My trick to budgeting
There’s a really neat trick to budgeting that makes it a breeze. I want to tell you about it.
First off, I help people make smart decisions with their money. It’s what I do – all day, every day. And one of the most basic tools a financial planner can use to evaluate someone’s financial situation is a budget. A budget can be a glorious instrument. It has everything a financial planner would love – mainly numbers. Lots and lots of numbers.
A budget simply sets forth estimates for income and expenses, usually by month. This allows the budgeter to track future income and expenses to see how they vary from the budget and to adjust accordingly.
But here’s the thing: I hate budgets.
In fact, I’ve only created one personal budget in my life. It was a painful experience, and not one I plan to repeat. If I never create another personal budget in my life, I will consider it a life well lived.
If I hate budgets, as a financial planner, I can’t imagine they are loved by many others.
So, here’s my trick to budgeting: Don’t do it.
In truth, budgets are not even necessary when it comes to financial planning. That’s right. You can create an entire financial plan without analyzing spending at even a high level. It’s just not required.
When it comes to financial planning, what really matters is how much you save, for how long and at what rate of return. All of those assumptions can be generated without the assistance of a budget.
This flips the common perception of planning on its head. Good financial planning does not need to account for every dollar of cash flow that comes in and every item of expense that goes out. That process can be terribly tedious.
Instead, quality time should be spent clarifying big goals. Do you intend to pay for a child’s college or pay for a wedding? What does retirement look like? When will it start? Where will it be spent? Once those goals are defined, projections can be formulated to estimate the cost of those goals.
Then it just becomes a math problem.
If you know how much you plan to spend and when those expenses will generally occur, you can work backwards. Math allows us to determine how much you will need to save every year, starting today, to meet the goals, given expected rates of return on investments.
As long as you are saving the necessary amounts each year to reach your goals, you are able to freely spend any other income on whatever you want. It truly doesn’t matter. Want to spend $15,000 on a really fancy vacation? Fine. Want to give more money to kids or charity? Great. Want to buy a sporty new car? Sure.
Once your savings goal is met – and of course, assuming you have a sufficient emergency fund in place – then spending any other incoming cash flow is perfectly reasonable. Go wild.
I find this approach to financial planning is not only more convenient, but it is equally effective as tracking every last dollar.
Now, that being said, a budget can be helpful in certain instances. For example, if you are not sure where all of your income goes each month and you aren’t able to save adequately for your future goals, it can be worthwhile to track your spending to identify areas of potential excess. But outside of that, I don’t find much value in the process.
As long as you have clearly defined goals and you are saving enough to make those goals a reality, nothing else really matters. Spend the rest on whatever makes you happy.
That’s a pretty neat trick.
Justin Lueger, CFP®, is President of Invisor Financial LLC, a registered investment adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at [email protected]
This column was paid for by Invisor.