It’s not a rhetorical question; I’m just not a fan of putting too much time and effort into budgeting. What I do think is immensely valuable is creating a list of all of your recurring expenses. If you pay it regularly, record it. What are possible line items?
In the first section list your regularly recurring bills:
- Trash Removal
- Car Insurance
- Car Tax
- HOA Fees
- Natural Gas
- Cell Phone
- Life Insurance
Next up in the second section are your investments:
- Roth or Traditional IRA
- 401(k) Match
- Mutual Funds/Stocks
- HSA Match
Now that you have all of your outgoing money summed up, create a list of income for the third section:
- Regular Paychecks
- Tax refunds
- Rental Income
From here you can gain insights on how much money you make, and how much you’re spending. I recommend calculating your income and expenses 10 different ways:
- Income (Actual monthly income (including any rental income))
- Income (Average monthly income plus bonuses and tax refunds)
- Expenses (Total of all expenses that you pay each month)
- Expenses (Average of all expenses paid over the year)
- Expenses (Total of all expenses that you pay each month – Excluding investments)
- Expenses (Average of all expenses paid over the year – Excluding investments)
- Invested (Monthly average of all money invested in your name)
- Invested (Monthly average of all money you personally invest)
- Income (Line 1) vs. Expenses (Line 3)
- Income (Line 1) vs. Expenses (Line 4)
Lines 9 and 10 should be illuminating. They show the total amount of money you have to spend on discretionary purchases, like food, gas, clothes, and haircuts. Line 10 should be a little smaller than line 9, because it takes into account bills you may pay once a year or every six months.
This type of exercise ensures that you pay yourself before spending money on day-to-day expenses. There are a few items in the first section I’d argue don’t belong in a budget, including a car payment. If you can’t pay cash for a car, you can’t afford it. But once you see how much you have to work with in line 10, you can see if that’s a reasonable amount of money to spend, or if you have more opportunities to put money away towards retirement.
The amazing thing is a person can make $150,000, a year and another person could make $50,000 a year, and the person making $150,000 a year can have a lower number for line 10; and that’s a good thing. Is the amount of money you have left over higher than you thought or lower? Your goal should be to get lines 9 and 10 to be as small as possible by moving money into the second section of your spreadsheet: investments.
If lines 9 and 10 are high, and you always feel strapped for cash, it’s time to analyze your day-to-day spending. After all, this is money you spend every day, not money spent in some distant future that you have no control over. You get to decide if you go out for dinner tonight or make something at home; if you upgrade to the latest phone or buy a used one from Craigslist.
If you follow this plan, you’ll be living off of your regular monthly income, and not dependent on tax refunds or sporadic bonuses to stay out of debt. If you do get that type of income, or any other kind of unexpected money, put it towards your retirement, after all, you were able to live without that money previously.
I think creating a traditional budget is a waste of time because it forces you into being a psychic. You can’t predict if your dog will get sick next week, or if your car will get a flat tire on the way to work tomorrow. But if you do need to replace the washing machine, maybe you don’t eat out as many times that month, or you can hold off on other discretionary purchases. It’s better to develop a financially responsible mindset, and have the skills to analyze each purchase to determine if you truly need it, or just want it.
Here is a sample spreadsheet to get started: Income and Expenses Example.