Budgeting is an Excuse to Spend

I am a budgeting failure.

Once, in a calorie counting phase, I found myself viewing the calorie budget as a challenge. If I had 100 calories left over at the end of the day, I would allow myself a donut, or a beer, up to my maximum, rather than banking my lower count for the win.

This is exactly what happened when I started a traditional budget. Each month I spent exactly what was in my little envelope, with nothing left over.

Budgeting was giving me permission to spend.

Being in debt, especially six figures of debt, mean no spending beyond the bare basics.

Even broad-based saving goals were full with holes. One method recommended to maintain a spending challenge budget is to put physical cash in envelopes, each labeled groceries, fuel, clothes etc. I realized early that this strategy had several disadvantages.

  • Taking cash out of the bank may incur an ATM fee.
  • Some banks charge a fee in addition to the fee from the ATM company, if you don’t use their branch. Money in an envelope can’t earn interest, even the piddling interest of the 2010-17’s.
  • Cash can be lost, stolen, or rationalized between envelopes.

To combat the shortcomings of cash, I opened individual savings accounts to save for large events, like trips or Christmas. We ended up with thousands of purposeless dollars sitting in low interest accounts while interest on our loans racked up at up to 8%. Furthermore, take out over six withdrawals per month, and your savings account is charged a fee, and converted to a checking account? What?!

How many of us can honestly say that each month we take the extra amount from our “Entertainment” fund and apply it to our Debt? How many of us with debt can honestly say we should even have an “Entertainment” fund?

If you don’t currently have a budget, please do not start one. If you currently do have a budget, please destroy it. Its keeping you in debt.

“But” you might ask, “if I don’t practice budgeting, how will I save for my next XYZ”

Setting aside for a moment the discussion abut why you need an XYZ while you are still in debt, I have come to understand the differences which exist between saving and budgeting.

Budgeting is a tool for those who cannot control their spending. I firmly believe you CAN control your spending, but your budget is giving you permission to lean on it like a crutch.

Saving is the road to Financial Independence.

The first step to saving is tracking your expenses. Here is what we do. I also use Personal Capital to track our many disparate bank and investment accounts.

Up front, I would like to note that while there are many excellent apps and web based tools to help you track your spending, some of which I use for their other benefits, I follow Rule #1- Do Your Own Math.

I have an excel spreadsheet which breaks down all the possible categories in which I spend my family’s money. I know, to the gallon, how much gas I used each month. I know how much food I bought, and how much I spent eating out, getting coffee, or paying for parking. I am awash in Data.

How? Each time my family makes a purchase or expenditure, I email myself. Then, during my downtime, I enter the data manually. (This way, I feel the pain of spending thrice. Makes one think twice about spending).

The side benefit to tracking your expenses is you find out where all your money goes every month. But that’s another post. Maybe go here?

Once I had data on our monthly expenses, from rent to coffee, recreation to car-repair, I was able to reverse-engineer our savings.

The second step on the road to financial independence is realizing that there are no financial emergencies, just unplanned expenses.

You know your car is going to need new brakes. Plan the expense, don’t let it become an emergency.

You know you might have to fly to see a loved one on their deathbed at a moments notice. Plan that expense.

Think about the big expenses you might incur, and plan on how you might pay for them. An emergency fund is one way, there are others. Again, another post…

By having the data on your expenses, you will eliminate your worry about month to month spending. You will be able to accurately forecast next month’s electric bill- it wont be a surprise! Most importantly, you will be able to save mindfully for the large expenditures which you can predict.

Mindful Saving: A License to FIRE

If, for example, I realize in January I will need $1,000 for a planned expense in July, rather than saving $167 each month for 6 months in an envelope or savings account, I can look at my expected “income minus expenses” statement for July available on my spreadsheet. If I’m in the positive, I can subtract my positive figure from the total planned expense to arrive at my savings goal, and know that, barring unplanned expenses, I will be in the black in July. Say in July I have a $400 overage expected. Looking back into June and before, I might see that I have a deficit of $100 in June, and an overage of $300 in May etc. Based on these projections, I can begin to aggressively save for the planned expense as late as May, and only tie up only $133 for two months.

  1. Planned expense  1000
  2. Overage July            -400
  3. Deficit June             +100
  4. Overage May           -300
  5. Saving goal                400, beginning in May

  Cost of Original Budgeting :167*(1.08^6) (Jan-June, 8 % compounding interest) = $265

Cost of Mindful Saving: 133*(1.08^2) (May-June, 8 % compounding interest) = $155

The value of investing, or in this case, paying off loans at 8% interest, for just four months, instead of budgeting saving blindly for six months, is $110. That’s $110 which will never earn interest against you again. Extrapolate this mindful saving policy to larger and longer goals, and the ability to forecast your saving needs and reverse engineer your goals might pay a better return than the stock market!

An alternate strategy with higher returns available for those who pay a significant extra portion towards a loan monthly, up to the maximum of their deficit or overage, would be to save nothing until the absolute latest moment, then reduce their additional payments to cover the planned expense. Using a similar example, if we pay about $1000 a month additional towards our debt, and have six months to save for a $1000 planned expense, the wait and defer strategy is worth:

1 month of 8% interest instead of July’s $1000 extra payment- $80

Original Budget- $167 monthly for 6 months, compounded- $265

Savings: $185

Start from zero. Starting today, track every penny that leaves your pocket. Next month, spend less. Rinse, Repeat, FIRE.

Disclaimer: I am not a licensed financial counselor of any sort. The opinions contained here are my own. Investing has implicit risk, past gains are no guarantee of future returns. You may lose money, including the principal. These opinions are my own, and are not endorsed by any of the armed services or the US Government.

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