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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.