Stop the Budget Insanity!

by Krantcents · 32 comments

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That’s right, stop the budget insanity!  If you think I am talking about what is going on in Washington, you would be wrong.  I am a lifelong planner and made a career out of budgeting, long range and strategic planning and financial management.   A budget is a structure to help you achieve your financial goals.  You can go through the motions or make it count!

How to Budget?

Most people approach budgeting as the answer to out of control spending.  It can give you the discipline to control your spending, but most people miss an important point of the budgeting process.  If all you do is take your annual expenditures and add them up and divide by 12 to arrive at an average monthly expense, you missed the point.  Some may even adjust the monthly amounts for seasonality, but you too missed the point.  Just averaging last year’s expenses is saying you are happy with what you spent for that category.

My approach is a little different; it is called zero based budgeting.  It is a method of budgeting where all expenses must be justified for each new period.  I start with my goal and determine what I need to achieve my goal.  I start with zero and it must not exceed my earnings after I take out the amount of my goal.  For example, if my net pay was six (6) thousand dollars per month and I wanted to contribute two (2) thousand dollars per month to my retirement accounts, I would set up a payroll deduction.  Next I would create a budget for my expenses that would not exceed four (4) thousand dollars.

Think Differently!

Normally, you would just take last year’s expenses, add them up and create an average.  That presumes that your expenses are performing at an appropriate level.  In the business world, you are always looking for efficient solutions, but in your personal life it is a little different.  If you perform well in your personal life your have more money, but you may not know because no one tells you are inefficient.  For example, I replaced all my light bulbs with Compact Fluorescent Bulbs.  It cost me around eighty (80) dollars. The savings in utilities repaid my investment in just three to four months. In addition, the bulbs last considerably longer which make them a better choice.

If you approach all your expenses this way, you will achieve efficiency and savings.  In addition to replacing light bulbs, I bought a programmable thermostat and lowered my water heater temperature. I did not stop there either!  I decided to use a cold water wash exclusively.  My utilities include electricity and gas for lights, cooking, hot water and heating.  My savings were approximately twenty (20) dollars per month.  Remember, I did not change my lifestyle to fit my utilities, but instead made changes how I used my utilities. How can you use my approach with your other expenses?

Let’s apply this approach to your housing expense. Housing is usually one of your largest expenses.  It generally ranges from twenty-five (25) percent to sometimes as much as forty (40) percent of your income.  Whether it is rent or a mortgage payment, you can do something to reduce your expenses.  You can take in a roommate, downsize to a smaller apartment or home or move to a less expensive place.  If you have a mortgage that has an interest rate that higher than the current rate, you should investigate refinancing to get a lower payment.  If you refinance a $200K mortgage from 4.5% to 3.5%, you will save $115 per month.  You still need to qualify for the loan, but you can save some money every month!

Expenses like groceries and dining out can drain a budget too.  You can make some changes to what you buy and save a lot of money.  The cost of groceries increases as you choose prepared foods or making other expensive choices.  Do you have to give up steak or other things to achieve savings?  Maybe!  Using a percentage is misleading because it is based on income versus what you should spend on food.  If I said you should spend 10% of your net earnings on food and you spend less, you will think you are doing great.  I think it would be better to approach your food budget as if it is important.

I love food and it is an important part of my life.  In fact, whenever we travel or go out, everything revolves around food as an important experience. How about you?  My wife and I create a weekly menu of the foods we enjoy.  We prefer good healthy food which includes mostly seafood, chicken and vegetarian meals.  Some of our menu choices may be soup, salads breakfast items as an entrée  My wife prepares enough so we have leftovers for lunches.  My wife is very good at finding low prices and we use coupons too.  I also purchase some of the food at Costco too.  Our food budget ranges from $250-350 per month for two (2) people. We still dine out twice a week and keep our dining out budget between $200-250 per month.

Our entertainment budget includes cable TV and movies.  Since I am unwilling to give up cable TV, I negotiated with my cable company to keep my expenses as low as possible.  I buy discount movie tickets which save me as much as 50% if I were purchasing an adult ticket.  My discount is lower because I qualify for a senior ticket, but it it is still a net savings.  My transportation costs are low because I keep my cars for a very long time. I just replaced a seventeen (17) year old car and my other car is seventeen (17) year sold. We do not drive a great deal and buy our gas at Costco which receives a 3% rebate and is lower than the market price in the area.

