By Dr. James M. Dahle, WCI Founder
While driving home from a hockey game tonight, I was trying to distract myself from the injustice of the 10 minute misconduct penalty I had been given late in the third period (sure, it might have been checking from behind, but it was two seconds after the punk crosschecked me behind the ref) by listening to Dave Ramsey.
If you've listened to this show once, you've heard it a dozen times. It intersperses marketing for Dave's sponsors, live events, classes, and books with two main types of callers. The first type is usually a financial train wreck that you just can't look away from even though you see it coming.
Tonight's edition was a 68-year-old recently divorced man who had $53K to his name and was trying to buy a house so he could move out of a relative's house. Luckily for him, he was able to get adequate housing in his area for $75K and could actually pay the mortgage using SS and his pension.
Following that was the other type of caller, the “Debt-Free Screamers.” These are pretty much all the same. While everyone gets into debt for a different reason, they all get out the same way. Not only do they quit spending more than they make, but they start living on MUCH LESS than they make, and use the difference to pay down their debt.
Tonight's edition featured a couple and their three teenage boys who had driven all the way from Salt Lake City to Nashville just to scream “We're debt-free!” after paying off their mortgage and other debts. I sure hope they were on their way to somewhere else when they decided to stop in the lobby of Financial Peace Plaza, but hey, if that's their idea of a great vacation, more power to them.
Dave always asks the callers, “How did you do it?” and the callers inevitably describe their saga which usually involves living on a budget, accounting for every dollar they made, and frequently, an increase in income. After hearing that tonight, this thought came across my mind:
BUDGETS ARE FOR ROOKIES!
Don't get me wrong, I'm sure living on a budget was integral to this couple in reaching their impressive goal. But in my view, budgets are like training wheels.
What Is a Budget?
Before we go any further, let me define a budget for you. A budget is a spending plan. It helps you to make sure you're spending your money on exactly those things that you wish to, i.e., spending your money in accordance with your values. It's a wonderful thing.
Technically, my wife and I have a budget. In fact, I have an Excel spreadsheet somewhere for every month of the last 16 years documenting where every dime of our money went. But I have a confession to make. It's really a spending record, and not a budget.
You see, a real budget is done a priori. Like a good double-blinded trial, you state up front what you're going to spend your money on and when the money runs out for that category, you quit spending until next month. If you're really hard-core, you have a cash and envelope budget. Each category gets an envelope. Then when you get paid you put cash in each envelope, and then take that envelope with you when you go to the store or gas station or out to eat. If you're spending more than you make, I highly recommend it. You will instantly stop.
Our “budgets,” however, are done, at best, 15 days after the month ends. Frequently, it's 30, 60, or even 90 days after the month ends. Sometimes we do two or three months at once. I wouldn't be surprised if we quit looking at all soon. Maybe it's good, otherwise, we might miss a fraudulent charge or something (haven't found one in 16 years, but it could happen).
Budget on Autopilot
You see, all of our “budgets” pretty much look the same and have for years. It can be kind of interesting for a month or two after a big income change or after moving to a new house. But then it's pretty much back on autopilot. My income now varies quite a bit month to month, and that can make it a little interesting at times, but not really since we've conditioned ourselves to live on the amount we get in our worst months, so it just changes how much we invest that month. Every budget fight worth happening probably takes place in the first one, two, or three months you start living on a budget. There just isn't anything left to discuss, much less fight over, in month 15.
The truth is that the big savings have already been done. It is done when you make the big decisions—what town you're going to live in, what job you're going to take, how expensive a house you're going to live in, what you're going to drive, etc. We don't discuss any of that in our monthly budgeting session. If we discuss anything it's, “Hey, what did you buy for $23.99 at Amazon?” which has pretty much zero to do with our financial success.
Grow Your Income So You Don't Need a Budget
Biking the Alpe De Huez, without training wheels
In medical school, we had to budget pretty tightly, as the difference between our income and our spending was fairly small. It was a little bigger in residency, but our spending went up as we started a family and then our income went down as a PGY2 when my wife became a stay at home mom.
