To “B” or Not to “B”: Reflections on the Budget

First Jeff Yeager in his latest book “The Cheapskate Next Door”, then financial journalist Liz Weston. Now it’s my turn to come out of the closet, so to speak, as a financial professional who doesn’t keep a “budget,” at least not in the traditional way. Do not misunderstand! As many of my clients can attest, I don’t argue for a minute about the value of expense tracking. In fact, I am convinced that thoughtful spending is tea most powerful tool in everyone’s financial planning toolkit.

However, whether you call it the “B” word, a spending plan, cash flow management, or [insert euphemism here]I tend to agree with many of my clients who crinkle their noses in horror and recoil at the prospect of tracking expenses at a detailed level. The very idea of ​​spending so much time looking at small numbers, maybe a few red ones, is off-putting enough for many that it just isn’t done, no matter how great the potential reward.

And therein lies the problem, as well as the solution. As a wise woman once said, “There is no one right way to organize anything, be it your stuff, your space, or your time”…or in this case, your living expenses. Okay, so the “wise woman” is my friend Sue West, a Certified Organizing Coach®, and her point was that no matter what you’re trying to organize, you don’t need someone else’s idea of ​​the perfect system. . Rather, you need a system that works to your. Otherwise, you probably won’t keep it up, you won’t end up with more useful information than you did before, and all the bells and whistles it presents will go to waste.

According to Sue, there are 3 key elements to designing a system that works for you: people, process and product. When it comes to tracking expenses, these include:

1. Your style: Are you detail-oriented or a “big picture” type of person? Are you an early adopter or someone who prefers the “tried and true”? Are you a road warrior or more at home?
2. Your Personality About Money: Those who are natural savers may not need to monitor spending as closely as those who tend to spend.
3. Your goals: If you’ve already funded most or all of your goals and have a solid cash cushion, you may not need to dig as deep into your cash flow statement as someone trying to pay off old debt, change careers, and buy a home. new while saving for college and retirement of their children.
4. Time Constraints: If you’re training for an Ironman triathlon while studying for a master’s degree in physics, have a full-time job, and are raising triplets, a full-fledged “traditional” budgeting process probably won’t work for you. If your schedule is a little less overloaded and you love doing this kind of thing, a more detailed solution might make sense.

Whatever your situation, there’s a system that’s right for you, and the factors described combine to give you the right mix of process and product. I’ve seen people do an amazing job of making the most of their money by writing down expenses daily using a pencil and graph paper, calculator optional. At the other end of the spectrum, the more mobile and tech-savvy may need a fully automated wearable solution, like Mint.com and its wearable app.

As for me, with all the time I already spend on the computer parsing small numbers into tables, I’ve opted for the simplest and least time-consuming path, something I call “reverse budgeting.” Basically, this involves making a decision once a year, after reviewing last year’s spending, about the target spending for the next year. After checking the savings levels vs. goal funding status, how much is left to spend on, well, living per month? Once a month, this amount is transferred to an account whose sole purpose is to cover living expenses. If that account drops below your predefined acceptable level, it’s a red flag that something isn’t going according to plan. It could be overspending, it could be under budget. Either way, it’s time to dig into the details, find out what’s going on, and if need be, change course while there’s still plenty of time to keep the overall financial plan on track.

And that, not spending hours entering and categorizing and analyzing data, is really the point of this whole exercise: to keep the gap between what goes in and what goes out for living expenses large enough that long-term goals don’t they fall off down the road When you find the system that allows you to do that without hindering your style, you’ve found your way to “B.”