My employer (school district) provides health insurance for my family for no cost.  I contribute to a Flexible Spending Account (FSA) to use pretax dollars to pay for my medical expenses.  My wife and I have term life insurance and Long Term Care insurance to protect us against financial risks.  My only debt payments are a small mortgage and a car loan.  Both loans will be paid off before I retire in less than five (5) years.

Final Thoughts

Budgeting is personal because it is supposed to help you achieve your financial goals.  Unless you are willing to really analyze your expenses, budgets are a waste of time!  You should never go halfway, it is all or nothing!   This approach worked in business and in my personal life!  It helped me achieve all my financial goals and still does.  I don’t use budgets to control my spending; instead I use it to achieve lower expenses and my financial goals.  Let me know what your think in your comments.  How do you use your budget?

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How do you use your budget?

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{ 30 comments }

Greg@ClubThrifty March 14, 2013 at 4:37 am

Zero based budgeting is the budgeting method that I would recommend as well. We use it ourselves, and it is by far the best way to help keep yourself accountable to your money.

Krantcents March 14, 2013 at 6:57 am

I take zero based budgeting to the next level! I keep trying to lower the expenses where I can.

Money Beagle March 14, 2013 at 5:23 am

We have a budget but it’s more of a guide than a rule. Some months we go over in terms of total, some we come in less. Every month we go over in some categories and lower in others. It sets a good guide for us just to make sure we’re not blowing things out of the water, and it gives us good information, but it’s not like we budget so hard and fast that if we run out of grocery money, we don’t buy groceries.

Krantcents March 14, 2013 at 6:59 am

Overall do you reach your financial goal? If so, then it works for you. If you don’t buy groceries, what do you do? Eat a lot of PBJ sandwiches or do you have enough in the pantry to get by?

John S @ Frugal Rules March 14, 2013 at 6:12 am

Great post! Zero based budgeting is the approach that we use and one that I would suggest as well. Without knowing your expenses and truly looking for ways to be efficient with them it’s really no more than just numbers on a page.

Krantcents March 14, 2013 at 7:00 am

Very true, that is why I keep reviewing them every time I pay the bills.

Tony@WeOnlyDoThisOnce March 14, 2013 at 6:46 am

Definitely an excellent way of thinking differently. Thanks for your clear insight. Great post!

Krantcents March 14, 2013 at 7:02 am

You’re welcome! Budgeting is so misunderstood and I hope to shed a little light on it.

The Happy Homeowner March 14, 2013 at 7:28 am

*standing ovation!*

This post needs to make its rounds–far too many people think budgets are something you set & forget. I’m always changing up the numbers to be more efficient with my money, and I’m not afraid to change up the plan if it’s not working.

My BF and I are all about the food, too! In fact, most of my vacation pics are littered with pictures of the food we eat, too…haha!

Krantcents March 14, 2013 at 10:32 am

Budgeting is very misunderstood! A lot of people just fill in the blanks on a form and feel they now have a budget. You should question every expense or you have not made any changes in your spending.

I probably should take pictures of the food, but I don’t. It is funny how memories and experiences revolve around the odd things you enjoyed the most. I remember the dessert I had in Greece or the pastry in Portugal or the crepe in France or was it the hot chocolate in Helsinki? I wish I could capture the moment with more than a picture, although I do have the memory of it. At least for now! :)

Grayson @ Debt RoundUp March 14, 2013 at 10:03 am

This was well put together. I have my moments where I just don’t mess with my budget. There are other times when I go in and muck it up. Zero based is a great way to see the picture and allow you to push expenses down where you can.

Krantcents March 14, 2013 at 10:33 am

Budgets are only as good as the effort you are willing to do for it. I guess that is true for a lot of things.

My Financial Independence Journey March 14, 2013 at 10:06 am

I spend a lot of time with my budget. I try to plan out all the major expenses for the next year based on historical expenditures and I add in how much I’m going to save. Then I track everything religiously and compare it to my goals.

Nothing stops me from going down each category and trying to reduce expenses further if I want/need/am able to. Occasionally I do a bit of this. By this point, I’m not sure if I’m able to optimize downwards any more without taking substantial quality of life hits. So my main focus now is making sure that I don’t overspend.

Krantcents March 14, 2013 at 10:37 am

I probably optimized my budget pretty well. I shop all my routine expenses every year or two. Surprise, I changed teaching assignments and did not check or report the reduced mileage to my insurance company. I now drive half of what I used to do. I do not know at this point how much of a savings I have, but I missed it. There is always something you can do, if you check often.