After residency, we gave ourselves what felt like an awfully nice raise, and then proceeded to save 25%-65% of our income. When I left the military, we gave ourselves an even bigger raise, while still saving a big chunk of that income, and essentially locked our lifestyle in to my “pre-partner” salary.
So when the “partner money” came along, and again when WCI actually started making real money, we splurged every now and then on a one-time expense, (you wouldn't believe how much crap I get on the internet for buying a boat, despite the fact that we paid cash for it) but the increase was mostly either saved or paid out in taxes.
My point is when you're “winning with money” i.e., increasing your income, limiting your spending, and investing the difference wisely, the gap between what you make and what you spend gets bigger and bigger, especially if you count the income from your ever-growing investments.
Suggesting I use an envelope system when I'm saving 30% (43% of the net) of the equivalent of a dual-physician salary is, to be frank, kind of insulting. “Where's your training wheels?!” they scream as I zoom past them on my way to the Alpe de Huez of personal financial management.
Now, lest you think this is some kind of “humble-brag” about our income, realize that it was the same game when we made $20K in med school, $40K in residency, $120K in the military, or $200K as an “average physician.” We became millionaires seven years out of residency on an average income of $180K over those seven years, shortly after making partner and long before this website started making real money.
This “dual-physician income” is quite new to us and our financial habits and current spending level were set long before it showed up. While it is far easier to save 30% of your income on $300K than it is on $40K, it's important to realize that part of the process of financial success IS boosting your income, and that isn't a bad thing.
I'm convinced that almost anyone can boost their income in some way given adequate motivation to do so. It might be a new job, overtime/extra shifts/extra calls, a second job, an entrepreneurial pursuit, improving billing, sending an underemployed spouse to work, or something else, but chances are there is something available to you if you are willing to sacrifice for it.
Develop Post-Budget Financial Muscles
There are really three kinds of people in the world. Those who can't ride a bike, those who can ride one with training wheels on, and those who can ride a bike without training wheels. It is the same way with budgets.
People who have never lived on a budget have no idea where their money is going, probably make much less than they could, and are almost surely spending more than they make. Then they are introduced to a budget. If they really take “the bike” out and ride it around the neighborhood for a few months, they'll have it figured out and realize that most of the time, those training wheels aren't even on the ground.
At that point, they'll take off the training wheels, i.e., ditch the budget. They are “Post-Budget.” Their “financial muscles” are so strong that the “exercise” of budgeting no longer makes them any stronger.
Going Back on a Budget?
Sometimes I wonder if maybe we should go back on a budget. We could decide a priori how much we're going to spend on restaurants, groceries, kids' activities, gasoline, and recreation, and then limit ourselves when we hit our limits for the month. But then I wonder, what's the point? So we can save 32% instead of 30% of our income? So I can retire three months sooner from two jobs I love? No thanks. I'll continue living my “Post-Budget” existence, maybe wasting a few dollars here and there.
I want WCI readers to “win with money.” I want the difference between their income and their spending to be so great that it seems silly to actually implement a real budget. You can get to that point by increasing income, or by decreasing spending (or better yet, never fully growing into that attending salary). Perhaps it is best to do both simultaneously. But however you do it, become “Post-Budget” and enjoy real financial freedom.
What do you think? Have you ever budgeted? Do you still have a real monthly budget that limits your spending? Do you consider yourself now “Post-Budget?” Am I wrong about being able to ditch a budget eventually? Why or why not? Comment below!
