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Somehow the word budget has gotten a bad name. An innocent financial tool has been equated with penury, and excessive frugality. Some people think budgeting is synonymous with obsessively tracking every penny spent. But it doesn’t have to be.
In Personal Financial Planning, budgeting is a tool to help us manage our finances, make better decisions, and achieve our financial goals. It can be tailored to fit your situation. If you find there is “too much month at the end of your money”, you may need a highly detailed accounting of your spending. Many of us only need a more general plan managing our income and expenses.
I think it’s much easier to execute a budget in today’s digital world. There are many ways to organize and automate your spending and saving plan; you can tailor it to your needs and comfort level. Some ideas include, but certainly aren’t limited to:
I’m a fan of the “pay yourself first” strategy. Simply put, you prioritize savings first, be it retirement savings, emergency accounts, college accounts, non-discretionary bills, or investments. What remains in your paycheck is what you have to spend on discretionary stuff. I think it’s good to feel a little tension when making spending decisions out of your remaining paycheck funds.
Retirement budgeting is different in that most of us are no longer in the “accumulation” phase. Many retirees use some combination of a traditional pension, Social Security benefits, and withdrawals from retirement accounts to fund their spending. If you are lucky enough to have sufficient retirement income, from whatever sources you have, to readily cover your expenses, your budget is pretty easy to manage. It could be as simple as having monthly pension and social security payments deposited to a checking account, and paying all your bills from that account. If the balance builds up, transfer excess funds to a savings or investment account as appropriate.
For retirees of limited means, managing their budget is more critical. They may have to track their expenses carefully. I’ve seen many retirees in this situation while preparing their taxes under AARP’s TaxAide program. One of the most effective methods to stretch a budget for lower income retirees is to share housing with family members or friends. When they explain the hard decisions they have to make, I realize how fortunate my wife and I are. We have some flexibility and margin in our income and spending plan and can organize it to meet our needs and goals.
Given the negative associations with the word budget, maybe it would be better to speak of something more akin to a “coordinated income and spending plan”. The reality is, we all have a budget. Some are exceedingly generous and require minimal action. Some are tight and require frequent monitoring. This versatile and valuable financial planning tool deserves a little more respect.
My use of budgeting has varied over the years. While I was a student I sometimes spent more than my income, meaning I needed a loan or an overdraft. After I started working I tracked my expenditures more closely, and I don’t think I’ve paid interest on a credit card since. I also ran a formal budget shortly before and after I left my first husband. I soon discovered that was unnecessary as I was living below my income. For the last few years I have also been spending less than my income, but this year, after my move to a retirement community, I will spend more than my pension and Social Security for the first time. However, since the excess represents about 0.66% of my portfolio I am not worried. I have run Quicken for the last 25 years, so I can see where the money has gone if I care to look.
I find it interesting that people think if you aren’t on a corporatized budget that counts every widget it isn’t a budget.
The most popular budget that I’m aware of is the 50-30-20, you don’t track line items, but it’s insanely valuable, esp for people starting out (the guardrails that 50 and 30 set really matter when you’re young)
In retirement it can be re-tooled as the 50-50 budget, where half your “paycheck” is discretionary. It should be obvious that if you know where you can reduce expenses, how much you can reduce, it gives a retiree a lot more power to survive bear markets (reducing spending is a good way to soften sequence of returns risk)
I agree with the general concepts in this post. Especially for those whose expenses and incoming cash flow are are similar, a budget is a good tool to be sure that you are keeping track and don’t end up upside-down with expenses more than $$ available.
And, while I keep track of almost every $ of expense and revenue (Quicken), because I always know what these numbers are for every month and year, and how this year compares to the past, I don’t have a budget. This is possible because the revenue available is usually significantly more than the expenses.
After enough years when you end up with a significant year end cash surplus, doing detailed budget planning loses meaning. It does not really matter if you spend more in one category and less in another. As I mentioned in a comment on another thread, when your spending is less than 2% of your financial assets, your pot of money is going to grow, and details of how you spend is noise.
I think you may be making the case for having a budget (or permitted spend) regardless. In early decumulation years those that have been good at saving do need to react appropriately to their new circumstances. It can take us a while to rewire new habits especially if natural or learned thriftiness has driven the “good” behaviours.
