I'll cut to the chase: I hate budgeting. Specifically, I hate the proscriptive nature of defining what should be spent each month. Sure, it's helpful to have an idea of what comes in and goes out each month – but what a person should do and what a person does are often uncorrelated.
As an example – I can build a spreadsheet that spits out the average monthly grocery spend, but does that knowledge stop me from buying the fancy coffee or the nice vermouth? Nope.
One strategy that works well in place of a traditional budget is a “50/30/20” budget.
The 50/30/20 approach to cash flow designates 50% of all income to basic, essential expenses (the “must haves” like housing, utilities, groceries, and basic care); 30% to discretionary expenses (the “nice to have” items); and 20% to saving & investing.
Here is an example to see how it works. Let’s say I receive a paycheck for $1,000 each week, which I deposit into a checking account. Of that amount, $500 (50%) is automatically transferred to a second checking account, from which bills & essentials are paid. Another $200 (20%) is moved to a savings account to build an emergency fund. The remaining $300 is mine to spend however I want. At the end of a month (let’s assume four weeks), I will have designated $2,000 for essential expenses ($500 x 4), $800 for saving ($200 x 4), and have $1,200 to spend on fun stuff ($300 x 4). Not bad for hardly any effort or calculations!
It may take a few months to settle in while you test assumptions about monthly expenses. If you find that the “essentials” account is building up a surplus, transfer some of the excess to savings. If 50% of income for essentials is cutting it too close for comfort, divert extra funds from the “discretionary” account for a few months. Not only does that build a buffer against accidentally overdrawing the “essentials” account, it also serves to preemptively curb spending by reducing the available balance in the “discretionary” account.
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals remove stress while taking control of their financial futures. As both advisor and accountability partner, we help identify current strengths and weaknesses, clarify and refine your long-term goals, and prioritize understandable, manageable, and repeatable actions to bring long-term financial well-being. Reach out today to take the first step.