Budgets work for people who a) subscribe to your original description of what constitutes a budget, and b) cannot boost their incomes to $200K per year. During my career as a professor, having just a humble PhD, not an MD, both of these applied. The budget should be a plan, not a mere record. The record is used later to see whether the budget worked. Then you can figure out why you missed by $$500. Was it a major auto repair or dental expense? Or was it nickel-and-diming by eating out too often, making that clothing purchase on a whim, buying the best steak instead of pork roast? Too many people don’t know where the money goes, and if they do, don’t know how to apply some discipline to live within their means. Like you, I keep a spreadsheet, projecting every month what my income (which is pretty flat) and my expenses (which can vary seasonally) will be, then make adjustments, if needed, in advance (which now is rarely required). Any good business is operated that way, and for most of us, personal finances should reflect good business practices. Buy that $75,000 boat when you have the means to pay for it, not just want to go fishing. Fly first class to Europe, if you wish, but only if you’re won’t have to cheapen the rest of the trip to make up for the extra fare. I fly economy and spend my money when I get there. The back of the plane gets there just as fast as the front. By the way, when I do travel, I budget, and see how far I can go and how long I can stay (comfortably) within it. My grocery bills should be about the same next month as last, but the heating costs will go up in winter. I can estimate both and plan. Works for me.
No, I don’t think I’ll stop budgeting. Maybe if your natural desire for spending would be such a small percentage of your income that there is no way you’ll ever spend too much, I can understand. But even though we don’t use envelopes or stress out if we go over budget for food one month, it is helpful for prioritizing larger goals like home improvements, vacations, etc. Considering most companies, non-profits, etc. do annual budgets, I don’t think designating an individual as a rookie for doing one is correct.
I actually agree with this assessment. I wouldn’t call anybody a rookie for doing and sticking with a budget. If congress did and stuck with the national budget, the country would not be trillions in debt. You will be amazed how easy people could blow money if they don’t keep a budget and monitor their spending. Corporations, companies and government do budgets and it is for a good reason.
Ben I’m right there with you. Our budget is mainly used for knowing where our money is going and just how much is going into savings. We only really use it to restrict our spending in one category – dining out. I’m easily tempted into eating out or delivery, so our budget helps control that temptation. The main use though is helping us plan for the future as well as making sure we are keeping on track with our goals and when we want to change those goals (i.e. increase charity donations or home improvement) that we’re not going to rock the boat in some way. I also agree that folks other than rookies should use budgets, but the use of the budget changes as one has a greater difference between income and day-to-day living expenses.
I actually have had almost the opposite chronological experience, although I agree with your basic conclusions. When I was in medical school and residency, I didn’t budget: I lived within my means, but pretty much spent whatever was left over. I always had housing and vehicles that were well within my means, though not specifically budgeted. As a young attending, I was maxing out my 401k and throwing a big chunk of money at my 6.8% student loans every month, still not overpaying for housing or vehicles, but I didn’t have a budget or even a mission statement that would specify whether I would spend $5,000 on a vacation and put $2,000 toward paying off student loans or vice versa. A few years out of residency, I decided to try YNAB to gain some more control and insight into where the money was going. I create a budget for next month with the money I’ve earned this month, and about 20-25 days into the month, I’ll move some money from one envelope to another to balance the budget. I don’t think I have to live on ramen noodles or free ketchup packets and saltines from the doctor’s lounge for the last 4 days of the month if I’ve accidentally burned through my grocery budget for the month, but I do like seeing where the money is going and setting savings goals and building up an envelope with money for a car or a vacation and seeing that progress every month. It sounds like you do have envelopes where you save for a new vehicle and you’re setting money aside for your kids’ college, so you’re doing similar stuff to what I’m doing, but in a more post-hoc fashion.
I use ynab to budget and really like it. I feel more organized and in control of where my money is going.
I say do whatever works for the individual situation. If money is tight, then a spending budget may be best.
However, instead of using a spending budget, I use a so called “savings budget system”. Instead of tracking spending, I track savings. Whatever is left over after all the savings is achieved, can then be spent on whatever without accountability. For me, how this works is the 401k, HSA, profit sharing, and cash balance contributions are all taken out of my paycheck pretax. At the beginning of every month the auto withdrawals hit the bank account: 529 contributions, taxable account contributions. I make my backdoor Roth IRA contribution at beginning of the year. The sum of these is called “actual savings”.
I then make a spreadsheet that tracks total gross earned income for the year (100% of passive income is saved). I apply the desired savings rate which results in “savings needed” and compare it to “actual savings” for the year. As long as the “actual savings” is at least as big as “savings needed”, then we can spend whatever is in the bank account on anything we want (without dropping below a set safety cushion). So instead of tracking spending in order to save, we save in order to know how much we can spend.
