The key is not how much you spend, but knowing how you spend your money.
- A budget is an estimation of revenue and expenses over a specified future period of time and is utilized by governments, businesses, and individuals.
- A budget is basically a financial plan for a defined period, normally a year that is known to greatly enhance the success of any financial undertaking.
Many people spend a lot of time constructing and monitoring their budget. One person told me she enters every penny she spends on a spreadsheet to monitor her budget. Actually some people find that an enjoyable activity, but to what purpose?
A budget is a projection of what you will spend during a future period. The longer the period, the less accurate the budget is likely to be. Because of that budgeting can be stressful, especially if one is trying to budget something like expenses in future retirement. It’s like a New Years resolution. We start with good intentions and then out of frustration, we forget about it.
Who wants to live with a ongoing worry about going over budget? The fact is, with two caveats our budget is always set for us.
🤑 Save first
🤑 Never have an unpaid credit card balance at the end of a month
If that “budget” isn’t working you either need more income or you need to cut your spending. It’s then you review how you spend your money. I’m betting that if you think about it you know what you spend on fixed basic expenses like rent, mortgage, utilities, car loans, etc. It’s the other spending – beyond expenses- you need to focus on.
Keep it simple: after tax take-home pay – savings = money available for spending.
Don’t spend more than that amount and there is no need for a budget. Your lifestyle is limited to the available money. A detailed budget is of no value because it always must fit into the above formula.
Dan Egan, director of behavioral finance and investing at Betterment recommends what he calls stress-free budgeting. His method eliminates constant monitoring of spending, which can be tedious. Mr. Egan and his wife send their pay-checks to a joint bank account from which they automatically pay recurring bills, including their mortgage. The couple also automate transfers to subaccounts earmarked for items including emergencies, a new car and vacations. Then they divide what is left in half so each can spend the surplus as they see fit.
I follow a similar method which I outlined on HumbleDollar.