One response is the fearful preserve capital at all costs and thus try to live off natural yield etc.
A better response I think is to have mapped out a “safe” decumulation budget and grant “permission” to spend up to that limit whether that’s in categories or total. For those of us that have to create our own cash flows that’s far better than trying to maintain thrift which our instincts may encourage us toward.
Obviously once you provably are in a situation where the balance of resources always goes up ( in real terms) no matter the spend the idea of “permission” becomes somewhat moot but even then life events will happen that may change the picture on spend considerably.
Thanks for reading and commenting. I agree that detailed expense tracking is more important for folks whose means are close to their spending. When our income greatly exceeds out spending, the need to track each expense goes away. I still think there is an amount that is significant to each of us, even if it’s 7 figures!
Agree totally. That question of significance is especially important for folks with a long history of thrift. Asking yourself if XXX amount for a purchase is significant can help you to rationalize spending more. $3000 when you have $3M is only .1%.
Rick, thanks for pointing out that everyone has a budget, even if some have one that doesn’t have a traditional look.
Early in our marriage, the family budget served to help my wife and me communicate in writing our thinking about money management. We each had a little different view of spending and saving needs. The budget forced us to collect our thoughts, express them out loud, then record them to aid our memories.
These days, our money-minds are so interconnected we haven’t had a formal budget talk in years. Instead, we just periodically review our current finances to see that we’re within the general parameters we’ve fallen into following.
It’s said that disagreements over money are a major reason for marital problems. I think the “budget talk” can help identify differences early, with the chance of working them out before they grow into unreconcilable resentments.
Edmund,
Thanks for reading and commenting. My opinion is that budgeting can be very flexible, and tailored to one’s needs and situation. As you point out, it can be a great forcing function for families to have important conversations. It’s very nice when we get to a point where we can automate our income and spending and not have to worry about it.
Thanks Rick. Nice article and a good one as the word does seem to carry a negative connotation for some people.
Michael, thanks for reading and commenting. I think having a decent handle on your personal cash flow is useful, especially if your means are limited.
The number of affluent low accumulators indicate it’s important for high earners too.
For many years I followed Dick Quinn’s process – – – I paid the bills, met obligations, and then decided what to do with the rest (if there was any). As an engineer, I was enthralled with the ability to slice and dice expenses and savings with a computerized tools. I became a user of both TurboTax and Quicken before Windows existed – back in the days of MS-DOS. With Quicken I have a long historical record of purchases, can evaluate spending trends, evaluate cashflow, check on my IRA & investments, and verify deposits. After my divorce, I had to track income and expenses much more carefully while I rebuilt my retirement savings & investments. Quicken helped me do that. It doesn’t matter if you call it a budget, a planning tool, or a “coordinated income and spending plan” if it gets you where you’re going
Another retired engineer here who relies on Quicken and TurboTax! Used to use Quicken’s budget feature but not anymore. Though maybe I should again to convince my wife she can retire too.
Randy, thanks for reading and commenting. It’s interesting that my wife is still occasionally amazed that we can successfully retire. The numbers show it, but there’s some small sense that it can’t be right. We have our yearly “state of union” financial review to discuss how we are doing and what we want our future to look like.
Jeff, thanks for reading and commenting. I know lots of folks who love Quicken. We used it for a while but got away from it I also have decades of Turbo Tax for reference.
It’s just semantics. Even the mighty budget/planning denier Mr Quinn has recently conceded he effectively lives off a reverse budget of enough discreet sources of income.
I don’t find budget a dirty or shameful word. It can be quite useful tactically to use with salespeople who want to fish for where to pitch and I’ve said to more than one car guy in response to the “How much are you looking to spend?” :
” Wrong question – my answer is zero. You need to be telling me how low you can get the price or I can just make a few calls”
BB, thanks for reading and commenting. Clearly budgets are in the eye of the beholder.
When did I say that?
You have just repeated it below but you recently covered it in your buckets of income post.
You just don’t see it because you seem to have some ideological position against both the words “budget” and “planning”. As I said semantics.
