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Do I need a budget?
Old 07-02-2014, 12:31 AM   #1
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Do I need a budget?

I donít post much, but I thought that I would see what everyone had to say about a question that Iíve been contemplating for a while now. My question is, ďDo I need a budget?Ē

Let me give you some background information.
Iím married. My wife and I are almost 40 years old. We have two small children, ages 4 and 5. We have about $1MM in investments. We have two rental houses. Monthly income on these properties is about $3,000. The combined mortgages are about $3,400. We still owe around $450,000 combined on these houses. I do not expect to keep these as rentals for income generating purposes, and they will be sold most likely in the next 5-10 years.

Over the last two years, our incomes have varied from month to month. I receive a salary, but my wife is an hourly wage contractor. Our monthly income has been fluctuating +/- $10,000 per month depending on several variables. I believe that our monthly expenses are around $10,000 which is covered by my salary and includes our investments of $2,000 per month. We also maxed out our IRAs during this period.

Iím a saver and my wife is a spender, although I have never had any issues with how much she spends since we have been married. With that saidÖ we donít have a budget. I donít track our investments very closely.

As I get closer to retiring from my current job (military), and as I research Mint.com and Personal Capital, I am wondering if should start tracking our spending. I know everyone will agree that I should pay more attention to our investments.

Thanks in advance for any thoughts or suggestions that you provide.

Very Respectfully-
Jeremy
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Old 07-02-2014, 02:20 AM   #2
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If I was spending as much as $10K per month, I'd want to know where it was all going. At the very least I'd start tracking expenditure by major category ie. groceries, holidays, savings, medical, discretionary spending, household amenities, rent/mortgage and transportation. If the amount you are spending in any one of these major categories scares you, drill deeper with sub-categories.
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Old 07-02-2014, 03:22 AM   #3
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Tracking our spending has made lot of sense for us.
I can also recommend the exercises of
The Nine Steps - Financial Integrity
and
Downloadable Guides - Financial Integrity
Seeing in detail where our money goes has led to certain reductions, as we often reconsider a purchase and put in in perspective with the time needed to make the money for it.
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Old 07-02-2014, 05:53 AM   #4
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Iím a saver and my wife is a spender, although I have never had any issues with how much she spends since we have been married. With that saidÖ we donít have a budget. I donít track our investments very closely.
You don't have a budget and haven't needed one. In the future, however, you may will need one, and it will be easier if you start tracking your expenses now. Having a clear understanding of your finances is critical to decision making and dealing effectively with change - like college, job change / loss, or retirement.

It doesn't have to be all or nothing. You can start by tracking a few major categories, just to build the discipline, then drill down slowly.
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Old 07-02-2014, 06:14 AM   #5
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Not sure if you need to or not. We used to track our spending so that we could figure out how to achieve our various savings goals. While it's probably a good exercise to see where your money is going, my view is that the most important thing is to first determine how much you need to save to attain your other financial goals. In other words, if you need to save $30,000 per year to retire in 10 years, $6,000 per year to help your children with college expenses, and $3,000 per year to maintain your rainy day fund, then you may need to figure our how to reduce/adjust your spending to be able to hit the other targets. Once you hit the other targets, you can decide whether you want to blow all the rest or get more aggressive with your savings goals.
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Old 07-02-2014, 07:06 AM   #6
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I wouldn't say you need a budget.


You do however absolutely need to know what you are spending and why. Especially since you don't know what you are / will be earning. Forget the investment tracking for now, take care of that later.

Do you travel without knowing where you are, where you have been, where you are going to or how to get there? That's basically what you are doing right now. You might be walking off a cliff or end up i paradise. You don't know.

Apologies for the strong language, but if were you I'd do my homework asap. Regardless whether you want to RE or not.
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Old 07-02-2014, 07:20 AM   #7
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As others have said, step one isn't a budget, but rather figuring out where you are today.

You mentioned mint.com. We use it and it's an easy way to get a handle on where your money goes over time. I know it was a real eye opener for my DF when he saw how he spent his money.

Once you understand your family spending habits you can decide if a budget makes sense. Keep in mind, "a budget" can mean different things to different people. Some people watch every penny. My family has a budget, but we don't worry about every little thing. It has broad categories like property taxes, health care spending, travel, etc. and a big one called "monthly expenses" for day to day living. It works for us. You may need something more tailored for you situation.

