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There are a lot of personal finance sites on the Internet. Although there are really only a handful of real topics out there (i.e. spending, saving, investing, taxes, etc.), what helps attract readers is the author’s take on the various subjects.
One thing I noticed on most of my cohort sites out there is the focus on budgeting. So here’s a unique perspective…
I’ve never budgeted.
That’s right. I’m probably in the minority, but I’ve never set a budget for any of my finances. I’ve never set aside money for groceries or even really looked at how much we spend on them. Are we blowing too much on entertainment every year? Don’t know.
And I’m so meticulous about entering every single transaction into Quicken religiously. I categorize each and every entry. It would take me 2 seconds to pull a report on where our money’s going or how much we should allocate to every category… but I don’t.
I’ve just never had a need to do it, so I don’t.
Is that a stupid way to manage your finances? Maybe, but it’s never been a problem for me and I’m planning on reaching financial independence in a handful of years, so maybe I’m doing something right.
So what do I do differently?
I’m not making a fortune at work, but I do make a pretty good living. Mrs. R2R is working part-time at a non-profit so her income is actually pretty negligible. And we have a school-age daughter, which usually means an uptick in expenses. So again, what am I doing differently from the majority of people who budget everything?
I think the answer is two-fold…
Paying Yourself First
First, I make sure that we’re always following the adage of paying yourself first. We save a lot of money. Some sites look at what percentage of your income your saving, but I think that’s not always a fair way to look at things.
If you’re making a ton of dough, it should be easier to save a much higher percentage of your income. On the flip-side, if you’re barely making enough to survive, every penny you can put away is a tremendous feat.
We save about 35% of our income, but again, Mrs. R2R’s pay is barely anything, so we’re living mostly on my pay. And my pay, although pretty good, still isn’t something that would make your jaw drop. Regardless, we always save and invest as much as we can.
In fact, I keep things so tight that my checking account gets overdrawn almost once every couple of weeks. We use a credit union and they just pull the money from our savings without charging us any fees which I “pay back” to our savings, but that’s just how close I keep things. In other words, if the money’s sitting in my checking account, it’s not doing anything worthwhile.
I would like to save more, but right now, that’s pretty difficult. To save more, you either need to make more money or cut your expenses. Making more money is a little tough right now (for the time being), so I’m focused on cutting expenses wherever I can. Every little bit counts and, slowly but surely, I’m getting rid of the needless expenses for the sole intent of socking more away to quit my job sooner.
Controlling Your Spending
Second, Mrs. R2R and I are not big spenders by any means. We still buy things we want/need, but our needs are low and we don’t spend frivolously.
Yes, there’s always crap out there they we think we “need”, but we resist that urge and realize pretty quickly that we don’t. We tend to focus on experiences over material things and our vacations and other fun things we do are how we enjoy life… making memories for ourselves with our daughter.
We’re also naturally conservative with where we spend our money. I mentioned the idea of budgeting for groceries at the beginning of this post, but we now spend most of our money for groceries at Aldi. I’ll be honest, it’s almost impossible to overspend at this place!
We’re in a house that might be a little too big for the three of us, but we’re happy where we live, and at $235,000, it’s not anything too off the charts. Other than that, our cars are 5-7 years old and we’re going to run ’em till they die. We don’t dine out too often and we spend very little on entertainment. We trim the fat wherever we can and we’re well on our way to financial freedom.
Lack of budgeting has never stopped us from reaching our financial goals and although we never budget, by making sure we are following the smart idea of paying yourself first and by controlling our spending, the whole idea of budgeting seems nonessential.
I’m curious to know how most of you run with budgeting. Some people spend a ton of focus in that area, while others don’t think twice about it. But more importantly, is budgeting what helps keep you on the route to financial independence?
Do you budget? If so, does it seem to help you save better? Or do you put more emphasis on paying yourself first and controlling your spending?
Thanks for reading!!
— Jim
Sounds like you and your wife do quite well with the system in place, good for you. For me, I come from a mindset of what isn’t tracked can’t be managed. So out of college I began tracking my spending to see exactly where it was going which then (after 3 or 4 years of tracking) helped me fine-tune my spending to maximize happiness and minimize waste. This helped me get into the mindset which it sounds like you are in, but I don’t think I could get there without tracking and understanding where all my money was going.
Thanks for sharing your perspective, Jim!
That’s awesome that the tracking helped get you to the place you’re at now. I think you’re probably in the majority and that fine-tuning sounds like it really was helpful. I think our frugality (and my past spending spree!) has just made budgets not as much of a necessity for us.
— Jim
Well, Budgets are not Sexy, so no, I don’t budget either. http://www.physicianonfire.com/sexy/
Both tracking and budgeting can be very useful for people who struggle to control their spending or understand where the money is going. Paying yourself first ensures you do the saving first. I’ve always made saving and investing a priority. Only recently did I start tracking, and it is interesting to see where the money goes, and to have a measuring stick to compare to other bloggers who publish their annual spending.
Best,
-PoF
Looking at your post, I think the part that I relate to the most is mindful spending. If paying yourself first is a priority, everything else just tends to fall into place.
— Jim
I’ve always been an advocate of the pay yourself first. I remember reading about it back in high school when I picked up a copy of Automatic Millionaire (I didn’t understand everything at the time, but I think I might have gotten more out of it then I thought).
