How to set and maintain a budget

[surprising]

Recently retired and struggling with budgeting. Wife and I have never set or maintained a budget for our entire marriage, but I've always had a high income and we always lived well within that income. Now that we are in retirement, and have a much smaller, realistic budget as set by doing the math, looking at expenses, firecalc runs, etc, I want to be more diligent about it, but it's a skill neither myself nor my wife have, and it's already causing stress. For example, we got hit recently with unexpected repairs on a rental which are going to cost about 4-5 months of our discretionary spending part of budget. So does it mean we should stop living for 4-5 months to recoup that cost? Eat ramen noodle and watch TV? Stop paying for hobby expenses? Skip vacation plans until we've recovered? Ignore it because there are so many other variables to consider (raising rent, big tax deductions to offset the costs, ...)?

If you have a budget, how do you stick to it? What changes do you make when hit with unexpected expenses? What's the worst expense you had to pay for and how did you recover?

 

[Midpack]

It's a common mistake for those new to budgeting. You should plan for some surprises, most of the big ones are entirely predictable - you just don't know exactly when they will hit. "Recovering" is largely avoidable.

Your budget has to include 'lumpy expenses' - those infrequent but often large ticket items that WILL happen to everyone. Replacing cars, replacing your roof/HVAC/applicances/consumer electronics, remodeling/updating (unless you're going to let your home become hopelessly out of date, replacing furniture/mattresses - those kinds of expenses. Cars don't last forever, and they won't get cheaper. Homes (primary, secondary, rentals) require maintenance, some very big ticket items like roof replacement, painting, HVAC/appliances, etc. Consumer electronics don't last forever, smartphones, laptops, tablets, etc. If you own boats or planes...

We have used budgets for many years, before and after retiring. For reference, in the past 5 years our total spending has averaged $104K per year without taxes, of that $29K was lumpy expenses (a car, new house expenses primarily). If we had budgeted for $75K, what daily living costs us, we would have been totally unprepared for those sporadic big ticket items. Not saying that exact ratio holds true for everyone, but everyone needs to budget for 'lumpy expenses' IME. And they are not insignificant.

 

[PaunchyPirate]

I agree with Midpack. If you are not dealing well with these lumpy expenses, then your original statement that you have a "realistic budget" isn't quite true. You have to incorporate some level of a "what if" amount into your calculations.

You also need to have a plan for what gets impacted if you don't meet your budget. Does it really matter? Will it impact your ability to live life as you want it? Really? Does increasing your budget by $25,000 (or some number) per year change your goals between now and your end of life? If so, then you probably need to take some action. If it doesn't, then just increase your budget and live life.

For me, I meticulously track my expenses. And I have a ballpark number that I plan to spend each year. But in some years I go over that. But that's ok. I don't fret about it. I'm confident that my investments can handle the higher level of spending too.

 

[surprising]

Your budget has to include 'lumpy expenses' - those infrequent but often large ticket items that WILL happen to everyone. Replacing cars, replacing your roof/HVAC/applicances/consumer electronics, remodeling/updating (unless you're going to let your home become hopelessly out of date, replacing furniture/mattresses - those kinds of expenses.

We have used budgets for many years, before and after retiring. For reference, our total spending has average $104K per year without taxes, of that $29K was lumpy expenses (a car, new house expenses primarily). If we had budgeted for $75K, what daily living costs us, we would have been totally unprepared for those sporadic big ticket items. Not saying that ratio holds true for everyone, but everyone needs to budget for 'lumpy expenses' IME.

I raised our budget 20% (100K/year to 120K) to try to account for lumpy stuff, but this latest expense is so high and is a once in a decade type expense (lots of things needing to get done all at once as we prepare a rental for a new tenant). When the budget gets hit like this, I don't want to just pay it and forget about it, I want to try to be proactive to recover that cost over time. That's a skill I don't currently possess.

 

[surprising]

You also need to have a plan for what gets impacted if you don't meet your budget. Does it really matter? Will it impact your ability to live life as you want it? Really? Does increasing your budget by $25,000 (or some number) per year change your goals between now and your end of life? If so, then you probably need to take some action. If it doesn't, then just increase your budget and live life.

That's the problem and the skill we don't have. We've never limited ourselves with anything for decades. So to go from that thinking to "well this month we can only eat out twice" just feels wrong.