This may not work for everyone, but since my wife is the one that spends the money on trips, activities, kid expenses, furniture, cars, clothes, etc and I am the stickler on savings, then she knows I am not “over saving” and I know she is not over spending. I never have to question any expense, splurge, remodel, etc. if the money is there it is free game.
Awesome perspective!
I take this approach as well. Investments and savings for non recurring expenses come out first and we spend what’s left. I also have a rough budget and do a monthly spending record just to have a general idea where we might have overspent, but without too much concern. It gives the spender in the family a little more freedom in their spending without feeling like every expense is questioned.
essentially what you’re describing is the “pay yourself first” philosophy from Rich Dad/Poor Dad (I think)
And every other personal finance book out there.
We use this too. It seems so much easier to budget for my savings, instead of every little thing that may come along in a month.
I do the basically the same thing. I save at least 30-35% minimum per year. I basically have a general spreadsheet that shows what large expenses are due each month (life insurance, disability insurance, mortgage, vacation, car/auto/home insurance, etc.). I just base this off last year’s spreadsheet. I also know from the previous year about when I may get a bonus. With this very basic and loose spreadsheet I know about what I should have in my bank account at the beginning of each month. I guess technically this is a budget, but it serves more of just a reminder of what’s coming up throughout the year. I don’t really care about what money is in whatever category or if I go over or under budget since my savings are all on autopilot. if I have a bank balance much larger than whatever I expected for the month, I just throw it in with the rest of my savings as extra. Pretty basic and easy, and it accomplishes my savings goals.
“Suggesting I use an envelope system when I’m saving 30% (43% of the net) of the equivalent of a dual-physician salary is, to be frank, kind of insulting.” This is actually why I read your blog – most financial websites are aimed at people who have no idea how to save money or who have incomes that require a strict budget to avoid debt. I don’t need advice about how to build an emergency fund. I’m interested in information about the best way to manage the healthy income and savings we already have.
Also, hubby and I were just discussing this the other day: “But then I wonder, what’s the point? So we can save 32% instead of 30% of our income? So I can retire 3 months sooner from two jobs I love? No thanks. I’ll continue living my “Post-Budget” existence, maybe wasting a few dollars here and there.” We landed on the idea that we have a pretty frugal lifestyle already and there is no need for deprivation just for deprivation’s sake. I mean, just because we could squeeze a nickel here or there doesn’t mean it is good idea. Life is short.
I really enjoyed this article. I have never been one to budget, but still keep a good handle on our overall financial picture by focusing on savings, much like Bob described above. We usually hit an overall savings rate of 45% of our gross income. However, in 2016, our five years of living like a resident is ending and we are moving into a larger, nicer home in an excellent school district. I’ve already declared a “savings holiday” for 2016 so that we have the funds to furnish the new place and finish the basement. We will still max our 401Ks, backdoor Roths, HSA, and SEP IRA (rolled into the 401k to avoid the dreaded pro rata rule) but our savings rate for 2016 will drop to around 23% of gross income. The plan is to then get back to funding the taxable accounts and 529s in 2017. It’s quite likely we’ll never get back to our previous savings rate due to the increased expenses coming our way after the move and as our children grow up, but we hope to level off at a savings rate of at least 35% going forward. Thanks to WCI and articles like this one for helping us see the big financial picture and keeping us on track toward our goals.
Thanks for the post. This clarifies my thinking on this issue. Your comments seem original and that is awesome. After listening to Dave Ramsey I usually feel like “yeah I guess I should start doing a budget and tell every dollar where to go” I’m sure I waste money and don’t know where some dollars go. We never seem to get around to do that though. I have a generous employment income and multiple other streams of income and always save >20% (often closer to 30-40%), am debt free, love my work and have no plans of stopping. I really don’t need to do a budget and that is liberating. On the other hand I wouldn’t say it is only for rookies: just that it might not be necessary for everyone. It can be optional and not mandatory. If someone continues a budget that can help them and doesn’t mean they are continuing training wheels too long.
