We are about halfway through our exploration of the Budget nebula, but we skirted a little too close to an asteroid field, so while we are dead in space effecting repairs it is time for a closer look at the properties of a budget. This was inspired by the post of another Aussie blogger – When The Path Forks (WTPF), named Budget Blunders. Feel free to remove your seatbelt and duck across in the shuttle for a read. We are currently caught in stasis, so you have all the time in the multi-verse.
Back and comfortably strapped in? While the post is full of truisms and wisdom regarding the path to FI, I feel that WTPF is being a little harsh on the humble budget. I’d like to pull WTPF’s old budget from the shelf and give it a little polish, to see if we might find something valuable under the tarnish.
A Budget is a Tool
A budget is a tool, no more, no less. It can make a job easier, but its success depends on your skills as the wielder of the tool. There are as many ways to design and use a budget as there are paths to FI. The budget you set up should meet your needs and help you to reach your goals. There’s no use copying the ETT Budget, because you live a different life to us. You may begin by feeling that you are no good at budgeting, but like all skills, you can improve with practice.
Your Budget Isn’t Out to Get You
Budgeting is allocating money for a specific purpose, but it doesn’t encourage you to spend that money, any more than a hammer encourages you to smash your finger. Of course if you are budgeting for bills you want to spend the money on those bills. However, you can equally use a budget to save and invest, by setting up and tracking those categories.
Nor does a budget deliberately set out to make you miserable by forcing you to stick to an arbitrary figure. Budgets are living documents. The longer you stick with them, the less arbitrary your figures become, as you learn to embrace your true expenses. It is no use pretending to yourself that you can live off tins of spaghetti for 2 weeks a month – it isn’t sustainable. Instead, recognise what your true spending is in that category and either reduce another that is sustainable, or, reduce spending in multiple categories by a small amount.
Likewise, if you have decided you only want to spend a certain amount in a month, but you are hit with an unexpected essential expense, you (hopefully) don’t decide that you will go without water until next month because you can’t exceed a number you’ve budgeted for your water bill category – you roll with the punches and again, move money between categories to cover the unexpected expense. When you first start budgeting, this may be nearly impossible if you have been living pay cheque to pay cheque, but the longer you budget, the more flexibility you will have to cover unexpected expenses.
Your Budget Isn’t Your Boss
A budget also doesn’t tell you where to store your money. Of course, for everyday immediate expenses, you do want some in an easy access account that likely has zero interest but for savings, it works just as well in a high interest savings account or term deposit. For your long-term investing, keep your money in shares or ETFs or property or gold bars under the bed (OK, not really the last one). Your budget won’t care and will still work!
The advent of cloud-based budgets and budgeting apps has solved the issue of budgets being retrospective in nature. The YNAB app allows expenses to be entered quickly and easily at point of purchase, with category balances updated immediately. Whenever you are contemplating spending money, you instantly know whether you can afford it by whipping out your phone (which we’ll all be using for payments soon anyway). This enables multiple family members to use the same budget and know where the family finances sit at all times. Just not sure about YNAB? Fellow Aussie blogger wealth from thirty has reviewed Pocketsmith; alternatively Nerdwallet has done a round-up of the best budgeting and saving tools here. Want to stay local? While I have no experience with it, Pocketbook is an Australian product.
You Are The Ruler of Your Budget
The time horizon of a budget will vary, depending on your known expenses and goals for the future. Do you know you have to pay health insurance, but can get a better price if you pay a lump sum annually? Just split the annual cost into 12 payments and budget away. Know that you are going to have to replace your car in the next 5 years? Calculate how much you will be willing to spend, then divide by 60.
In 5 years time, not only will you have the money to replace your car, but you will have likely embedded FI thinking and you may find you now only need to spend half of what you were originally anticipating. Want even more flexibility to move when an opportunity arises? Create a “stuff I forgot to budget for” category that you can use freely, either in and of itself, or to top up another category.
Budgets don’t set out to make you their slave, nor encourage you to spend every dollar. If you want to save and invest, then after your dollars have all been allocated their individual jobs, the remaining ones have a nice comfortable category to slip into, where they can go and work for the future you. If you want to include some discretionary spending, that’s OK too! Set up your budget based on your values, not someone else’s. Just remember to update your budget as you find your values and/or goals changing. The best part about a budget is that it is a form of measurement, and what we measure, we can improve!
Let Your Budget Help You
Our spending habits and relationship to money have developed over a lifetime, regardless of how old we are. Very (very) few of us can go cold turkey on habits of a lifetime, so use the tools available to help you make slow, sustainable change. Eventually you may become a master, and no longer require the tool, but even masters need to continue training to maintain and improve their skills. In short, the modern budget has evolved to be so much more than a static, accusatory spreadsheet. Its flexibility, availability and ease of use make it a valuable tool, even for the masters.
- There are lots of mentions of YNAB here. If you click on a link and decide to sign up after your free trial, both of us will get a free month. I think the product is great, but if you have something else that works for you, then stick with it.