 

[Midpack]

I raised our budget 20% (100K/year to 120K) to try to account for lumpy stuff, but this latest expense is so high and is a once in a decade type expense (lots of things needing to get done all at once as we prepare a rental for a new tenant). When the budget gets hit like this, I don't want to just pay it and forget about it, I want to try to be proactive to recover that cost over time. That's a skill I don't currently possess.

Where did you come up with the 20%?

Lumpy does not mean you can expect 20% or whatever % is appropriate for you every year. It will be less some years, and more others - plan on it.

As you can see we've averaged 38% over the past 5 years. Though I could have delayed the car purchase and some of the home upgrades we did. Our longer term average will be less than 38%, but some years it will be more than that.

I actually estimate how much we'll spend and how many years apart. I know about what we spend net after trade on cars and how often we plan to replace them. I know what a roof will cost, and I know it will probably have to be replaced every 15-20 years. I know appliances will probably have to replaced very 10 years. I know our consumer electronics will be replaced every 5-6 years, and what they cost. I have those and others projected out for 30 years, and inflation adjusted. Needless to say you can stagger those expenses in the process, would be foolish to do otherwise IMO. Sure expenses will be higher some years than others. But I can flatten that some by being proactive, instead of letting things hit "all at once." And if we get behind, we can review our normal expenses and adjust if possible. I can also extend the frequency of some lumpy expenses, keep that old car a little longer than originally planned. Have the roof coated to get another few years out of it to delay replacement. I have my HVAC inspected twice a year so I know if my AC or furnace is getting near the end. TBH lumpy expenses have been one of the easier parts of our financial plan, it's one page on my planning spreadsheet and I only need to review it every few years.

 

[rodi]

We track our expenses after the fact, but don't have a rigid budget. Some years we spend more, others less. That said - if we have a lot of big expenses in close order I tend to want to pull in the purse strings... That's human nature.

As for our rental - we know there are periodic expenses with it. Especially at tenant turnover... but also randomly, like the washer/dryer quitting... Fortunately, in our 'rough budget' I never factor in all 12 months rent - more like 9 months... That gives me 3 months of 'slop' to pick up these expenses.

 

[Pointby2]

We have a fixed budget that includes all our normal expenses. But we also use the number on the "investigate" tab on Firecalc as our top number.
So for example, our fixed living expenses are $60,000 a year for food/housing/healthcare, etc.. Our normal budget is $100,000 a year and that includes travel, dining, home upgrades and other lumpy expenses. That's what we typically would spend in a year. But the Investigate tab says we could spend up to $160,000 a year and still have a 96.6% chance of a successful retirement. If we ever had a year we exceeded that number I might worry, a little anyway.

 

[surprising]

Lumpy does not mean you can expect 20% or whatever % is appropriate for you every year. It will be less some years, and more others - plan on it.

I took a swag at it based on what I was seeing these past few months. For future tracking I could add a 'lumpy' tag to all these expenses so I can look back over the year so I can see the bigger picture.

I actually estimate how much we'll spend and how many years apart. I know about what we spend net after trade on cars and how often we plan to replace them.

Can you share your total yearly budget for all these? Just wondering if it's in the 1000s or 10000s.

 

[pacergal]

If you had high income and never budgeted or tracked spending, is your "smaller, realistic" budget truly realistic?
What if you lived on the original 100k planned, and used that 20k to pay down the rental repairs over time?

I also used the investigate tab to see what we "could" spend. It is lower than what our budget is, so I don't worry too much about the irregular lumpy expenses.

 

[Jeffman52]

DW and I retired just this May. But prior to that we tracked our spending and downloaded our bank transactions going back 3 years. We used that to baseline our budget into blocks. (like groceries, taxes, etc etc). But we have a fairly large emergency fund that we use for these large uncommon spends like you described. We also were very liberal in our discretionary spending part of the budget so if we needed to, we could lower our spend fairly easily. If we spend money that is in our emergency fund, we will simply add a line item to refill it over time and lower our spend somewhere else to make up for it. Or maybe the market will be good to us and we will just fill it from market gains and not alter our spend at all.

 

[HarveyS]

I set my retirement budget based on my spending for the several years before I retired. Essentially, my budget in retirement is equal to my spending pre-retirement. No surprises. Absolute $ in any given category will shift, but my focus is on the bottom line. It gets reviewed quarterly. Works for me.