Pauline March 14, 2013 at 10:54 am

I have a similar approach, all my obligations and savings goal go out automatically, and the rest is mine to enjoy the way I want. Line by line budgeting is just too tedious for me.

Krantcents March 14, 2013 at 12:07 pm

Remember a budget is a structure to help you reach your financial goals. If you have an automatic deduction, you are 99% there. You still need to make sure you do not spend more than what you have left.

Sicorra March 14, 2013 at 10:55 am

Our budget is a work in progress. We analyzed each expense and reduced each one as much as possible. For example, we rarely dine out anymore. We use to go out for lunch quite a bit, but we found that it was more a habit then something we really enjoyed. The food wasn’t even that great. As well we use to order in chinese food whenever we were bored with cooking, but again, we didn’t really enjoy it, so why were we spending 50 bucks on chinese food?

We also haven’t purchased much in the way of new clothes in over 2 years, nor do we spend on the house, since we our renting, and it is not ours to fix up.

Krantcents March 14, 2013 at 12:10 pm

It sounds as though you need to spend on some fun things. My wife and I love to dine out, but we keep it between $200-250 per month. We love to travel and travel overseas every other year.

Jacob @ iHeartBudgets March 14, 2013 at 11:07 am

I made this mistake for years! I thought I was budgeting, but what I was really doing is just keeping track of my expenses. Then I would look back and be like “wow, I spent a crap ton of cash on fast food. Bummer.” But nothing changed. Not until I made a commitment to set goals for each category, and then stick to them was I able to truly benefit from budgeting. Doing cash-envelopes helped set the tone for my budget, as when the money was gone, it was gone forever. I am now venturing into automatic withdrawls as soon as my check arrives, so I still only have a limited amount of money to use in the account, and when it’s gone, it’s gone.

Thanks for the reminder :)

Krantcents March 14, 2013 at 12:11 pm

You’re welcome, you made my point very well. Just going through the motions is not really budgeting, it is keeping track of your spending.

Brian @ Luke1428 March 14, 2013 at 7:31 pm

Great post! The hardest part about budgeting for most people is just getting started and sticking with it for at least 3-4 months. When my wife and I really started budgeting like you are supposed to, the first few months were awful. We did not agree on where the money should be spent. It took time, effort, some disagreements and fine tuning before we eventually ended up on the same page. Now our budget flows smoothly each month. It takes less time to prepare because we are both on the same page about where the money should be going.

Krantcents March 14, 2013 at 9:03 pm

It was not the budget, but change you had to get used to. When I used to prepare a budget i the business world, I asked a tremendous amount of questions. The more you understand the numbers and what makes them up, the netter the result.

leslie beslie March 15, 2013 at 6:09 am

I love zero-based budgeting as well. In fact, I include “Savings” as a fixed expense so looking at the budget, it’s just another ‘bill’ to pay. That way when I see I’ll have $0 leftover at the end of the month, I know that everything has been taken care of.

My spending really fluctuates by month (gifts, travels, etc), I can’t imagine trying to plan out a yearly budget.

Krantcents March 15, 2013 at 6:56 am

I keep my savings and investing automatic! It makes my life less complicated.

Alexis Marlons March 16, 2013 at 7:39 pm

Budgeting is one thing I have to learn. I have to admit I am an impulsive buyer and I am just learning how to budget when I got married.

Krantcents March 17, 2013 at 6:51 am

Budgeting is a process where you think about your expenses. More time should be spent on how much you should spend on various things rather than just taking what you do spend. A budget is a way to help you achieve your financial goals.

Rob @FinancialSprout March 18, 2013 at 6:52 pm

I totally agree with your budgeting ideals. Why would you sacrifice when you can just get things for lower prices. It just seems to make sense.

Krantcents March 18, 2013 at 7:22 pm

Thanks, I identify myself as a value shopper vs. frugal or cheap.

Kim@Eyesonthedollar March 19, 2013 at 9:53 am

I’m still getting used to budgeting, but it has helped me see where we spend too much money and how to do better. By budgeting, I’ve been able to find several categories where we were able to cut back. It’s the unexpected stuff I have a hard time with, like when our dog had to have $500 worth of lab work and X-rays. That can really wreck your numbers. I think the overall goal has to be to spend much less than you make and take out the savings part first like you said. Otherwise that ends up getting spent on non-essentials.

Krantcents March 19, 2013 at 11:50 am

You want to include an extra $100 for miscellaneous each month for those unforeseen items. Another choice is to increase your emergency fund. Remember, budgeting is a process and you learn by going through it monthly or annually.

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