One other thing, you mention your wife is the "spender." I'd be careful to make her part of this process. You need her buy in for this to make it work. You don't want her to feel like it's just a way to attack her spending habits.

Good luck. You're on the right track looking into this.
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Old 07-02-2014, 10:33 AM   #8
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I wouldn't say you need a budget.


You do however absolutely need to know what you are spending and why. Especially since you don't know what you are / will be earning. Forget the investment tracking for now, take care of that later.

Do you travel without knowing where you are, where you have been, where you are going to or how to get there? That's basically what you are doing right now. You might be walking off a cliff or end up i paradise. You don't know.

Apologies for the strong language, but if were you I'd do my homework asap. Regardless whether you want to RE or not.
Agree, you do not have to use a budget, but you must understand where you spend money. Only then can you make any adjustments.

Personal anecdote, I do not use any budget as a guide or limit, but do track major expenses and bills. When I was first married, my wife could not understand why I would get $200 or so cash every couple weeks. She never carried much cash, and would go to ATM for $20. I prefer to just use cash for small purchases, lunch, or whatever. Funny thing is now 20+ years later she has come to my way of thinking and we just have that cash as a portion of the spending with flexibility.
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Old 07-02-2014, 10:39 AM   #9
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I regard having a budget or not is like having a checklist to get things done.

Some try to get things done with a mental note (today, gotta buy groceries, take car for oil change, and such) where for others there's a sense of accomplishment of having an item on the list and crossing that off.

I fall in the latter...at least most of the time
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Old 07-02-2014, 10:52 AM   #10
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For me, retiring was never about how much I made. It was about how much I saved. The more I knew about my spending habits, the better decisions I could make about saving. I was willing to sacrifice some near term things for the opportunity to control my time (this is how I think about retirement). While I agree with much of the advice, I think Totoro comes closest to my thinking, if you do not want to track your expenses. You will at least know what you need to save. But, having said that, knowing where your money is going provides the best chance to redirect it. Tracking it is fairly easy with Mint or Yodlee. My suggestion is to use one of those tools or something similar. You have nothing to lose and lots of information to gain.
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Old 07-02-2014, 10:58 AM   #11
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Not really a budget but definitely a system.

We fund all the retirement accounts (401k,401a, Roths), Education, and Expedited home mortgage. And keep enough for all the regular stuff (utilities, food, etc).

The rest is fair game to be spent on "whatever" (not much left though). When major things pop up like car repairs the whatever amount is less.
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Old 07-02-2014, 11:10 AM   #12
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I believe that everyone can use a budget. It doesn't have to mean spending less, it could be just tracking expenses. Determining what your standard of living cost and what is left over.
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Old 07-02-2014, 11:24 AM   #13
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I do not use a budget, but I watch my expenses very closely. I log all charges in Quicken, I rarely spend cash.

I have more of a savings budget. Max out 401K, contribute to Roth or regular IRA, pay all CC balances in full, each month. Save a large chunk of what is left over.

So, as long as I meet my savings goals, I can spend the rest. I allocate ~$2K per month for my spending.

Maybe you can do the same.
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Old 07-02-2014, 12:11 PM   #14
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There might be an issue with semantics. A budget can serve 2 purposes: knowledge and action. If you have no intention of controlling your collective spending, then a budget might just be an irritant causing a rift between you and your spouse. We never had a budget until we retired. Then we discovered that we were really lousy at forecasting expenses. Interesting that the bottom line was very close!

Now what I do is produce a yearly summary of actual. DW and I discuss our expenses and she has aligned with me in her spending. She will splurge occasionally and I don't object but she is aware that she is the main source of all our spending. So she has gradually reigned in her spending.

We are now LBYM quite significantly and two of the major contributors were her initiative. So things are stable.
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Old 07-02-2014, 12:25 PM   #15
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We never had a budget when we were still working. All I knew was that with an LBYM lifestyle we always had money left over after maxing out our 401k, and IRA whenever we were eligible. When I was serious about early retirement, it dawned on me that my means would be reduced, and I'd better know beforehand if it would work.

