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I ran my own business for nearly 30 years. It had a multimillion-dollar turnover with multiple income streams and complex timing around incoming and outgoing payments. Managing this intricate system required meticulous budgeting and continuous use of spreadsheets and accounting software—exactly what you’d expect from a well-run business.
I’m now retired, and in stark contrast to my business experience, on the domestic side of finances my wife Suzie and I don’t operate on a detailed budget per se. I know friends who do, but I don’t feel the need.
There’s a saying that sums it up nicely: “Know thyself.” I like to loosely translate this as: know your financial self and your spending patterns. I’ve had lots of practical experience with this during our long marriage. I would hold that most people have this knowledge if they only look.
Knowing what we spend annually gives us the ability to operate without a budget. We simply pay ourselves a weekly allowance—in our case—for personal spending, and the balance of cash required for regular bills comes from a separate account specifically for that purpose. No hassle and no worries.
Vacations and irregular spending are covered by two further accounts that get funded monthly. Once again, over a long timeframe, our knowledge of vacation habits makes this an easy number to quantify and fund.
Our only unknown is irregular spending. A reasonable assumption combined with an emergency fund should overcome all but a black swan event—which itself should be covered by insurance.
Maybe you would argue this is a budget. I view it as using data and experience to create a self-managing system that requires very little thought or input other than an annual review and inflation adjustment. What do you think? Do we use a budget or not?
I pay attention to a couple of things on an ongoing basis, but without usually putting pencil to paper.
They include: (1) my basic feel for the ongoing flow from my spending, the core of my discipline; (2) my anticipation of one-time (for example, a vacation, a reunion gift to my college or buying a new car) or known periodic (for example quarterly income tax payments, property taxes, insurance costs and Christmas spending) spending events; (3) atypical increases in basic costs (like groceries, gasoline or cable television); and (4) my occasional spending weaknesses (buying something I like but don’t need, like a piece of art, or an unusually expensive dinner with my significant other). I also pay attention to unusual receipts, like a devise from a will or a long-awaited tax refund, though those are fewer and farther between.
My gut usually tells me when I’m a little out of balance and that I need to be thrifty. I throttle down my spending appropriately to balance out the expected deficit. I don’t do a detailed calculation. I do it by feel. It works for me.
But I do engage in periodic detailed assessments of spending, too, to make sure I am not deluding myself. Perhaps twice a year, I go through my spending more carefully, so I can catch anything odd or unusual that slipped through without my notice earlier. And at the same time, I carefully balance my checkbook and calculate the changes in my investment portfolio.
The gains in investments over the past few years have been significant, and I think that is partly why I don’t micromanage my finances as much as I used to.
First off, I would differentiate between budgeting and tracking spending. To me, the first is about estimating spending and/or setting spending limits, while the latter is tracking what actually happens.
For the last 10 years or so we tracked spending pretty rigorously, categorizing monthly credit card transactions. Leading up to retirement we used this information to establish our “burn rate” — the combination of fixed and variable expenses — so we could better understand what was discretionary and what was not.
For calculating how much we would need to retire, this was necessary — otherwise how would we know how much we would need before pulling the plug on earning?
Now that we’re retired, I continue to track spending and compare it to my estimated budget amounts so I can determine whether our spending is within the planning limits I’ve established. This has been necessary since our spending has changed dramatically since we retired. We’re now spending over 50% more than we were when we were working.
Our annual travel budget has increased 3x or more — an otherworldly amount to us — so we have no basis for intuiting whether we’re over or under spending.
I suspect within the next 2-3 years we’ll have adjusted to our new lifestyle and no longer need to track things quite so closely. OTOH, I’m also aware that we may find ourselves in a position to spend even more if we so choose, allowing for more travel or upgraded travel options that we never would’ve considered while we were working. Or not. We feel very fortunate to have landed where we have, and do not take any of it for granted. It could all go the other way in the blink of an eye, too, so we’re also prepared for that should it occur.