when I first started reading this post, I started getting upset. WCI has lost his mind I thought…But I see what you mean now. Although I like to think of myself as budget conscious, my wife and I have been “post-budget” for some time now. Like you, we retrospectively budget with Mint.com. We have monthly (sometimes more frequent) “budget meetings” where my wife shows me the cool color coded bar graphs of spending by category on Mint. I still get a lot out of it, and I do think the exercise in reviewing spending is like exercise for our “frugality muscles” but its not budgeting in the strict sense. Unlike the guy living out of envelopes containing earmarked funds, I picked up the tab for breakfast with my brother in law’s family without batting an eye and knowing we were “over budget” for the month on the dining out category.
Have Never followed a “budget”….But have never had any debt (outside of mortgage and student loans). Millionaire status should be achieved within the next 1-2 years before the age of 40. Was on food stamps at one point as a child and never higher than low/middle class growing up.
Don’t spend what you don’t have and save a large portion of what you make and that is really the only budget anyone needs.
I agree with the above post that it’s too bad Congress can’t follow this simple principle.
Thanks,
Wait..what?
I need perspective on balancing earning vs spending in your sixties.
“The truth is that the big savings has already been done. It is done when you make the big decisions- what town you’re going to live in, what job you’re going to take, how expensive a house you’re going to live in, what you’re going to drive etc. We don’t discuss any of that in our monthly budgeting session. If we discuss anything it’s, “Hey, what did you buy for $23.99 at Amazon?” which has pretty much zero to do with our financial success.
Grow Your Income So You Don’t Need A Budget”
Okay, a few details.
The big savings has already been done.
Husband and I are both physicians, I am a bit older, always the spendthrift, including choice of funding my education with a military scholarship, and got the nestegg with a VA loan for a house in California. We paid for our kids private colleges, help out our families of origin, have almost paid off our mortgage, and finally took a trip to europe lastvyear. In the last fifteen years I have also had luxury of doing work I want to do, while husband gets employee benefits.
So now I am seven years from my planned retirement, and facing a decision about working fewer hours doing work I like, but maybe falling short of maximizing my retirement savings.
We all know folks who died shortly after retirement. Does this influence your planning?
Wait….spendthrift means spends a LOT, doesn’t it? That always surprises me. I was always the budgeter.
I know lots of folks who died before retirement. So I’m trying to live the life I want to live right now and for the next 50 years.
From the title I thought I was going to disagree, but as it turns out, you’re right. Bob (post#5) also has a great perspective that is similar to mine.
I use Mint for “budgeting”. But as you described it’s more of a spending record. As Bob does, I enter our savings items such as 401ks, backdoor Roths, 529s, HSA, and taxable account savings into Mint as expenses. Everything gets spent out of one account so it makes it easy to track automatically in Mint with very little effort on my part. After I’ve accounted for all of my expenses and savings, the rest can be spent guilt free if we so desire. If there is still some left over, I use it as “extra” savings.
Mint gives me a forecast of what I’m expected to spend each month (considering that some expenses come annually, biannually, etc), it doesn’t tie me down when I need (or want) to spend extra, and allows me to see very quickly if something is awry.
By using Mint for our “spending record” I also get the benefit of the categorizing and trending features over months and years without having to expend the effort it do it myself. I can check the trends a few times during the year and at the end of the year and make adjustments as necessary. I used to do this on a spreadsheet myself, but now I wouldn’t go back.
Great Post!
I have never really had a budget. My entire life I just spent less than what I made and saving came naturally. Unfortunately I used to be a stock picker and wasted the opportunity of growing those savings, but still, if I was able to live below my means as a poor college student, then a very poor medical student, then an even poorer resident, it was not that difficult to do it as an attending. Since I started work in late Sept after residency, I did not get paid till October. I still lived like a resident renting a place for $1,100 per month. I saved almost everything to try and maximize my retirement account for that year.
As poster #5 above does. I always paid myself first as an attending. I had certain financial goals I set for myself. Back then my savings rate was a cash figure I thought would be a good idea based on my income. I never really thought about a percentage of my income. Retrospectively it turns out I was saving 35%. Then I made my monthly payments into school loans. Everything else was fun and living expenses. Because I was so used to living below my means all my life, Every month I still had extra cash left over. Eventually it went towards my higher interest rate school loans.