I suspect the OP as fallen into the trap many high earners do. Living within your means while earning becomes a challenge when the checks stop. I suggest you go back and look at what you spent for the last 5 years. As a first pass, simply look at take-home pay, subtract what you saved from this take-home pay (do not count 401(k) contributions), and the number left is what you spent. Do that over 5 years and see if the numbers are within 20% of the average. If so, that's what your lifestyle costs. If not, look to see if there was a lumpy expense in the outlier year(s). You can do this is about 30 minutes looking at your checkbook register.

Now, it gets a bit worse. To the average spending, once in retirement, you have to add income tax payments (no more W2 withholding) and possibly medical and dental insurance, life insurance, etc. Any cost that you had drawn from your gross pay needs to be made up in retirement.

Now you have a good idea what your lifestyle costs, and you can set a budget off that. Want to travel more, add to the budget. Selling a commuter car - deduct that car payment/insurance/gas/maint. cost from the budget. Kid graduated college - deduct those costs. You get the idea.

If you spend the time to understand your lifestyle cost over the last 5 years and don't like the number you see, that's when you need to dig deeper to see where the money went.

 

[surprising]

If you had high income and never budgeted or tracked spending, is your "smaller, realistic" budget truly realistic?
What if you lived on the original 100k planned, and used that 20k to pay down the rental repairs over time?

I also used the investigate tab to see what we "could" spend. It is lower than what our budget is, so I don't worry too much about the irregular lumpy expenses.

I used a full year of real data to come up with the original $100K budget, but I focused on basic living expenses and average discretionary and kinda ignored lumpy expenses since a lot don't make sense now in retirement (kids stuff, etc). After tracking a few months in retirement testing-mode, I was seeing we were hitting $100K rather regularly, so I upped total budget to $120K to help with lumpy.

Checking investigate tab is a good way to keep it in perspective. It shows we could spend nearly double and still be at 95%, which is reassuring.

 

[FLSUnFIRE]

A formal budget isn't/may not be necessary and many find them too restrictive, I personally find a true "budget" impractical for personal finance. I track my expenses and the feedback loop of tracking impacts future spending -sometimes intentionally and sometimes more subtly. My records of expenses are used to project my spending for future years to plan cash-flow needs but I don't plan to spend x on one category and y in another and reallocate resources throughout the year between categories.

 

[surprising]

DW and I retired just this May. But prior to that we tracked our spending and downloaded our bank transactions going back 3 years. We used that to baseline our budget into blocks. (like groceries, taxes, etc etc). But we have a fairly large emergency fund that we use for these large uncommon spends like you described. We also were very liberal in our discretionary spending part of the budget so if we needed to, we could lower our spend fairly easily. If we spend money that is in our emergency fund, we will simply add a line item to refill it over time and lower our spend somewhere else to make up for it. Or maybe the market will be good to us and we will just fill it from market gains and not alter our spend at all.

This makes a lot of sense but I just don't know how to do it in practice. I too have a large emergency fund and just cash on hand to pay for this unexpected large expense, so that's not a concern. But I want to keep the emergency fund replenished like you. Adding a line item to my monthly breakdown sounds like a good idea. If I have extra moneys that month I can put it towards the emergency fund.

 

[Midpack]

I took a swag at it based on what I was seeing these past few months. For future tracking I could add a 'lumpy' tag to all these expenses so I can look back over the year so I can see the bigger picture.


Can you share your total yearly budget for all these? Just wondering if it's in the 1000s or 10000s.

Sorry, but you have to build it yourself. It's just one simple spreadsheet table.

Column headings are Appliances, Special Travel, Car 1 after trade in, Car 2 after trade in, Home Repairs/Replacements, Furniture, Consumer Electronics, Other. Whatever makes sense for you.

Rows on mine are 2009 thru 2054

I put in $ estimates for each, at the frequency I expect, and then inflation adjust the whole thing. A car will cost more in 2054...

Using the $ totals for each row, I can then average all years and get a ballpark total of lumpy expenses. Makes it pretty easy to anticipate what it will all cost me per year, knowing actual expenses are indeed lumpy.