My wife had been taking care of bills, and she had her system with an Excel spreadsheet, but I had no idea what our housing cost was, our utility bills, etc... I had MS Money installed, but it was only for tracking investments. I joined this forum and saw that people had a much better grasp on spending than I did.

When MS Money went defunct, I switched to Quicken and decided to use it to download checking account and credit card transactions. It is now painless to track expenses, and I can call up with a few clicks how much I spent on electricity, home repairs, etc...

I have a very loose budget in the sense that if Quicken tells me that my last 12-month expenses add up to 3.5%, then I am OK. If it is lower, then I can do some home improvement projects, or some more traveling. No more guessing, no more not knowing where my money went.
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Old 07-02-2014, 01:44 PM   #16
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While I have a budget it is more for macro level planning purposes rather than something that we monitor spending against.

I think it is important to know what my spending is. I have categories that align with our budget and all of our credit card charges and bank transactions get into Quicken and get categorized so I can see how much we spend on different things. Having a good handle on how much we needed to support our current standard of living was a key consideration on deciding to retire.
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Old 07-02-2014, 01:55 PM   #17
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I've done budgeting when I was barely making ends meet to try to identify and control expenses and be able to save more. I've continued keeping a budget out of habit but pay less attention to it. However, when I was looking to retire and apply the 4% or 3.5% or whatever withdrawal rate, or use Firecalc, I thought it was very important to use good numbers. You can just look at your bottom line numbers of what you've spent total for a year, but if you haven't had to replace your car or do any major house repairs or had any other major non-annual expenses, that number isn't good enough. A retirement plan that only works if you never replace a car or roof or take a real vacation in 40 years isn't a very good one. So, I've tracked my regular expenses and then added funds for replacements and repairs. As much as I wanted to retire as early as possible, it was more important to have a solid plan rather than an optimistic one.
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Old 07-02-2014, 01:59 PM   #18
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I've done budgeting when I was barely making ends meet to try to identify and control expenses and be able to save more. I've continued keeping a budget out of habit but pay less attention to it. However, when I was looking to retire and apply the 4% or 3.5% or whatever withdrawal rate, or use Firecalc, I thought it was very important to use good numbers. You can just look at your bottom line numbers of what you've spent total for a year, but if you haven't had to replace your car or do any major house repairs or had any other major non-annual expenses, that number isn't good enough. A retirement plan that only works if you never replace a car or roof or take a real vacation in 40 years isn't a very good one. So, I've tracked my regular expenses and then added funds for replacements and repairs. As much as I wanted to retire as early as possible, it was more important to have a solid plan rather than an optimistic one.
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Old 07-02-2014, 02:01 PM   #19
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I don't have a detailed budget. I just determine how much I want to spend in any given year. Then I track our spending very closely throughout the year to make sure we generally stay on track.
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Old 07-02-2014, 02:09 PM   #20
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To be clear, tracking spending and having a budget are not the same thing although to have an effective budget you usually need to track spending.

You can track spending by making a record of what you spend and looking at it while to establishing any spending targets from it. That is simply historical information that may tell you how your natural spending will change in the future. Example: I have 2 kids now in college and have many expenses associated with that. I know how much I am spending on that, so even if I don't budget I know that spending will be going away in a few years.

I do think that tracking spending is very important whether you budget in a formal sense or not. Knowing what you are spending helps you to plan for the future and will let you know if your goals are realistic or not. That is, if you are receiving $150,000 income each year and are spending $149,000 in income then having a goal to save $100,000 is not very realistic.

As for budgeting and whether you need one -- it depends.

There are many different types of budget. One type is a savings budget. You take x% or amount of your income off the top and put it in savings or investments. Then you spend the rest of whatever is left and it really doesn't matter what you spend it on.

Some people do well with that. And that is all they need to do.

Other people find that if they just do that then they end up running out of money before the month is over and suddenly they are going into debt to make ends meet.

I think most people are somewhere in the middle between them. That is, they manage to make it through the month without going into debt but they may not be spending what really matches priorities.

For example, a couple of years ago I did some budgeting and realized that there were a few things we were spending money on that really were not a big priority for us. We decided to cut those expenses out so we could spend that money on things that were more important to us.

Personally, I budget on a monthly basis using YNAB.
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