I budgeted religiously throughout my life from about 21 to 65. Then after the children all graduated and left to their private lives, I finally decided, we could navigate the future with no budget. I am happy to say the last 14 years have gone well, and we made the change successfully. I do think budgeting is good for many, but not all. Happy it worked for us.
I spent my career in the wealth management business, trying to get clients to develop and stick to a budget plan – with varying success! In retirement, I like you, do not work from a budget. However, I track closely how our investments perform and what our sources and amounts of income are.
I’ve been retired 13 years and am comfortable with my approach. However, everyone’s pain points are different and careful budgeting for some may be what helps them sleep.
To not have a budget, we need two things. One is as an attitude towards spending which is conservative. The other is money. It’s easy to spend less than we make when our income exceeds what we need and when we are conservative about spending on what we want in addition.
I can’t speak for attitudes towards spending in general, although Humble Dollar postings suggest the vociferous readers here are very similar (I see myself in these postings). But I do know about wealth by looking up statistics, and due to wage stagnation, health insurance, and recent inflation, it’s a stretch to expect people to meet the condition of having money, even if they are working hard.
Sorry, I can’t see that. Regardless of the amount of money a person has they can’t (shouldn’t) spend more than their net income after saving, taxes and deductions.
Everyone knows that even if they don’t admit it. Everyone knows what they spend beyond necessities.
A budget doesn’t change anything.
I’ve found over the years that the higher your income, the less important a budget is, but the lower, the more important.
The higher the income, the bigger the safety margin of not coming up short.
The lower a persons income is, the more important it is to have a budget. Every penny counts, and its easy to go over the edge into debt.
A budget also gives a person with low income peace of mind that they can make their bills each month.
You’ve made a fair point. The less financial wiggle room, the more compelling the case for a budget.
Why? That is only valid if a person has the means to spend more than they have to spend which to me simply means don’t use a credit card and you can spend more than you have.
we use credit cards, but always pay them in full before the end of the month because we have the means to do so, but that wasn’t always the case. In the many years when there was no excess income we just did without what we might have wanted but couldn’t afford.
We always saved in advance for things we wanted, including vacations and only and if we had the cash did we spend it.
I find that concept so easy, I can’t understand why many people can’t follow it.
I agree with your logic, and it’s how I’ve always operated. However, I can also see the utility of a budget for someone with a low disposable income.
For example, imagine you’re unexpectedly invited to a nice restaurant with friends on the weekend after payday. You could go and spend $300, or you could consult your budget and conclude that it’s beyond this month’s means, given all your scheduled payments. The alternative is being short on money at the end of the month. In this way, a budget acts as a decision-making tool, enabling you to foresee this problem and decline the invitation, thereby preventing financial strain.
Trained as an engineer, budgets alluded me. So none in my business or private life. Perhaps it would have been better if I had, but we survived every surprise. Of course, it helps if you have sufficient lines of credit set up well in advance to cover all temporary shortfalls.
It’s easy to establish lines of credit with your investment firm or bank using a portion of your portfolio as collateral. Interest rates are significantly lower than prime. Instead of waiting for accounts to settle, if you need to raise cash, funds from a credit line can be instantly wired to your checking account or directly to a payee. No fees are charged for this service.
When the market was hot and interest rates were in the two’s, I often left LOC balances running for a bit. This is way less complex than buying on margin. Raising cash while minimizing tax consequences is essential.
Some like cash reserves. I do not.
I managed a large IT organization with lots of moving parts. We had a large capital budget and a large operating budget. My organization was known for its budgeting expertise, and we handled lots of “surprises” along the way.
In our personal life, my wife and I never had a budget, but we were cautious about our spending. We knew when to say no and only occasionally would splurge on something. CCs were paid off monthly. We saved for retirement even though I had a pension. The only debt we had was our home mortgage which was paid off in less than 20 years. We used our HELOC to purchase cars (which we kept a long time) and we always paid off the debt in 12 to 18 months. We paid for our daughter’s college expenses on pay as you go and the same for her wedding which was expensive but worth it. We have also contributed to our granddaughters’ college expenses and our son’s business startup.
