge income hit (i.e. laid off)
- If you are the kind of person who needs to hold yourself accountable
- If you live with someone who needs to be held accountable
- If it’s been a few years since you’ve tracked your spending and you’ve let things slip a bit
It shouldn’t even be considered optional. You need to right the ship, and do it right away! Falling in to one of these categories could spell disaster – and if you’re in more than one, you should install a giant fire alarm in your home that sounds until you’ve completed the exercise.
To get you started, a few years back, I created a free budget planning spreadsheet. I still use it to track my spending and you can use it to do the same or to start micro-managing your budget.
The rest is up to you, my friends.
- Do you budget? Why or why not?
- Do you track your monthly spending? Why or why not?
- What did your monthly spending look like over the last year?