Somewhat strangely your self imposed rules about only ever spending what is left monthly are arguably tighter constraints than many people with “budgets” will impose, because they will also recognise that expenses fluctuate during the year (and if they are prudent they’ll maintain a buffer fund) . In your case I suspect your rules are merely notional as you’ve told us how you throw off surplus
Isn’t a budget a plan for spending over some future period of time, generally a year? Tell me how one budgets spending beyond net income? If that is not how you define a budget, we are talking in circles.
I don’t do any such planning and never did. I do know when we can’t afford to spend on something though.
I used to manage a $200 million budget when working, but even then there were only broad categories and we didn’t bean count each item.
If I spend less in one month the money remains in the bank accounts thus available. As I said, each month some money goes into what I call emergency fund, but not used for routine expenses.
Knowing when you can’t afford something is so infinitessimally different from having a budget it’s not worth debating.
None of this matters except to you and how you seemingly want to portray yourself as some personal finance maverick despite really being very conservative but simply insisting on your own language about things.
As as been pointed out many times to you people in your position with abundant pure income will rapidly become a small part of the retired population as the true 401k generations succeed the salary based pension generation. They won’t be in a position to ignore planning and budgets because they need to make what they have fund the rest of their lives. Well I guess technically they could throw in the towel early and just convert everything to annuities but that would seem to me to be a costly and inefficient response.
Note I’m replying out of politeness not because I want to prolong the discussion.
Living with in ones means which is actually what this about in not based on income, nor retirement. How I describe using money is how we have lived our entire married lives. identifying unnecessary spending when necessary is one thing, but trying to budget in advance under a conventional definition provides no added value that I can see. It’s a crutch for undisciplined spending.
‘’You take your net pay, you take your savings (which includes into and emergency fund) and you have an amount left – the amount not mattering and now you know what you have to spend which assumes you don’t use credit beyond paying the balance each month.
When it comes to retirement planning I would focus on what I can reasonably generate as income from all sources. I have to fit my spending into that no matter what. Then get into details of how you want to allocate spending limited by the funds available. There may or may not be sufficient funds to meet desired spending.
‘’What good is a budget that can’t be supported by available funds?
Your penultimate paragraph is almost exactly describing budgeting.
I truly don’t know whether you do it for effect but your characterisation/ implication that budgeting is pointless because it can’t help you spend money that isn’t there is just daft.
It’s not a “crutch for indiscipline” and even if it is a useful tool to help people get on a sound financial track using that phrase is, as a minimum condescending, if not downright rude. When you ask for examples of where your tone makes you come across poorly there is one right there.
You say rude, I say to the point and accurate in as few number of words as possible.
Of course what I actually said was “trying to budget in advance under a conventional definition provides no added value that I can see. It’s a crutch for undisciplined spending.”
When I did multi-million dollar budgets they were a planning tool. The goal was to stick with the budget, but at times we didn’t and couldn’t when for example health care claims rose unexpectedly. However, the claims were paid anyway.
Individuals and retirees especially typically don’t have that luxury so budget or no budget they are constrained by available income or they must use credit or take from other resources creating future risk.
Individuals must exercise discipline in spending, that’s the key, not numbers on a spreadsheet. IMO of course.
Richard, I think the crux of this discussion is that you refer to classic definition of budget, especially as used in business planning, versus a plethora of alternative ways ordinary people use. For example once a year in January I make a list looking backward of what we spent the prior year. It isn’t very detailed, I don’t dissect credit card spending which includes things like restaurants, insurances, utilities and whatever. It gives me an idea of our spending versus our income. I refer to it as a budget, but it certainly is not by definition one. We typically spend between 55 and 60% of our income, so I would agree that we need no classically defined budget.
I think you are right. We throw around words and individuals come up with their own definitions. Retirement is another word that seems to be variable.
I know what we have to spend each month. I put cash in different accounts for different purposes, some used each month, some accumulated and used all at once.
After a time I knew that what I put in the account for ongoing expenses will cover them all, but I don’t know what each expense is. I do know that account balance remains pretty stable over a year so I assume the monthly allocation is pretty close. If in a month we spend less than average I may transfer some excess to the expense account as a future cushion, just in case.