Anyway, I always think that key is to pull that money out first. Your paycheck is a lot like a plate of food. If you have a lot in it, your lizard brain will find a way to spend it all. But if you are pulling money out before you even see it, your brain naturally will figure out a way to make that amount of money work. At least that’s been my experience.
I haven’t read Automatic Millionaire, but I hear it’s like The Richest Man in Babylon which was great, so I’ll make sure to give that a read.
I like the analogy – I think I usually get served just a couple of peas on my plate, but I have a pretty full pantry because of it! 😉
— Jim
Hi Jim. You ever hear the expression “What gets measured gets done”? I’ve found this tidbit of wisdom to be very true.
We don’t exactly ‘budget’, but I do set a target for our monthly spending — I want it to be roughly the same as our dividend income. But no, I don’t set a budget for grocery spending or anything like that.
I like to keep a pulse on things so I can make changes before there might be a problem.
Understanding the swings in monthly spending is also helpful for allocating a large enough cash buffer to deal with emergencies. Once you quit your job and the income doesn’t come in steady, you’ll have to plan for this.
That’s a great point about how this will become more important after quitting the job… I imagine we’ll do things similar to you with targets for monthly spending. That’s going to be especially a big deal for us for the first 5 years after quitting while the Roth IRA Conversion Ladder is getting into swing. After that, we might be able to loosen up the purse strings a little bit more.
— Jim
We don’t budget but we keep track of how much we spend. If a given category was clearly overspent on a given month, we try to understand what happened (e.g. if in September we spent $750 on groceries while we typically spend closer to $500, we’ll want to discuss), but as long as our savings target is met I usually don’t care that much.
That sounds like a good way to do it – my only problem is that I take all the savings out first, so if we were to overspend, we’d have to shift some funds around to fix things.
— Jim
For the first few years of my career, I did not budget. Everything went just fine with that approach. I paid myself first, made massive payments against my student loans, and lived on the rest.
But then I started to think about what if I could do a little better? What if I could improve things by a mere 1% each month? I read a fascinating article by David Foster Wallace on Michael Joyce, a professional tennis player who reached No. 64 in the world. By any objective standard, this guy is a great tennis player. There were only 63 people in the world who could beat him. But yet we’ve never heard of him. What’s the difference between him and the top 10 players? Or for that matters, what’s the difference between the guy ranked 150 and him?
Whatever it is, I think we’ll agree it’s a slight edge. And so that’s what led me to budgeting! What if I could save just a little more? What if I could reduce my spending by $10 a month? I’ve been using YNAB for a little over a year now and it’s really made a difference. Now I save even more, mainly I think because I’m conscious of my expenses each month, so am more likely to be motivated to make changes.
That’s a nice perspective on this! That’s cool that YNAB has helped you become a little more conscious of expenses. I tried to make that an alternative to Quicken for myself, but it just wasn’t what worked best for me. Maybe I need to go back and try it out again.
And you’re right that every dollar in reducing spending matters – that money could become a decent chunk of change over time if invested well. Unfortunately for me, I’m not sure how much more I could scrape by on saving more right now… I’m almost obsessed with getting out of the 9-5 as soon as I can and spend most of my waking hours trying to think of any additional expenses I could reasonable cut out or cut back on. Yes, I have some mental problems! 🙂
— Jim
I get why YNAB isn’t for everyone. It’s a specific way of handling your finances and if that doesn’t click for you, I’m not sure there’s any reason to force it. Also, in my circumstance, I had a high income and so I was looking for a little more accountability because it’s easy to lull yourself into thinking you’re doing a great job when you’re saving a lot of money each month but I wanted to push that number even higher. I can safely say that switching to YNAB over the past 12 months has had a much bigger impact than I thought it would. It is a big commitment though. You basically have to throw out the old system and fully commit to YNAB which can be daunting.
That’s awesome to hear that’s worked so well for you. Like you said, it’s tough to have to throw out the old system. Quicken does have the ability to do budgeting – I’ve just never messed with it. Quicken was recently sold off, so depending on what the new buyers do with it, I might be checking out YNAB again anyway! 🙂
— Jim
I only started budgeting over the last few years, but at a very high level. I set our monthly expense goal to $4,500. If we’re under that, then we’re good. If we’re over, then we need to tighten our belts a little bit for the next month. It works well for us because we already pay ourselves first and we track our expenses. Of course, we have spikes like travel expenses, but it works out annually.
That sounds like a really good way to do it once hitting FI. I don’t want to be too focused on every single penny since we already do a good job at keeping expenses low in general. However, we’ll need to make sure that we still keep the reigns tight, particularly for the first handful of years during our Roth IRA Conversion Ladder.
— Jim
This is absolutely awful to admit. We don’t budget either and we loosely track our expenses. I mean I check each week to make sure we’re not overcharged. But for the most part our expenses are fairly consistent that nothing jumps out at me. We are doing really well and it works for us right now.
For 2017 I was planning on trying to set some aggressive financial goals. But the other part of me is if it ain’t broke don’t fix it.
I think if you’re naturally extremely conservative in your spending, it makes it a little easier not to budget. Not to say that it might not be more beneficial to do it, but like you said – if ain’t broke, don’t fix it.
— Jim
We use the banks built in budget systems via separate saving accounts (they even have a little progress bar thingie). That way everything is automated via transfers. We just budget for big blocks of things (such as new car fund, tuition fund etc). We are still trying to decide if this is too informal.
That’s a cool idea – I always forget that a lot of banks offer those!
— Jim