As a personal finance blogger, I have failed all of my readers. If this were a religious blog, I’d start out with the bold claim: “I’ve sinned.” You see, I stopped budgeting.
When I started this blog some 3 and a half years ago, I was very strategic with the content that I published. I wanted to start with the basics, because that was where I was at, and so I did. Budgeting was one of my first topics. In fact, I still have one of my first articles published on budgeting mistakes to avoid. (There are many others that I have since deleted).
As a personal finance blogger, or “the finance guy” as my wife sometimes refers to me, the expectation is that I budget. But I stopped doing it last year when life got busy, and very little changed.
Are You Saying Budgeting Is Unnecessary? Yes, I am
You read that right – not that much changed. But before you click the X and close out the window, hear me out.
While I do believe that budgeting isn’t necessary – I am really trying to say two different things:
1 – Budgeting is more helpful when you are starting to get a handle on your finances. This may be right after graduating from college (whether you are living with your parents or living on your own) or it could in your 30s, 40s, or heck, even 50s – but the reality is that budgeting makes a larger impact on your financial situation when you haven’t done it before. Budgeting helps you identify your spending as well as limit the unnecessary spending.
Slowly, both of these become everyday habits and you don’t need the formal process. Instead, it becomes more of a mental game that you play.
For example, at Costco, just last week, my wife and I were stocking up on food and she and I had been discussing buying a dog bed for our dog (you know, because she is spoiled). Long story short, I was able to curb our spending by saying to myself, “Do we need this right now?” The answer was obviously no, and we kept walking.
2 – Failing to Budget doesn’t mean financial ruin. While there are some die-hard budget fans who would argue that everyone must budget, this is far from the truth. In fact, you can do pretty well with mentally controlling your spending, checking your account balances, and being happy with moderate net worth increases.
This is in fact what I have been doing for the past 6 months. I use Personal Capital to check my account balances almost daily with the clicks of a few buttons. And so, while I am not regularly looking at how much I spend in each category of a budget in the formal sense of the word, I have a big picture of our cash flow and net worth.
With that said, just because ignoring a budget does not equate to financial ruin, it does likely mean that you are letting some things go. It’s much easier to let yourself spend extra money on eating out, when you are not reviewing that category each month. This ultimately means we are spending a little more money and I’m not a fan of that. I like telling my money where it should go, and being intentional as possible.
So, Why Did I Stop Budgeting in the First Place?
I know what you are thinking – If you really wanted to decide what to do with your money, why did you stop budgeting?
There are several reasons. Let’s jump right into them, and then this will highlight why I am changing the way that we budget as a family (and how I am doing it), and give you an opportunity to tell me if it’s going to work or not.
1 – There was no positive or negative consequence for meeting our budget each month. Yes, we did set spending goals for each category and I used to use a spreadsheet and manually add up each category. That’s before I signed up for other tools and ultimately landing with Personal Capital. But, when we spend $40 more on food than we would have liked, what did we do? We said, we should do better and then we would spend about the same amount next month. Why? Because we weren’t breaking the bank. When we spent under our amount on travel, we’d pat ourselves on the back, but that’s it.
2 – Our Budget Failed at Including Irregular Expenses. Years ago I went to a financial conference and saw a five-minute presentation on how to budget, and it included great tips on including irregular expenses (like car insurance, etc.) The presenter suggested to split the costs evenly over the months and be done with it. The reality is that my budget operates on a cash method of accounting (money comes in, count it. money out, count it) and does not really operate on an accrual basis (when was this money earned, spent). In other words, while I could evenly split up the expenses for my targets, the actual expenses did not line up.
As a result, the budget wasn’t effective and the measure of whether we had successful or not for that month had all of these conditions. It would be like saying, “We met our budget last month, assuming that we continue to spend X amount on travel for the next 5 months, don’t spend more than X amount on car repairs for the rest of the year, and…” You can begin to see why I pushed this to the side. In other words, I was having a difficult time balancing both the short-term and long-term. I was really good at including the long-term, or big picture, but it was hard to measure the short-term success.
Our New Budget
In line with my attempt to simplify everything that we are doing, we are creating a new simplified budget in 2015. Given that my goals (which I will be sharing with you next week) are prioritizing increasing our net worth and investing aggressively, we are going to resolve the annual/monthly balance issue while also not over-complicating it. In other words, we are not going to be categorizing our budget.
WHHAATT!? Is that still a budget?
I’m glad you asked. Yes, I think so. Here’s our plan.
Over the course of 2015, we are going to ignore the fixed housing costs. These expenses (mortgage, insurance, taxes, and HOA fees) are fixed – never changing. So, why focus on these. We’re never going to pay more or less on these, and these are only a distraction.
Instead, we’re going to focus on everything else. And we’re going to group them all together. So, instead of focusing on how much we spend on food, travel, shopping, etc, we are going to look primarily at the big picture. Partially because we do a pretty good job at controlling our spending and also because I need to do things a little differently to make it exciting.
Over the course of the year, we are going to hit the following targets for all of our non-fixed housing costs:
- 2 Months under $4,000
- 4 Months under $3,000
- 6 Months under $2,000
Following this would mean that we would spend $32,000 in addition to fixed housing costs for 2015. This will give us plenty of money to save up for larger expenses, invest in our retirement, etc. This not only means simplifying our budget, but gives us a new game to make managing our finances exciting again.
At the end of January, we will add up all of our expenses. If the total expenses add up under $2,000, we will remove that from one of the options. And repeat that process each month. As the year progresses, we will not only see trends of how much we are spending, but also if we are going to meet our goal. If we are not on track (i.e. using up too many $3k months), we will have to dig deeper and see how we can save money.
I’m really excited about this new budgeting method because it’s a different spin on things. It’s not “Pay yourself first,” or “carefully watch where every dollar goes.” It’s simpler, more exciting, and carries over from month to month.
Readers, what do you think of my new way of budgeting? Do you think it will work?