Although today, I have leaned more about personal finance, I still follow the same recipe as above. Pay myself first, then spend money on living expenses. Anything extra goes into toys, fun, and if there is still extra, I invest that as well. To this day I do not budget, but check my yearly spending every year. Despite not having a budget, my spending sits at +/- $10K every year naturally.
I think when I retire, maybe I will look at having a budget since my income is finite. Until then, this process has served me well.
I have met many people, even high income people who naturally spend more than they make. For those people a budget is mandatory. At least until living below your means is second nature.
Exactly, the goal is to make living below your means second nature (and boost your income) such that you no longer have to budget.
Of course do not spend more than you earn and save 10-20% of your income
Never had a need for any budget
If your significant other is a spender, rein him or her in
And don’t listen to dave ramsey
Our Investments, Saving and spending all are depending on our natural desires how to control money. No need of monthly budgeting if you understand the fixed ratio between your Income, Expense (Fixed and Variable) and saving. Those who are not frugal in spending I think they never face any financial crisis in their lifetime with a standard income.
My wife and I have always done the spending record review as well as the “pay yourself first” strategy, with automatic transfers to whatever savings goal we were working on – until mid-residency, that was the Emergency Fund, and soon thereafter switched to saving up a cash cushion for expenses surrounding the birth of our first child. It was around that time that we felt like it should have been easier than it was to save extra, and we started doing our first real budget with YNAB. This helped us a lot – it never felt overly restrictive, as you can easily shuffle money into a category if priorities change mid-month, but taking time at the beginning of each month to create a spending and saving plan based on our values has helped to make sure the dollars really do flow in the right direction.
My wife just started as an attending this year (I’m still in fellowship), and while finding extra money is easier now than it used to be, I still like budgeting at the beginning of the month, as even though we still have automatic transfers set up, we tend to have extra money left over after budgeting. In our old system, this money probably would have been spent, but now we can make the decision ahead of time if we really want to leave some extra for restaurants, or decide to throw extra at saving up the house down payment (it’s usually the latter). We someday may be “post-budget,” but I suspect we’ll continue budgeting this way until at least our hefty sum of loans are paid off, to make sure our money is being spent and saved as we truly intend.
Be nice to the ref, or you will feel more shame!!!!
Another plug for MINT.
My wife and I, resident and attending, have used MINT since as long as I can remember…early 2010 maybe? Anyway, while it’s not really a “budget”, it’s more of a passive spending tracker, it’s retrospective analysis and charts allows for us to plan for the upcoming year. By using the budgets function, but as WCI does, we can see where we are and stay “in-line” by watching our spending. For instance, some months we spend $1200 on food, others $600, but over the last 12 months we’ve averaged closer to $800 (also breaks it down into where you are spending this money-Fast food, coffee shops, grocery ect..)…this lets me set a budget for $800 and then as we go along I can keep an eye on how we are doing for the month. It also helps with big expenses like Life insurance premiums due once a year…by setting a budget of $250/mo, I can move $250 into savings every month, categorize it as Insurance, and then when the big premium comes due, it’s there.
YNAB seems similar, but way more involved and costs money. If you have even a bit of discipline, using MINT for free is all you need. And I agree, Budgets are for Rookies.
I guess we budget our savings forward, and I budget to be sure I have the funds for big ticket items coming up- and we discuss if it seems we won’t have the money in the time we wanted it, to okay or not tapping savings for stuff.
But no backward look beyond phone, elec, credit card.
My husband and I are on the verge of retirement………in 2 and 3 years. We are trialing a budget / spending record , which is new to us. Our spending had veered stratospheric. so I love the new feeling of limits. We enjoy the phrase, “I live on a fixed income.” So far, we are gaining confidence that our spending plans are doable.
Congrats. Would you mind sharing more detail of your plan for the rest of us to learn from? How do you feel about retiring? How old are you? Adequate resources and a good investment plan going forward, etc? I struggle with how much it takes for the average physician to be able to retire comfortably.
