Detailed Budget Overview
#getrich #stayrich For anyone who’s looking for this kind of budget, I always demand they have at least three categories: fun/easy to cut, delayed, and mandatory...
Congratulations! You’ve made it to part three of a series of blog posts on budgeting! That means that you are a member of an elite group of personal finance nerds who understand that budgets are a big part of how to extract the most out of the big, juicy, sweet melon of each month’s money. Far from being a dry subject, budget are your chance to live your values, and pick out what’s most important in life!
So what’s the ideal monthly budget? First of all, budgeting is a lifestyle, not a monthly task. Budgeting is a loop:
Look at your spending, in detail, from multiple directions.
Decide how your spending reflects your values. Do you want more time with family? Do you want to increase your giving? Do you want to expand your horizons through travel or toys? Who do you want to share your life with? For each expense, was it a better or worse expression of your values than the rest of your expenses?
Remember the lessons of expenses past, and make sure that your future expenses better reflect your values. Budgeting isn’t an all at once thing. It’s a gradual improvement over time.
Ok, so that’s a nice set of platitudes. But I promised hard core budget nerdery, and I’m going to deliver! First, we’re going to need categories or tags. Tag every expense, or sort it into a category.1 There are a bazillion tools for this, from doing it manually in a spreadsheet, to specialized software like YNAB (You Need a Budget) and competitors.2
I’m reasonably agnostic on which categories you use. You should pick categories that make sense to you and your life. Don’t feel overly constrained here. The purpose of the budget is to maximize value against the genuine constraints that life imposes on you, not sort your life into little buckets. On the other hand, little buckets make for clean thinking and clean data, so pick a middle ground that works for you.
However, for anyone I coach who’s looking for this kind of budget, I always demand they have at least three categories of buckets: fun/easy to cut, delayed, and mandatory. Here at Solving Wealth, we divide subdivide fun into Mr. and Mrs. Solving Wealths’ individual budgets, which each of us has complete and 100% dominion over, and joint fun, which is mostly spent on travel. We also have a giving budget, split between charitable and personal giving, and we divide up delayed spending into automotive, medical, house repairs and upgrades, and durable household goods. Our mandatory spending is split into groceries and non-durable goods, personal services (house cleaning, house maintenance, lawn care, prepared food, etc.),3 utilities (insurance, fuel, electricity, internet, mobile service, etc.), education, and loans (we have one of those unicorn 2.5% mortgages, which we are not paying off early!).
If a budget category is underspent in a month, we add that on to next month’s budget. If a category overspends, then sometimes a budget starts out negative! Look, I’m not a monster. Very occasionally, a budget category can go negative. But that requires trusting your future self to hold back on spending until it gets back to zero. Can you trust your future self? Remember, trust is built with a track record over time, even when it’s you on both sides of the relationship! Without that track record, you’re going to have to be strict!
Fun is the most important category. Without an outlet, resentment against your own budget will build up until it bursts into your life in an ill considered splurge on something you will regret later, and that trust will be lost. For folks who are already FI (financially independent), I recommend it be set to at least 15% of your total spend, and potentially as much as 25%+! If you are early on your financial journey, then it might be more like 5%, or the minimum necessary to prevent you from going crazy over the long run. The richer you are, the more you should spend on fun and giving, not just in dollar terms but in % terms as well!
Fun money is not allowed to be spent on anything useful! If you have a partner, then it’s strictly forbidden to even hint at criticism about how that fun money is spent! And absolutely, positively, no hoarding! It’s fine to save up for a really big useless thing, but no saving fun money just to have it! Fun money is for the useless things you want, but don’t need. No exceptions.
We aim to spend:4
~17% – giving
~17% – fun
33% – delayed
33% – mandatory spending
Someday, I’d like to be rich enough to get to this much more responsible and grown up budget:5
25% – giving
25% – fun
25% – delayed
25% – mandatory spending
Ok. That’s how the Solving Wealth household budgets month to month. Later in this series, I’ll go over year to year budgets, and we’ll also start diving into some topics like maximizing the after tax value of spending. But I also look forward to sharing my thoughts on investing and portfolio allocation, getting good value on toys, houses, vehicles, and vacations, and even more generalized advice! Stay tuned!
I used to do this monthly on a spreadsheet, but now I have an app that I can import my expenses into and I mostly categorize them whenever I’m bored and on my phone, as they come in.
I have no association with YNAB, other than being a happy customer paying the full, normal rate. And just as a thing, the only selling you will encounter on this blog are my arguments, plus any goods and services I start as a side hustle, which will all be clearly labeled. Apparently, influencers make the most money doing their own thing anyway, and I don’t like how advertising, paid placement, and referral programs muddy up the incentives around giving excellent guidance.
It might seem odd to put having someone performing a service for you into mandatory spending. And this is where it gets personal, literally. If you are ordering takeout, that’s from a business. They aren’t going to notice if you skip a week. But if someone comes to depend on you as a source of income, I believe you have an obligation to do what you can to ensure that source of income is there for them. So when we eat out in the Solving Wealth household, it’s fun money. But when the local person that we have on retainer is expecting a certain amount of hours each month fixing our house, then we find work for them whether we “need” it or not. Some months, it’s repainting the spare bedroom, because that would be nice. But sometimes, it’s fixing that overflowing toilet, and we urgently need it! They depend on us, and we depend on them! There’s a world where we see terrible investment returns and our income collapses and we have to cut these services out, but that comes long after we’ve sacrificed everything else we could. Because that’s the right thing to do, and our world needs more of that from rich people.
Admit it. You’re reading this footnote just to see if I was going to make some comment about rounding and summing to something other than 100%. Well, joke’s on you! They do sum to 100%! But, actually, we really aim for 33.3 repeating % on delayed, 33.3 repeating % on mandatory, and the remainder split evenly between giving and fun. We never actually achieve that, and I’ve achieved inner peace on that. I swear. The buckets don’t need to be tidy. The buckets don’t need to be tidy. Really.
Welcome to the weird, backwards world of personal finance, where it’s more responsible to spend more money on useless things, because those are easy to cut in bad times, and the conservative assumption is planning to live into your 120s, because what if you do live that long and run out of money?! It’s wacky! It’s upside down! It’s unintuitive!