The bottom line for me is you need to work backward from available income to possible spending. Income constrains spending – for prudent people at least – so a budget has natural limits no matter what.
I retired assuming none of our expenses or spending would change in total and worked until retirement income would at least match that. The only real variable spending from working was travel which, of course is highly discretionary.
“Income constrains spending – for prudent people at least – so a budget has natural limits no matter what.”
That doesn’t mean that a budget doesn’t exist. In fact I won’t know whether the limit is an issue unless I have a handle on what I’m spending. If I have money left over above my income each month I don’t need a formal budget, but if I find I am spending more then obviously I need to start tracking expenditures.
At the risk of more wrath, aren’t you saying the same as save first, never end the month with a credit card balance and then spend as you like with what’s left?
As you say, Rick if the what’s left part is insufficient then what needs to be cut requires investigation and action. Do it a few months and it’s automatic.
My hot spot is that if the above is followed, what need is there for a budget?
What can the budget be other than the money left after saving?
Does it matter the level of one’s means? Retirees of limited means aren’t saving so their net income is what they have to spend. What are they tracking? Don’t they know what they spend on necessities each month and what is left? Unless credit is abused, you can’t spend more than you have to spend.
My income each month does not change, most bills are auto taken from bank account. What is left is all there is to spend. I pay credit card every week or so and look at checking account to be sure the balance will always be sufficient to pay anything on credit at end of month. If they don’t stay in sync, we don’t spend.
Should there be an unexpected expense it comes from emergency funds if necessary, something contributing to each month as one of the auto expenses.
I think more necessary than budgeting is financial discipline and if there is no discipline will a budget really help?.
Means clearly matter.
For someone on a tight monthly income maybe they’ve covered all expenses for the month but got to the 29th and the income for that month is gone. An old friend they don’t see very often is suddenly in town and wants to go to dinner. Do they say ” Nope it’s not an emergency and I have no income left” or do they say “This opportunity doesn’t come around often I’m quite happy to borrow from next month’s budget to do it” (and give up meals out the next month), while short financing on credit card or from a buffer fund?
I don’t think that most would pass it up. And anyone who doesn’t ignore it and instead makes some adjustment in the following month is exercising some form of budgeting regardless of whether they recognise it or not.
Even those who have plenty to spare and do some sort of mental or actual check to confirm they can cover the cost are IMV doing a form of budgeting. Budgeting isn’t one process of agonising over every cent in every category.
The real issue in personal finance is for people who don’t think and let externals be the only form of restraint like a credit card limit.
Your final question is pretty easy to answer. Even for someone who’s disciplined, a budget can help them focus and exercise that discipline.
For example, take a person or couple who enjoys eating out and does it a lot, perhaps to excess. Sure, some might just say “I’m going to eat out less,” and do it.
But it might be more useful for some to say “I’m going to limit my eating out to X dollars a month (or Y times a month).” Then as the month goes along they can see how they’re doing and make choices appropriately. Then the discipline comes in, but it’s focused, e.g., “Last week’s dinner out cost more than I had expected so I’m going to skip this week.”
Or, someone can see an upcoming expense and look at their budget to decide where to cut back a bit to make room for it. Then the discipline to do so comes in.
People are different and we can focus or trick ourselves in different ways, but I can certainly see the value of a budget.
Dick, Thanks for reading and commenting.
Tracking cash flow is a good beginning, tedious as it is. If you don’t know where your money is going, making up a budget is rather futile. However, it too (the budget) will eventually find the leaks and cracks in the cash barrel. Both are useless if you cheat on your tracking. You likely will not put every expenditure in the “right bucket”, which isn’t a crisis, and you may inadvertently miss an entry here and there. The keys are to be diligent and be ready to make some tough choices on your spending habits.
