Absolute Minimum Budgeting
#getrich #stayrich Budgeting doesn’t need to be a ton of work, and it doesn’t need to be a life lived without joy or spontaneity...
If I tell you to budget, you probably hear, “Eat your vegetables.” Look, we both know that doesn’t sound very sexy. (Apologies to the vegetarians in the audience!) But budgeting doesn’t need to be a ton of work, and it doesn’t need to be a life lived without joy or spontaneity.
The easiest budget is one that you just naturally follow, without ever categorizing an expense or balancing a checkbook.1 Some people just have a sense of what kind of lifestyle they want, and happen to make a lot more income than that, either through work or investing. Great! Problem solved! But what if that’s not you?
The next easiest budget is sometimes called “a reverse budget.” Basically, you set up a couple sets of automatic transactions to pull out part of your portfolio or paycheck every so often, and then spend every cent you have of what remains.
If you are already FI (financially independent), then the first transaction you’ll have is a transaction that pulls money out of your portfolio each month. If you’re working, it instead dumps money into your retirement accounts, and ensures a high savings rate.2 Remember, even if you manage to invest your way to wealth, you won’t keep that wealth unless you keep your spending under control.
The second transaction helps you save up for big expenses. Set aside money each month for your next car, a wedding, a down payment for a house to live in, your kids’ or grandkids’ college, etc. For those of you who have a monthly spend over about $150K, then you might not need this, because you can just pay out of your monthly normal spend. On the other hand, you are probably saving up for tax payments, expensive art, a new plane or yacht, or a giant donation, so this is still a good idea. Nobody, even billionaires, should YOLO any spend above about half a month’s expenses!
So say you make $30K/month (after tax), and haven’t hit FI yet. Try to put $15K towards retirement, and put another ~$5K towards future big ticket items. Then, just spend everything that’s left! Congratulations! You just started a countdown towards financial freedom! You’re on autopilot towards money becoming less and less of a barrier in your life to anything you want to do!
Or, say that you are already FI, and have $15M, which translates into an initial safe withdrawal rate of $45K a month. You’ll need to set aside money for taxes, so work with your CPA to ensure that money is flowing into that “big expenses” account from that $45K. Decide how often you want to replace your car, fund a special charity initiative, buy a new toy, or take an ultra luxury trip. Set that cash aside, and go nuts with the rest!
But what if this doesn’t sound organized enough for you? Or what if you’ve tried this and you just can’t make it work? Stay tuned for our next post, where we’ll talk about more complicated budgets. (Hey, I’m a big nerd, so I actually like eating my vegetables doing budget spreadsheets!)
I can’t help myself. I still think you should look over your expenses every few months just to make sure that someone isn’t ripping you off with some giant recurring credit card bill. But in theory, you don’t have to do that.
How high? Readers of this blog should aim for at least 50% if they are still working. We’ll get into why you should aim that high in later posts. But you can afford that, right? You make plenty of money, or are on your way there, right? No? Well, then you’ll need an even higher savings rate!