A Few Thoughts on Budgeting

This is not a story about how to save money on groceries or cut your energy bills. I do have a few practical suggestions I could write on living on a budget and reducing expenses, but this more about putting together your actual budget – a clear record of all your income and all of your expenses, in plain, easy-to-read math.

This exercise should begin with your income – what is your household income and where does it come from? Do you have investment income? Rental income? Do you receive federal benefits? What about a salary? Do you have a side hustle? How much money are you reliably bringing in each year? Each quarter? What about month? As an intellectual exercise, you can calculate income down to whatever time increment you like, but a month is sufficient for most personal financial planning.

That’s only half of a budget. Your next step is to aggregate all of your expenses – mortgage and/or rent, utility bills, groceries, gas, dining, entertainment, clothes and laundry, car maintenance, home maintenance, internet and television, gym memberships and taxes.

Subtract your expenses from your income – if the number is positive, that is your potential savings. If the number is negative, you’re bleeding dollars and need to make some changes in your financial life immediately.

Here are a few tips I use in the process of budgeting, which I do by hand and using software on a monthly basis.

1) Don’t Leave Anything Out

It’s easy to put your monthly bills on your budget, and set aside money for necessities like groceries and transportation. I think most budgeters give themselves some kind of allowance for meals away from home or a monthly trip to the movies or some other distractions. What’s easy to forget is all the money we spend in between – snacks and drinks at the gas station. Food at the movie theater. A beer or six with friends on the way home from work.

I’ve cut a lot of this spending out of my life, but I don’t think it’s all bad – these are often the kinds of expenses that make life worth living – but if you’re the kind of person who regularly finds themselves spending money on the little things, you should be adding them in as a line on your budget and allotting a fixed amount to such leisurely luxuries, because they definitely add up over time.

2) Automate and escalate

Any savings into bank accounts, investment accounts and retirement accounts should be automated on a weekly or monthly basis. Rather than using a stable contribution amount, like $50 a week, I would rather low-ball my contributions initially and escalate over time. So I might start contributions at $35 a week and gradually increase to $65 a week over a period of six to 36 months. This allows for a gradual behavioral adjustment to higher contributions and a higher contribution level at the end of the period. I sacrifice some of the power of compounding for behavioral guidance. Gradual escalation works wonders.

"What's the best way to eat an elephant? One bite at a time."

3) Round up all expenses and liabilities

All of your expenses, whether fixed or discretionary, should be rounded up. This makes for easier math AND gradually builds a natural buffer. Eventually, as the balances in your accounts grow, this money can be invested, but I also find this buffer to be a nice first line of defense against unexpected expenses that can help spare a growing emergency fund.

Also, round up all of your debts. It makes the math easier.

4) Round down all income and assets

Rounding down your income adds to the buffer I described in tip #2. Rounding down your assets makes the math easier when you’re calculating your dollar and true net worth.

5) The objects in the mirror effect

When you round liabilities up and assets down, it gives you a somewhat distorted view of your personal net worth – you’re always doing a little better than you think. I find the distortion works in my favor, it adds motivation and urgency to my budgeting. It's helpful to forget about the buffer you're building between income and expenses for months - or years - at a time, one receives a nice surprise when there's suddenly an extra $500-$1,000 available to invest.

6) Track in real time

Use an online aggregator OR keep your own ledger. Don’t play the game of waiting for transactions to clear. Know what you have every time you reach for your wallet or pocketbook, and know as precisely as possible what the impact of any spending decision will be before a final choice is made.

7) Live simply but happily

You can have a great social life without dropping a lot of money every week. I’m an old fogey who doesn’t really need much in the way of entertainment or social life these days, so it’s quite easy for me, but it does seem like the act of going out with friends these days typically implies a lot of spending will happen. Find friends who are homebodies, learn to enjoy entertaining company and being entertained by your friends, and life becomes a little less expensive. Also, the amount of happiness we wring out of our lives is not at all proportionate to the amount of things you we or consume, rather, it depends more on the length and quality of the time we spend with the people we love.