I've been tracking actual lumpy expenses since 2009, and made trim adjustments since. I now have a pretty good handle on what cost to plan on, and a good strategy for adjusting where necessary - by changing the frequency of lumpy expenses where possible as needed.

 

[Dtail]

I keep a detailed budget with many categories. This includes a short term lumpy expense account which is funded monthly. An example is car maintenance.
We also have an emergency fund for larger more unusual expenses. This is funded from time to time. An example of this type of expense can be a new car.
The budget indirectly affects our spending, as our SWR ultimately comes into play. If we are very over in one category, but within the overall budget, we will adjust in the following year perhaps against other categories dependent on our investment performance.
I keep track of all expenses mostly on a daily basis.
So the naysayers state too much work. On a daily basis, it is about 3-5 minutes work.
On a yearly set up decision basis, it is about 3-5 hours.

 

[brett]

We do not have a hard copy. budget. Like you, we never have. But we do have a very good sense of our spend and a realistic view of the amount and frequency of capital items, tax installments, dental, etc.

I do keep track of our monthly/annual after tax spend. Just the bottom line number. For comparative reasons only. Less than five minutes a month to add up expense items from our chequeing account.

I do not have anything like a separate account for our periodic income tax installments or for lumpy items. Nor do we budget for them. That does not mean we do not expect any because we do. We are financially prepared for expenses of this nature.

My advice if you have never budgeted before you may want to keep it simple. Don't get lost in weeds and start tracking every carton of milk. Start at a high level and see what works for you. Focus on the numbers, not the process.

 

[Lorenzo]

We, too, are having difficulty with budgeting. The issue is that tracking one's spending for purposes of budgeting in retirement means one has to want to live a similar lifestyle in retirement. That was never how we envisioned retirement.

 

[audreyh1]

Once we retired we still tracked, as we had for decades, but we had a very coarse budget - just 4 categories: living expenses, travel, gifting, and special expenses. The last three were discretionary. The living expenses had some discretionary padding too. Quicken tracked numerous subcategories but those were what we looked at first a high level view.

And we were aiming for ballpark and adjusted the “budget” as needed. Have increased it over the years. We tended to underspend our planned budget anyway, and didn’t sweat the details.

When we were working we were much more careful with budgeting and tracking the details.

 

[Koolau]

We never had a budget but were naturally frugal. We also had decent income. Now that we're retired, we have even more money coming in (or available to us through our savings.) We're still frugal and simply don't spend a lot extra. When we have lumpy expenses, we have sources of savings for that. YMMV

 

[pjigar]

I am not retired yet but for planning purpose, I have a somewhat crude system to track retirement expenses. I track regular expenses as normal (restaurant, utility, grocery, travel, etc.). I track lumpy expenses separately which may be amortized over years (roof, AC, car, tractor, etc) along with their expected useful life. The lumpy expenses are normalized annually (based on their useful life span) and added together. Final retirement expense required (for nest egg calculations) = normal + amortized. I also keep in mind "one time" expense (dream home, college, wedding, etc.) which are taken off the top from nest egg before calculating WR.

So when we retire, our plan is to track "regular" expense as "regular" budget. Ignore the lumpy and one-time expenses all together because we already accounted for them in WR calculation.

PS: I can normalize lumpy expenses somewhat accurately because I have been tracking all our expenses for over 20 years and counting.

 

[RetiredHappy]

We budget and God laughs. We overspend by anything between $40k to $150k a year. But since our investment value keeps increasing we just not worry about it. In other words, we have too much impromptu expenses that we really can't budget for.

 

[Dtail]

We, too, are having difficulty with budgeting. The issue is that tracking one's spending for purposes of budgeting in retirement means one has to want to live a similar lifestyle in retirement. That was never how we envisioned retirement.

Not necessarily. Our retirement budget is clearly lower than pre retirement, but we knew that going in.
In pre retirement with a Wall St career, there were many extravagant expenses which is not necessary or desired now. One simple example was our monthly food budget was $3,000.

 

[Gallaher]

Before FIRE, we talked about creating and living on a budget.
Never did it. Still don’t.
Life is different for all of us. For me/us, life has too many positive and negative events to sweat a budget. Too many variables.
In your opening post you describe some unexpected expenses.
I would just go with the flow and figure it all out in the future.
Just guessing that you are not going to spend yourself broke.