When I think of a traditional budget, there is a spreadsheet with a list of “buckets” that are allocated a portion of your income. Each “bucket” is given an amount that is somewhere between an estimate and a guess (or guestimation if you want to use technical terms).
We have never had success guestimating our spending each month; planning ahead is not our strong suit and we don’t like to pass up enjoyable events (within reason) – when trying to budget, these 2 facts stomp all over any attempt I have made to categorize expenses on a monthly basis.
Long story short – I gave up the idea of having a traditional budget a few years ago and developed a method that works for us.
The Apathy End’s solution to having a budget
Before we get to far into this post let’s review a few terms I will use moving forward
- After Tax Income: Take home pay, for the purpose of this post we will use 2 paychecks every month
- Unavoidable Costs: Costs that are difficult or impossible to cut and can be estimated monthly
- Mortgage, heat, water, electric, insurance, cell phone, internet, car loan, gas, student loans
- Variable Costs: Costs that are not mandatory for survival and could be cut out if necessary, these vary heavily month to month and are hard to estimate.
- Savings Rate: % of after tax income saved
Turning Terms into a Plan
First lets walk through a few equations:
After Tax Income – Unavoidable Costs = Variable Cost Bucket
$10,000 – $3,500 = $6,500
The above example would imply you do not care about saving any money and anything that is left over after “Unavoidable Costs” is going to be blown over the next 30 days. Sounds fun right?????
Since I am a responsible personal finance blogger, one tweak is needed to make sure this has a chance of passing the budget test.
After Tax Income * Savings Rate = Savings Amount
After Tax Income – Unavoidable Costs* – Savings Amount = Variable Costs Bucket
Example with some numbers:
$10,000 * .35 = $3,500
$10,000 – $3,500 – $3,500 = $3,000 (Variable Cost Bucket)
*I do have a ballpark number for unavoidable costs
How we make this work
- I set a yearly financial goal for our savings rate and setup automatic payments to all of our accounts.
- Without thinking or any manual intervention, 35% of our After Tax Income is moved to savings and investment accounts
- Whatever is left in the Variable Costs bucket – we do whatever we want with and do not separate it out between entertainment, food, drinks, buying non-essential products etc.
- I periodically check our credit card balance throughout the month and if it starts getting out of hand, we take it easy for a week and then resume our normal spending
Additional layer of accountability
Recently we started going through our credit card line by line to make sure our variable spending bucket is not getting out of whack.
The purpose of this is to look for purchases that were a result of poor planning (coffee, eating out at work, etc) or purchases that don’t align with our theory “spend money on things that you truly care about and cut out the rest” – I am not trying to completely cut this spending, just make sure we are spending it the right way.
Another reason to take periodic looks at the Variable Bucket – if I want to boost our savings rate without increasing our income – it is easier to cut Variable Costs than Unavoidable Costs.
-Not a mandatory step, I will probably stop reviewing our credit card on a monthly basis once we curb a few bad habits – any money we “save” from the review will go to paying down student loan debt or will be spent on something we care about – summer is expensive
- Guilt free spending of any money in the Variable Cost bucket because we hit our savings rate goal
- Easy to maintain
- Set a savings rate, make it happen automatically, wing the rest
- Spending review takes about 30 minutes each month
- Planning becomes less important
- Spending can vary heavily month to month depending on what events we have
- Certain expenses can build over time unchecked (part of the reason we started doing the CC review)
Do you have a traditional budget or use a hybrid approach? What do you think about setting a savings rate goal and letting the rest of your finances fall into place – guilt free?