I’ve spent quite a bit of time trying to figure out the best way for me to manage my finances, and after a few years of trying different budgets and inevitably failing at each one, I think I’m closing in on what works for me. Since there have been some people that are looking for ways to budget, I figured I share what I do.
As much as I love spreadsheets and playing with numbers, I had to make sure that whatever budget I put myself on, it would meet the following criteria.
- Automatable - All bills, transfers, and budgeting should be automatically handled.
- Set and Forget - I want to find an investment strategy that doesn’t require my attention.
- Simple To Understand - I should be able to hold all the peices in my head without getting a headache.
- Monthly Touch Points - I only want to check in once a month, less if possible.
- Smartly Allocate Each Dollar - Nothing is worse than an idle dollar. Every dollar should have a job.
I HATE itemizing each purchase and when I would log into some budgeting software like Mint, I would link it to my account, Mint would then extract and monitor the transactions in my accounts, and would allow me to see exactly where my money is going per purchase. (Also, it’s not perfect at picking the right category and requires some manual management.) This is WAY overkill and unnecessary for me. I don’t care what my spending looks like over 50 categories, in fact, I only care about three.
- Fixed Costs
- Financial Goals
- Flexible Spending
These categories are taken from LearnVest where they wrote an article titled How to Budget Your Money With the 50/20/30 Guideline. I already had adopted this three category philosophy, but what I really needed was the numbers. How should I expect to allocate my income? Well, glad you asked.
- Fixed Costs (50%) - This includes all of my monthly bills like rent, electricity, Spotify, loan repayment and any service that I can count on to be “regular”.
- Financial Goals (20%) - This is money left to invest and put towards retirement. This is also money that goes towards an emergency account which I will talk about later.
- Flexible Spending (30%) - Everything that fluctuates like food, fuel, books, Amazon purchases, concerts, and basically anything I can feel guilt free about, is here.
The next step is to get a financial snapshot of where you’re at. This is where I enlist the help of my trusty spreadsheet. Open a new one and create a tab with each of the following titles. They’re pretty self-explanatory.
- Passive Income
If this loses you, I highly recommend a book called Rich Dad Poor Dad. It does a great job at defining how to look at your finances. Honestly, I’m not even at par with what they suggest, I should probably read it again. Anyways fill in the spreadheets using this information and the Overview tab will be for calculating big picture stuff like how well you’re utilizing these categories. (I realize I’m being vague, but understanding your finances is important, you should spend some time learning about these concepts.)
On the overview tab I calculate my actual percentages for Fixed Costs, Financial Goals, and Flexible Spending, and then compare them to what the target is. The target for Fixed Costs is 50% of my income, and after calculating it, I found that I’m at about 41%, so I’ve got some wiggle room. This doesn’t mean I’m going to go out and obtain more fixed cost stuff, it’s more like “Oh, I have some extra money from this category where I can make a bigger payment towards my loans or allocate toward a different category.” You want to try to minimize fixed and flexible costs while maximizing your financial goals allocations.
To be honest, after I did these calculations, I found that I could afford to have more guilt free spending, so I increased it a little, but not all the way. By understanding what percentage of my income is going where, I was able to calculate how much money in dollars was not being used. I then allocated this amount towards my financial goals and getting out of debt.
When it comes to the financial goals, I considered many different vehicles but ultimately settled on an automated trading firm called Wealthfront. I had taken investment courses and learned all about the world of trading, but what I found out is that I don’t really like the work it takes to make a living trading stocks or [insert asset here]. If you do this, you’re up against some massive players that are able to move the market by there activity, teams of analysts, and recently a rise in computer automated trading. I don’t have that kind of capital or time and knowledge to compete against these entities, so I’ve enlisted the help of a firm that has all of these qualities in one. I enjoy many things, and candlestick analysis is pretty low on that list. Some people love it and are very good at managing investments, so I just give my money to them. If you are one of these people, thank you.
For a long time the advice has been “Save your money!” without any direction as to what I’m saving for and how much I need before I can say I’m safe. It has been a race for infinite savings and always preparing for the worst. Well, I’m going to give it some direction. After all, money in a savings account only has two things going for it. It is extremely low risk, like you will probably never lose that money, and it is very liquid. Meaning, you can go to the bank and pull out all of your money right away to immediately spend on what you need. Other than that, it barely keeps up with inflation and what is the likelihood that I’ll need every dollar I ever made right now for an emergency that can’t wait 10 business days to pull out of investments? I can put my money to work for me instead.
I shoot for 6 months of expenses and not a dollar more. If something happens and I need more than that, I will have enough time to liquidate some of those invested assets.
Take your monthly expenses (Fixed + Flexible Spending) and multiply by 6. The amount was eye opening, but it brings back the savings cap from infinite to something more manageable. If you’re expenses change, you change how much is in your emergency fund. This money is just bound to inflation, I don’t allow myself to worry about it losing value by doing nothing with it or the opportunity cost of it being in an investment. It’s value is maintained through it’s liquidity.
This next part was a game changer when I finally started implementing it.
I get paid into a checking account which is where everything is paid for out of. I then set up another checking account for which I have a debit card to, and I make a weekly transfer into it. This weekly transfer is paid out of the flexible spending category. I use 4.3333 for the average number of weeks per month to get a read on how much this weekly budget translates into a monthly budget.
Essentially, I decided to think of my life as a business. I am an employee in this life and pay myself a weekly budget to go spend on whatever I like. I’ve surprised myself how well this works. To keep from having to log into my bank every time I want to make a purchase, I use Mint’s widget on my android to show the current balance of this weekly budget account.
One of the things that I like about handling money this way is that it automatically rolls over to the next week. If I transfer $100 and only spend $50, then next week I’ll have $150. Maybe, I’ll get some fancy seafood. It also puts a hard limit on how much you can spend. It’s like a budget inside of a budget. Budget-ception.
This pretty much covers my budgetting planning. I will most likely find that I need to update this article as I learn more. Plus, I’m only taking care of myself, so that tends to simplify things quite a bit, however, you can still work to automate your finances. I update my spreadsheet every month, and honestly, I could do it less than that.