Budgeting is a Waste of Time
I've wasted countless hours trying to track my cash flow and budget. Over the years I've tried all of the personal financial planning tools. Quicken, Microsoft Money, iBank, Mint, Personal Capital, eMoney. The list goes on. In the early days it required physically inputting all of my receipts. In the later years it transitioned into categorizing all of my bank transactions that downloaded into the software.
In the early years of my marriage, I asked my wife to input her receipts in a timely manner as well. Needless to say she did not enjoy the concept or my constant reminders. I wasted hours each week trying to breakout each expense on my receipts. And for what? What was I trying to accomplish?
What is the Purpose of Keeping Track of Your Expenses?
For years I continued this routine without questioning why I did it or what I was trying to achieve. Tracking my spending gave me a false sense of confidence that managed my money well. Every month I'd proudly print off a statement showing where our money went. Finally, one night my wife and I discussed how romantic it was to have to enter receipts into a computer on a Friday night. I realized my approach wasn't working and agreed to quit cold turkey.
Certainly, the financial wheels would come off, right? Without knowing where my money is going, I certainly would overdraw my bank accounts and spend too much money at Blockbuster renting movies. Months went by and nothing changed. I spent money as I always had. My bank account balances kept their same levels. I felt less stressed not wasting time deciphering my receipts. My wife was ecstatic.
The Problem with Micro-Budgeting
Putting in my receipts each week after I had spent the money was backward looking. I wasn't budgeting where my money should go. I was just looking at what had happened rather than what should happen.
Stephen Covey illustrated prioritizing how we spend our time by trying to fit rocks and pebbles into a jar. You can watch the video here. In essence Stephen suggests that big rocks are our goals or priorities, and pebbles and sand are all the other stuff. If you fill the jar with pebbles and sand first, there is no room for your big rocks. However, if you first put in your large rocks or priorities, the sand will still fill in the rest. This reframes our focus and highlights the importance of our big rocks.
That's how I had been managing my finances. I was so worried about the pebbles and sand - making sure to input every little expense. Those little things are always there and often insignificant. The bulk of my budgeting was looking at the granular rather than the big picture. Once I learned to focus on my big rocks first, I didn't need to worry about the sand.
My Big Rocks for Budgeting
I reframed my thinking and decided to focus on what was important to our financial goals. I would then ensure that those big rocks were funded first. The pebbles and sand remained - but they didn't matter as much anymore. As long as I funded my big rocks first, the rest took care of itself. Don't sweat the small stuff. As long as my bank account stays steady each month, I know the plan is working.
Saving and Investing
This is our biggest rock. Saving money and investing it will ensure that our future is taken care of. Savings means anything that will improve our financial life. This includes 401k contributions, Roth IRAs, Health Savings Accounts (HSAs), funding our emergency savings, general investing, and paying down debt.
This category ebbs and flows depending on what is happening in our lives. The goal is to do a minimum of 10 percent. When we get a windfall such as a gift or bonus at work, we try to earmark 80 percent of that to savings. When a windfall happens, we donate 10 percent, spend 10 percent on fun stuff (to satisfy our spending temptations) and sock away the rest.
Helping others has always been a priority for our family. We recognize that compared to most of the world we lead a blessed life. One way we can help is with charitable donations. We set up recurring contributions to our church and causes we care about, so that the money is allocated before we can spend it on the small stuff. Our long-term goal is 10 percent but right now it's closer to five percent. As our incomes rise this should become more attainable.
Life is unpredictable. As we work to build up our net worth, we realize that risks are out there. As such we make sure to adequately cover ourselves with insurance. This includes health, auto, property, life, and umbrella policies. I don't want to overpay for any of these, but want to fund them enough to protect against worst case scenarios.
Through 20 years of marriage my wife and I have prioritized experiences over physical possessions. Recognizing we only have a limited time with our kids living under our roof, we want to create memories that will last a lifetime. As such we spend a large portion of our disposable income on travel while we are healthy enough to enjoy it. Some years it is a large percentage while other years it is moderate. But compared to most families it's significant - because it matters a lot to us. We plan out our trips a year or two in advance to know how much to save for them and to give us something to look forward to during our dreary Midwest winters.
Housing, Cars, Etc.
For housing and cars those percentages are fairly fixed after we've purchased them. My main goal in this area is to keep the percentage we spend on our mortgage and car payments at a reasonable number. In other words - we don't stretch ourselves thin to buy property we don't need. Our house is perfect for us and our monthly payment is a manageable fraction of our income. At this stage in life, we'd rather build our savings and enjoy our travel.
Weekly Financial Review
We keep our finances as automated as possible. Paychecks are directly deposited. Bills get paid via automatic payments. Savings and giving are systematized. This frees up time to focus on what is important: reviewing our progress and keeping tabs on our account balances.
I have created a spreadsheet that allows me to get a big picture review in about 10 minutes a week. I log into each account we have and quickly input account balances into a spreadsheet. Then I review how it looks.
Track Your Personal Finances with This Simple Spreadsheet - Free Template
The spreadsheet is broken out into sections as detailed below.
I also like to list the account descriptions and where each account is held. I always want my spouse (who isn't as involved with the day-to-day finances of our life) to know what we have and where it is in case something happens to me. I also keep all of our account login information in a password management program that she has access to. I personally use LastPass.
Liquid Net Worth
This covers assets that are easily accessible or accounts that need to be paid soon.
Liquid accounts include the following:
- Short-term savings accounts (checking/savings)
- Short-term debt that needs to be paid soon (credit cards)
- Large expenditures I've committed to that need to be paid soon (vacations/home improvement).
- I have separate spreadsheet to track vacation budgets. This will be the subject of a future blog post.
The total of these is my liquid net worth - or what I count as my emergency fund. Every person will have a different comfort level here. For me my goal is to maintain it at $50,000 or higher. If I was single or didn't have kids it probably would be lower. If I wasn't self-employed it would be lower. Basically, the more career risk you have and the more mouths you have to feed the higher the number should be.
This covers any account that is invested for the long-term (greater than one year) and not in a retirement account.
This could include:
- Taxable Investment Accounts
- Stock Options
- Businesses you own
- Rental Properties
- Primary Residence
- You can put your house here if you choose. I personally list my house with a zero value. An asset implies to me that it is something you can sell and live off of the proceeds. I will always own a home. Unless I plan to downsize to a cheaper house the value of my home doesn't do much to improve my long-term financials.
Covers any retirement assets that you have not paid taxes on yet.
This could include:
- HSAs (assuming you have more in the HSA than will be used for healthcare).
Covers retirement assets that you can withdraw tax-free.
This primarily includes:
- Roth IRAs
- Roth 401ks
Covers any long-term liabilities.
This is debt including:
- Car Loans
- Student Loans
Your overall net worth. Adds up all you own and subtracts all you owe.
Every six months or so I like to make note of this number to track my progress. As long as it keeps moving upwards, we are on the right track.
I keep a second column to track any accounts held for the benefit of my children.
These could include:
- Custodial Accounts
- Checking Accounts
- Minor Roth IRAs
Get Help from a Fiduciary Financial Advisor
If you've gotten a handle on your finances and need help prioritizing your next steps, please contact Birch Investment Management for a free consultation.
We are based in Brookings, South Dakota but you don't have to be. We serve clients across the country virtually.