I would describe our approach as “disciplined spending”.
I have been retired 15 years. Re Mark’s irregular spending: There seems to be a lot more irregular spending in retirement than when I was working. Medical expenses, home repairs and so forth. However, we are in good financial shape thanks to financial planning.
Mark, I too ran and created several businesses for decades. 44 years to be precise. This predated PCs and spreadsheets such as Visicalc, Lotus123 and Excel.
Yet, we (and I) did cash flow, margin and profit analysis as well as managing projects with subcontractors, retirement plans, etc. The only loans were for a commercial property and occasionally to fund receivables.
Of course, any loans reduced margins and were to be avoided. We paid up to $500,000 for hardware for each project with no possible payment until after installation of the systems and acceptance testing. We invoiced progress payments based upon terms negotiated, but the invoices were anywhere from Net 30 to Net 90 days. We were largely funded internally.
Budgeting became second nature and of course this became a part of my personal life, too.
Today I read about the complaints of the young; we are not prepared for life, little or no financial acumen, we are taking on excessive debt, etc.
Perhaps mandatory training is necessary and education contracts, too.
We argue the pros and cons of knowing one’s net worth. Yet, if we purchase that $45,000 SUV many don’t realize the actual impact of a 7 year loan on their finances. Now they write on social media on how, after paying on the loan for 3 years they discover they owe a $50,000 payoff and are underwater. Ditto for those credit cards and that boat anchor of college debt that they assumed.
I’m in favor of teaching how to invest. But first one must learn how earn income, learn how to save a significant portion, what debt may be worthwhile and the true consequences of assuming any and all debt. Today there is a push for a better 401(k) with an annuity. Why? Because it is the acknowledgement that too many cannot or will not save for retirement. Social Security was designed to provide 30-40% of one’s income needs in retirement. Many now want someone else to provide the remaining 60-70%. That’s intellectually lazy and an acknowledgement that they aren’t capable and that their education has failed them.
I’m convinced that financial independence requires budgeting. Once we retire our finances may be on automatic. That’s not typical for most of society.
Lotus 1-2-3 brings back memories. At 25, I was tasked with sourcing and implementing a database solution for all six branches of the specialist pipeline equipment wholesalers I worked for. I chose the Lotus 1-2-3 software suite for the job. The CEO gave me this project because he knew Tandy Inc. had sold some game software I developed as a young teenager. Goodness knows why he thought that qualified me for the job, but I digress. I agree that financial education isn’t where it should be, and perhaps I’m a bit harsh in my view that essentially, you reap what you sow. Annuities as part of a retirement account, to my mind, are a positive and possibly a better route for many people than managing a portfolio.
Norman, the push for a 401 k is not because people will not save (although that’s an issue too) because they still have to save to accumulate the annuity. The annuity issue is a steady income stream to avoid some of the retirement withdrawal/ cash management issues
RQ, the desire for an annuity or MYGA (Multi-year guaranteed annuity) by young adults seems motivated by several factors. 1) Desire for employer contribution. 2) Risk Aversion. 3) Principal Protection. 4) Tax Deferred growth. 5) Guaranteed Income.
There is a concern about the availability of retirement income in the future. Some financial advisors are pushing these products. Of course, the fees generated are substantially greater than low fee ETFs.
Young adults in surveys I’ve read admit they lack financial acumen and some see an annuity as a means to balance riskier investments. The overwhelming desire is for the employer to provide these annuities as opposed to saving a portion of their income.
Agreed, I wouldn’t call what you do budgeting.
We may do even less. We do what we do and spend what we spend. At the end of the year, look back and see what that was. Everything pretty much comes from the same account.
When we’re spending more for some reason, we’re aware of it, so we’re generally not surprised by this rear view mirror number. It’s just a reality check.