We are each age 58 and will retire at ages 60 and 61. Our FA unceremoniously announced 18 months ago that we could stop working now and do something else. Honestly, we never thought that far ahead, as to retirement being a reality.
Our nest egg is 45% qualified and 55% taxable.
We will divide our retirement years into 3 intervals:
Age 60-66: taxable account dividends ( 25%), CD 5 years ladders (60%) , and harvesting taxable capital gains ( variable )
Ages 66-70.5: social security ( 10%) , taxable divs (25%) smaller CD ladders ( 50%), and harvesting capital gains.
Ages 70.5 +: drawing RMDs.
Oddly we are working 4 years overtime. My husband’s group is down to 3 partners and have not been able to replace themselves. If he stopped , his group would implode, which he will not do to his partners nor employees. He’ll work until his surgical partners segue to employment, which both are loathe to do.
Thought about Roth conversions?
Great post WCI.
1) Like you, our “budget” is really just a record – but I look at it to see if we need to make course corrections or if we are still on track.
2) The budget issue and the “big money decisions” vs “skip the lattes/small money savings” arguments are kind of unnecessary IMHO. They all have value in different but interlocking ways. The value of the budget and the value of watching the small stuff like eating out, lattes, etc when you are starting towards FI is to get you in the habit of valuing money for its ability to produce true happiness. This leads you to ask the good questions about the larger expenses as they arise. Once you are in the habit, then sure, you don’t need to budget and you can self-regulate adding in more expenses that truly increase happiness (trips, boats if you are into boating, etc). By then you have committed to avoiding the small scale waste and the big scale (fancy leased car or bigger house than you need) items. Then you can judge whether you like your work options enough to increase your income or you can continue to live below your means happily. Just my 2 cents. 🙂
+1 for using an Excel spreadsheet. Ours is half-budget, half spending record. One set of columns is a list of our fixed monthly bills with a few lines for add ons below, like “extra student loan, or extra mortgage”. Moving over, the next column has our monthly income, a summation of all the bills, what is left over, and what is left over plus last months left over. We copy and paste a new month in advance. Having the fixed bills already listed, and knowing what our unfixed bills have averaged in the past allows us to fiddle with different numbers for extra student loan or mortgage payments and always come out positive at the end of the month. We have used this method to pay off our student loans quickly.
My wife can follow the spread sheet and knows nearly as much about our finances as I do.
I guess I disagree to some extent… I’ve been following this blog for a while now and have a pretty healthy net worth for my age, and certainly don’t think of myself as a rookie, but I use YNAB religiously to record every single expense as well as plan the next month, and my wife and I still use a cash system each month. The cash system has been a saving grace for us. Each month we withdrawal how much we plan to spend (usually about the same, but sometimes more if the month was good) and she spends it as needed. We base that number off what we think will be needed for each category but ultimately the spending is up to her. This lets her spend the cash however she wants, as she’s the primary spender and family caretaker. I know that we are saving what we need to save (both long term and for non-recurring expenses that could come up) and lets her spend without me asking about every little penny or how much she spent on groceries this week. We allow for some “free” money for the both of us and the kids, and it really has improved both our financial status and our relationship…
I do think that budgeting can be as strict or as loose as you may want it, but really I think most of us are probably budgeting to some degree. To me, putting away 30% up front then spending whatever is left in the bank account is still a form of budgeting. Paying cash for a boat (which, btw, is awesome, but maybe turning into a little bit of a humble brag considering you mention it almost more than your kids lately!) is a form of budgeting, or at least I think so. My wife and I just tend to prefer a more traditional model of budgeting than others. If I’m still riding my bike with training wheels then so be it, but I’m still riding that bike faster than most people I know!
Just kidding about the boat comment… unless you mention it in the next post! : > )
I was looking because I could have sworn I’d seen another post similar to this… I wouldn’t say that the WCI has necessarily changed his opinion (maybe strengthened it significantly?) but the 2013 guest post was definitely more budget friendly (as were the comments) than this 2015 post is. WCI, like Eddie Murphy said in Beverly Hills Cop, “Phil? You’ve changed, man…”.
