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).
Example:
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?????
Wrong.
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
Advantages
- 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
Disadvantages
- 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?
I like your approach – it focuses on paying yourself first, not paying yourself with what is left. I don’t like traditional budgeting either. I use more of a passive approach where we shoot for a spending number per month instead of breaking everything into buckets.
Makes sense to me! I have respect for people who are disciplined enough to stick to traditional budgets – just not for me
Hi, thanks for explaining (very thoroughly) how you see things. Good way to look at it. We have a traditional budget, however we don’t rigorously stick to it (either positively or negatively). It is more of a guide. We try to get as good value as possible for our money.
Tristan
Making the most of your money is important, a budget is only the guide
Great post! I just found your blog via Twitter and it drew my attention because I just recently wrote about why I think a persons savings rate is important, but I like you dug in to the details and explained how to incorporate it into a budget.
I’d like to link back to your blog if that is OK on the “Blogs I Follow” on my blog. Let me know if you are OK with that.
Thanks!
That is 100% ok with me!
Thanks for stopping by and commenting!
That’s an interesting approach, I like it. It’s very helpful to sit down and review expenses and see where your money is going. My wife and I do this using the traditional budgeting approach but this goes to show there are multiple ways to skin a cat. Thanks for sharing!
The Green Swan
Thanks! There are definitely multiple ways to do this successfully
This is a practical approach. We do something similar.
We automatically transfer the money to the different savings and investing accounts when we get our salary.
There is also a transfer for the fun money for my wife and I to spend guilt free. Next to that, we have pro rat costs of big yearly bills and some life happens savings transfers.
What is left over covers the monthly known bills and grocery shopping.
Now that I reread, it sounds complex.
Haha, it makes sense to me and if it works for you that is all that matters
I like your approach! We do keep an itemized budget because I feel more in control, however, we are big believers in the “pay yourself first” motto. Right now we have most of our savings coming off the top of our paychecks which we allocate between our investment accounts and savings. With our remaining pay, we live off of Mr. FE’s salary and we save mine. – Mrs. FE
I have heard of other couples living off one salary and saving the other – I like that approach for the obvious reason of a high savings rate, but it also proves you could live off one salary if you move to single income
As you know I am still in school but I do budget with a traditional budget. The accountant in me loves spreadsheets but I will say that I have a ballpark that I would like to restrict my spending to. No number is a hard number except for rent, utilities, and tuition for me. Any spare change I can get goes into investing/savings. Will give you a much better update once I actually work full time :p
Haha, when are you set to graduate and move on to full time work?
Thanks for sharing your approach. To be honest, I don’t spend much time budgeting, but I should. It’s an area of weakness for me.
That’s because it’s not fun (for most people) – i finally quit trying and found another way to accomplish the same goal
Our budget definitely leans toward your approach. I do not categorize spending after all of our needs and savings have been addressed either. If we need more in gas one month, that’s simply means we do less with some of our other variable expenses. I try not to make it too difficult because I can’t follow through with a rigid budget and I never met my goals using one. Since I’ve taken this approach, Ive been able to consistently contribute to our emergency fund and other goals without feeling like we were being deprived of anything. I encourage anyone to use this approach if they are disciplined enough to not just spend money for the heck of it. I definitely like how you explained it though, much better than I ever have or could:)
Thank you! Discipline does play an important part in this strategy, if you can’t control unnecessary spending, the credit card bill can kill.
My favorite aspect of your approach is the implementation of the savings rate goal. I am far too much of a details guy -not to say you are not- to budget this way. I’m just not comfortable not tracking every penny. However, it seems to be working very well for you.
I like your approach. It’s similar to the one we used prior to my “retiring” earlier this year. Make savings a priority by placing it above the variable spending. If you don’t, it’s very easy to “variable” your funds away and save nothing.
Nice work!
John
Love it. It is simple and automatic, the way saving should be. I do budget the traditional way but I am constantly annoyed that I am always updating it. I am going to try your method. Well done and thanks for sharing!
-Brian
Glad you enjoyed it and if you give it a shot let me know!
I enjoyed this! I love how you establish your savings rate, and place it at the forefront of your monthly expense planning. Different methods work for different people, the key is in the ability to execute. Very cool!
This is gold! (I’m channeling a Seinfeld quote in there somewhere).
I started off with traditional budgeting, but couldn’t keep up with the work required. Brutal. I made it 2 months.
Now I want to apply your approach, seems so much easier. Once you have the standard expenses accounted for and figured out a savings rate to use, you are left with the variable bucket. So many ways to slice the breakdown. Then I can focus on increasing the savings rate by driving down variable costs.
I’ve gone super nerdy and built a blog g data analytics tool to review our spending patterns all the way back to 2012 by exporting all of the data from Mint into a program called QlikCloud. Then you can review your spending by categories/companies on a monthly timeline and identify the 20% of spending that accounts for 80% of your unnecessary spending. I’m hoping to write a 5 ‘minute tutorial in the near future.
This sounds similar to my approach, I use broad categories rather than trying to track every dollar. I pay rent, savings, known bills, holidays and then anything left over I can spend how I want which varies from month to month depending on what is in my calendar.
I think more people who don’t like regular budgeting should try this and see if it works for them.