Today’s post, “Simple and Successful Budgeting” is part 4 of our 5-part blog series titled, “5 Key Planning Steps to Ensure Financial Freedom“. Here is the table of contents and posting schedule:
| Date | Upcoming Articles |
| August 22, 2011 | Know Your Starting Point |
| August 29, 2011 | Define Your Personal Goals |
| September 5, 2011 | Calculate Your Financial Freedom Numbers |
| September 12, 2011 | Simple and Successful Budgeting |
| September 20, 2011 | Financial Advisors and Monitoring |
In our previous posts we created a Personal Balance Sheet, Defined Personal Goals and Ran Our Simple Financial Model for our test subject.
Now we are ready to overlay a monthly budget for our test subject. However, my approach to building a budget is different that most other budgeting tutorials I have seen.
First off, I do not include variable costs in my budget whatsoever, only fixed costs, such as rent, utilities, car, etc… For variable costs such as food, fun, and dining out I calculate a final number: “Free Spending Cash” and I am allowed to spend every penny of this money any way I want, on whatever I want. In my opinion, it is a lot easier to say to myself, “Since all of my savings and expenses are paid, can I live on $x per month?”.
I find myself saying “WOW, do I really spend that much on fun, eating out and gas for my car?”. Self regulating seems to fall right into place when I know everything else is taking care of and it is up to me to dip into my Free Spending Cash or not for a purchase. It is also great to know that I can take my Free Spending Cash account down to $0 every month. There is a odd freedom in that…
Second, I base may long-term/retirement saving rate and my lifestyle savings rates on my personal goals (e.g. I want to save $2,000/year for vacations).
Third, I consider my savings goals as expenses that are required to live. These expenses take priority and are paid first.
Finally, When the budget is done I know how much I can spend in a month and at the same time I can estimate how much I will have available to spend when I am 80 years old. I have created a linkage between how much I spend today and relative to how much buying power I will have tomorrow.
What We Learned Through Budgeting:
In our last post, our test subject was shooting for a very early target retirement age of 56 years old by saving an aggressive 20% of pre-tax income . (Initially we tried 53 years old but our model showed us this target was too aggressive.) However, after incorporating the budget described above into the financial plan we learned that our test subject simply could not sustain a savings rate of 20% and reach his other lifestyle objectives including a yearly vacation and saving for a home purchase.
By adjusting the savings rate down to 15% and delaying retirement to a still early 60 years old, we have created a realistic financial freedom plan for our test subject. His budget allows him free spending cash of $723 a month (which will adjust upward with inflation) while saving for lifestyle objectives and retirement objectives.
Give it a Try!!
The best way to try out my budgeting approach is to download Simple Financial Freedom Kit and give it a try for yourself! The instructions are straight forward: If the text in a field is BLUE it can be edited and replaced with your own personal information. Full instructions are included within the spreadsheet. As always feel free to contact us with any questions.
Have a great week and please subscribe to our mailing list by email to ensure your receive the final segment of this mini-series.
Download Now – Simplified Financial Freedom Budgeting & Planning Model
Simplified Financial Freedom Budgeting & Planning Model
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[...] you if have created a financial freedom plan and therefore have budgeted a portion of your income for spending then my advice to you is to allocate money to take a [...]
Budgeting is your road map to your financial goals. Between my budget and goals setting I achieved financial freedom at 38 years old.
It is so important to pay your self first and separating it out and making it seem as if what is left is really your monthly income really helps mentally. At least for me it does.
Also I like how you included gas as a fixed expense. I do the same thing. Mostly because I know how much it will take me to get back and forth to work each day and maybe one drive on the weekend. If I get close to running out of gas I just have to stay home. It saves gas and money. It also reminds me to combine trips and find other ways to save gas on the weekend like riding with friends to events every now and then.
Right paying yourself first and tricking yourself into living on less allows you to save more and build wealth quicker. And it gets easier to save more over time
What I would also add is to do some checks to see how close you are at the end of every month. If you have exactly $723 in free cash, great! but chances are it’ll vary either to your advantage or maybe lower. You might need to make adjustments based on what ‘real life’ throws at you.
Good series.
That is a great idea! My ultimate goal is to turn this into an easy to use application that tracks your budgeting and Saving success. Having the built in feedback loop regarding actual vs expected free cash would be great. I know there is a lot of competition in this space but I tthink there is a way to make it easier for people and I want to find it! The programs and website I have seen are too complicated in my opinion