Remember us little people, still working toward FI!
https://www.whitecoatinvestor.com/all-doctors-need-a-budget/
That one was a guest post! 🙂
I still think all doctors need a budget, but ideally they’ll outgrow it.
The boat is the only example I have of spending a ton of money on a want. That’s why it gets used so much as the example. Plus, my wife doesn’t take it personally like if I used the fancy table or new windows!
Perhaps a common theme to this discussion is discipline. Some people naturally have it, and some have to cultivate it. On top of that, some just like the idea of data. I naturally like to save, and my wife needs more external input to guide decisions. In my mind, financial budgets are is similar to the fitness tracking that is all the rage right now (Fitbit, MyFitnessPal, etc). You take your basal metabolic rate, add your activities and you see how many calories you can take in. If you want to loose weight, you have to take in less than what you burn. (Sounds a lot like money in vs money out) However, once you know the currency of calories and the calculus of energy in vs energy out you don’t really need all the tracking any more. Discipline and healthy habits take over. That said, I like the idea of constraints, even if self-imposed. I fast for 24 hours once a month, which teaches me to control my appetite. I strive to live within a budget because I want to avoid lazy self-indulgence. I think constraints keep you healthy and sharp. Living lean is good for the bank account as well as the body.
There are a lot of parallels between good financial management and dieting.
My Quicken records date back to the early 1990’s – tons of gaps through residency and military but helpful recently to figure out my basis in a Roth account that started life as an IRA, then transferred to Schwab while it was still in the 4 year grace transition to pay taxes (Schwab didn’t have the earlier records and couldn’t tell me the basis). Like WCI, we use the “budget” as a spending record – much easier now that Quicken downloads transactions and accurately auto-categorizes (similar to Mint, but I prefer to use my software rather then share online). The detailed spending record was quite useful when we recently met a financial advisor to get a professional 2nd opinion if we were on track (at 52, should be able to “retire” to part-time or locums in 3 years). The FA was impressed we had such good data for the main question of “how much do you spend?” to run some retirement scenarios!
Don’t know if others bother but one thing that I don’t categorize well is cash – I gave up a long time ago and so ATM withdrawals just get lumped into a “pocketcash” category – unless I catch a stray receipt for a significant expense, it’s a black box, but I don’t worry about it at all (anymore, it took a while for my OCD to relax to that point…)
I do something similar with cash. It’s considered spent when it comes out of the ATM. But that’s only 2 or 3 times a year. Our spending is almost all credit card or direct debit out of the checking account.
I’ve started budgeting in the last 6 months–not because we “need” to, but because I find it to be both useful and fun. I always lived before by the method many have described here–pay yourself a generous amount of savings first, minimize spending, and keep a cash cushion on hand for anything unexpected. But that led me to always feel pinched. I didn’t give or spend as much as I probably should’ve, because my mindset was simply to minimize spending–anything other than that made me feel like I might be veering off the rails. But, with a budget, I can look with clarity at the beginning of the month at all the money coming in and have a plan for how much to save, how much to set aside monthly in sinking funds so that we don’t need a giant amorphous cash cushion for “random” expenses that aren’t really that random, and how much I can comfortably give and spend while still feeling like I’m “winning”. Our big goal now, other than regular retirement and college savings, is paying off our mortgage, so I like to throw as much at that each month as possible. We don’t do the cash envelopes, and we leave ourselves enough wiggle room in the budget that we rarely have to tell ourselves “no” to a certain purchase–we can usually take it away from another column and make it balance. And, if there’s not enough room in the spending categories to make the extra purchase work, and we’d have to decrease our planned extra mortgage payment to make it happen, it makes us stop and think a bit longer about which is more valuable to us at that moment. Having an actual forward-looking plan, and measurable short-term (i.e. monthly) goals, rather than just a basic principle and retrospective tabulating, has caused me to enjoy what we have more and to feel more excited about the track that we’re on.
Good point that a budget also gives you permission to spend.