The best, worst thing that we experienced in our younger days was the day my wife suggested we have a chat about money after dinner. At the time, I was working a ridiculous number of hours per week and my wife was somehow holding down the fort with one young child and another soon to arrive. Money inflows were improving with promotions and for a short while, COLA payments to boot. Unfortunately, the spending habits were on their own upward trajectory. While I don’t recall the exact number, we had racked up quite a large credit card balance. While I stared at the, “this can’t be right”, numbers, I do vividly recall the awful feeling in the pit of my stomach. It took a few years, but the debt was paid in full, including student loans (which we had a plan for paying off before we even married.). From those days forward to day, some 40 years, we have never carried a balance forward on a credit card. Tracking expenses and developing and following a budget were two main keys in our financial turnaround. We did some side jobs as well to save up for a bigger house. I guess those are called “hacks” now. And make no mistake, we had a lot of good luck to help us move in a positive direction. One of which was getting a much lower mortgage rate than the 18% on our first home.
in short, our financial teacher was real life. Nobody had sat either of us down to talk about money, ever. In my teen years, I started my own yard care, snow shoveling and household help business so, I could have my own income. Needed a few gallons of gas for the car? Better go earn it now. (Notice I didn’t say, fill up the car?). I recently found a notebook that had been lost in the boxes we seem to overlook every time we’ve moved. In that notebook was the rag-tag cash flow register I started from my teenage business adventures. (Yeah, I still have it.)
When money started flowing in years later, we temporarily lost sight of our modest beginnings. This bad practices learning in our early years might have been the best thing that helped us for the long haul. I had previously written about buying a new car this year and taking out a loan on part of the cost. I don’t care much for debt and even though I could do better with the money, I opted to pay off the loan after a few months.
Still standin’.
“One of which was getting a much lower mortgage rate than the 18% on our first home.”
Ah, the early 80s mortgages. I thought our 13.5% first mortgage rate was bad.
And to think people are complaining that 6-7% is egregiously high!
GW, thanks for reading and commenting. I’m a big believer in real life training. I had similar experiences in learning how to manage money. I recall scraping up coins to get enough gas to get somewhere.
We didn’t have a good education about finances either, it is not just you, GW. Chris
Thanks Chris. Many of us learned from the challenges we observed growing up, more than any formal training.
One of the other personal finance websites I visit describes 2 broad categories of budgets.
First, the PROSPECTIVE budget.
What will we spend our money on next period?
Second, the RETROSPECTIVE budget.
What did we spend our money on last period?
Personally, once we retired we moved from the first type to the second.
Of course we’re lucky enough that our SS and pension monthly payments are more than sufficient to pay for our everyday expenses and essentials.
YMMV
Winston, thanks for reading and commenting. You highlight the point that budgets flexible and tailorable to individual needs.
Given your last sentence Winston, why do you need a budget?
Good question.
Both my wife and I are retired IT geeks. We like numbers and still love to play with spreadsheets.
That’s as good a reason as any.
Just to show you what data geeks we, I looked up our
Income to Expenses spreadsheet from 2019 to 2023 – 5 years or 60 months.
The ratio was almost 119% of income over expenses.
We KNOW we are very fortunate.
Excellent article, and I completely agree. Leading up to retirement I started tracking my finances more closely about 10 years prior to retirement. That experience base really helped me answer the question “do I have enough to retire”. At this point it takes minimal effort to maintain and it’s still providing value as it enables me to spend with confidence. I like your thought about calling it a “coordinated income and spending plan” since that’s exactly how I use it.
Thanks for reading and commenting. Glad you enjoyed it.
I did this too. Chris
Thanks for reading and commenting.
This is my process exactly, including the 10-year retirement lead-up to establish spending pattens and know with assurance that our retirement income would more than cover our spending. We track the income and expenses, just don’t build a budget which we would then need to pay attention to.
Dave, thanks for reading and commenting. It sounds like this is a “best practice” for near term retirees.
This is a useful article Rick! I read Jane Bryant Quinn when I was younger, and followed her suggestion to track my spending over a period of time. I was surprised at how much I was spending in some areas, and how little in others. From that, I prioritized my spending and developed a “spending plan” which I further modified over time. The “pay yourself strategy” funded our budget with what remained after making automatic contributions to retirement savings (401-k plans my wife and I had, and a taxable brokerage account). This helped us with retirement planning. She retired four years before me. To paraphrase Adam, the date I chose was a combination of what “the calculator showed, and my gut.” And now in my seventh year of retirement, we use the same budgeting process, adjusting along the way when appropriate.
Thanks for reading and commenting. Sounds like you have a system that works well for you.