Nothing is projected for the next year, other than the assumption that it will probably look similar to last year.
Btw this is just with pencil, paper and calculator, and we don’t keep it once done.
We are fairly similar. My workbook has a worksheet for income sources, a worksheet for expected/regular monthly expenses, worksheets for actual spending each month, and a worksheet on which the budgeted amounts and actually spent amounts are shown side by side. This allows a quick look to see what “irregular” expenses we have. We also transfer money each month to our vacation account and we have another savings account which we use to fund irregular expenses. That account gets replenished when used. So, yes, we have a budget, but it isn’t used to regulate any spending; rather, more of an informational piece for us to “know ourselves”!
Goodness, I’m embarrassed with my simplicity. I jotted down our different expenses on an A4 page and went from there. But I did use different headings lol
And, there’s more to it than what I described, but the description pertained to yours. I think the bottom line is that whatever works for a person is what they should use.
We don’t have an emergency fund. I consider our entire portfolio our emergency fund. We continuously have 1-2 years of cash readily available in a Federal money market fund with our brokerage. This would be more than enough to immediately to cover more than a truly extraordinary emergency. This is extremely unlikely as we are well insured, and could sell a portion of our significant position in short term bonds as well.
I’m curious, short bond fund or individual short dated bonds?
BSV- Vanguard Short-Term Bond Index Fund ETF Shares
VTIP- Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares
Also: BND- Vanguard Total Bond Market Index Fund ETF Shares
31% in BND, the short term @ 2:1 short term to short term TIPS
I can’t seem to take the plunge back into bond funds, even short-dated ones, after the bond sell-off. I’m all in with bond ladders now.
I have tracked my spending in detail a few times in my life, usually when contemplating a major change. More recently I have been using Quicken, where all my expenditures plus pension and SS income are recorded, without much effort on my part. I take a look once a month, when I pay my credit card bills. After I started taking my own SS I moved money from my local checking account to my Vanguard money market account every month. Since moving to the CCRC the transfer is going in the other direction. It is not large enough at this point to cause me concern. And after all, the reason I have a portfolio is to fund my retirement.
We must be related in some way. This is virtually how we operate. Never needed a budget because we never spent more than what we had to spend after saving was done.
We use separate bank accounts to allocate funds for designated purposes like routine household bills, and vacations. We each have small savings accounts – for exactly what purpose we never defined.
And, we have two checking accounts, one designated for Connie which she uses as she sees fit.
All the above are automatically funded each month from pension and SS income. I wrote about all this in detail on HD, but I’m too lazy to go find it🤨
The budget is the net amount we receive each month from the pension and SS income- after tax withholding and deductions for insurances.
Maybe kindred spirits who like to keep things uncomplicated. After all, it gives us more time to convert the unconvinced to the cause of simplicity 😉
We have only one checking account.
Anything under, say, $20 we just buy.
Any large expenses, say kitchen appliances or dining room chairs, we discuss and agree on BEFORE we spend any money.
It helps that we both view financial matters the same way. We both grew up in ‘savings’ households and it took.
We Smiths seem to think alike. One checking account, cheap stuff we just buy. Chrissy always comes to me to discuss larger purchases, where I state my objections just before totally capitulating to her desires. 🤑
I used to call your current method a budget, until someone, whose name and initials I will not disclose, correctly pointed out, is not really a budget by definition.
I think a proper budget can be an effective tool for certain people.
That being said, I agree with you and that old HR guy. You don’t need an accountant or a spreadsheet for your money If you successfully live within your means.
I wonder who that could be 🤔
👍
Mark, I think we handle things in a similar way to you. I call it guardrails. We have SS and pensions deposited in our checking account for daily expenses. Our tIRA goes into our money market account quarterly. If we have extra in our checking at the end of the month, I put it in the money market. Most months this year we have had extra. I just try to keep things simple. Chris
Chris, simple is my mantra.