Author Topic: What's the point of budgeting?  (Read 2396 times)

jnw

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What's the point of budgeting?
« on: October 23, 2023, 05:04:35 AM »
I don't understand it. Is it so people can give themselves excuses to spend X amount of dollars each month in discretionary items / services?  So they don't have to spend time deciding whether or not the discretionary item/service really brings any value to their lives?

I don't see the point of budgeting fixed necessary expenses like electricity, automobile fuel, necessary clothing, home repairs etc..  I have a very large emergency fund (which I am also earning about 10-15% APR on), and just buy necessities when they are truly needed.

I just try and be as frugal as possible, without sacrificing any quality of life. And when I do occasionally spend on discretionary items/services, I weight the pros and cons and consider whether or not it truly brings any real value to my life, realizing it will deplete my savings at the same time.  There is a cost to having fun, and don't want to throw away X dollars per month just because the "budget allows for it".  (I save about 1/2 my net income each month.)

I seem to do great without budgeting.  I always buy things used and mostly only necesseties.  I always try and get the best prices on services etc.

I do track my spending carefully though and generate monthly, quarterly and yearly reports.  And use that data to help discover ways to save even more money. 

I guess I am lying here, I set a goal to spend only $400 per month (avg) on groceries this year. I noticed last year I spent near $600 per month on average.  I've gotten down to $420 per month on average from the $600.  So I guess I budgeted, at least with respect to groceries.   Also I sort of budgeted when it comes to discretionary; I told myself no more than $500 this year.. but I am under $100 so far.

I think most people do monthly budgets?  I sort of just have yearly goals and look at data I've recorded for several months to see how I'm doing.

« Last Edit: October 23, 2023, 07:56:24 AM by jnw »

uniwelder

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Re: What's the point of budgeting?
« Reply #1 on: October 23, 2023, 05:17:53 AM »
The typical American is living paycheck to paycheck. If they spend an extra $200 on their monthly groceries, they’ve just put themselves in debt, and since they’re paycheck to paycheck, will have a hard time getting back to neutral $0 territory.

That’s why utility programs to average out billing for annual consumption are popular. People don’t want to be surprised by an $100 gas or electricity bill when winter comes.

Raenia

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Re: What's the point of budgeting?
« Reply #2 on: October 23, 2023, 06:06:00 AM »
We don't use our budget to decide whether to make a purchase or not, we use it to gauge how we are doing compared to our goals. If grocery spend has been slipping above budget, that means I need to pay more careful attention to prices at the store, and maybe make some substitutions on the shopping list. On the flip side, if my personal spend or entertainment is far below budget, that often means that I'm letting anxiety make me say no to things that really would be worth it - I often have trouble spending money on myself, so having a budget helps. It's not that I have to spend all of it, but if I'm not, it might be a signal that bad habits or patterns are getting in the way of my priorities. For instance, I had a lot of trouble persuading myself to buy a rain jacket last year. It was on sale, I didn't have a rain coat at all at the time, and it was an entirely sensible purchase, but my internal monologue insisted that it was unneeded, as I could just use an umbrella, stay inside, or get wet if it was raining and I really had to go out. That's not logic talking, that's my Inner Bag Lady, who needs to be overruled from time to time. Being able to go to the budget and show that I'm hundreds of dollars in the black and operating from a false scarcity mindset is helpful in moments like this.

Basically, the budget is the canary that warns me when our spending is trending out of line with our stated priorities. Sometimes that's fine, and we adjust the budget the next year to accommodate, but sometimes it's a signal that something is wrong and needs to be addressed.

If you never have trouble keeping track of your priorities, then good for you, but some of us need psychological tricks to get there.

newbie

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Re: What's the point of budgeting?
« Reply #3 on: October 23, 2023, 06:20:26 AM »
"I have a very large emergency fund (which I am also earning about 10-15% APR on)"

@jnw - can I ask where you are earning this return? 

Omy

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Re: What's the point of budgeting?
« Reply #4 on: October 23, 2023, 06:42:43 AM »
I've never used a budget. My default has always been to save, so it really isn't necessary. I don't really track spending, either.

We only occasionally tracked net worth in the past. Now that were FIREd we try to make a point of checking quarterly to make sure there aren't any surprises.

Metalcat

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Re: What's the point of budgeting?
« Reply #5 on: October 23, 2023, 06:44:43 AM »
Uh...no one needs to budget if they are happy with their spending, so just don't. It's quite normal here for folks not to budget.

Some people really benefit from budgeting and it keeps their spending lower. Others don't benefit and don't bother budgeting.

I've never budgeted, it doesn't benefit me, but that doesn't mean I don't see the point for others. That's kind of like a non-diabetic saying "I don't get the point of insulin." Some people need budgets to keep their spending in line, others don't.

If you don't want to budget then don't budget. No one will kick down your door and forcefully install YNAB on your devices.

lucenzo11

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Re: What's the point of budgeting?
« Reply #6 on: October 23, 2023, 06:53:28 AM »
For most people, the point of budgeting is to establish a way to pay for all their needs, save some money, and hopefully have some leftover for wants because they do not have a frugal mindset and overspend on wants. This results in needing to tap into debt and defer savings/working towards larger money goals. The budgeting allows them to see that they really only have X leftover each month and then they can track to make sure they stay within their budget.

For people that are very frugal and who's income is much greater than their needs and wants, budgeting doesn't have as much value because there's not any worry for month to month and whether you can pay your utility bills. But budgeting can still be valuable to make sure we are saving enough each money to meet our long term goals. Like most of us are targeting a savings rate goal for the year and our wants spending impacts that, so budgeting can help to check to make sure we are on track. As you noted, the reverse is true sometimes as well that we want to make sure we are spending to have some fun now. Overall, I don't specifically budget right now. One reason is that we are hitting our savings goals by being frugal so checking each month has little value. Second, we've had some life changes that have resulted in our income and spending oscillating a lot more than normal so even if we did budget, it would be hard to really gauge where we are. Once things settle back down to being more consistent, I'll start budgeting/tracking again so we can re-evaluate our savings goals.

Sanitary Stache

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Re: What's the point of budgeting?
« Reply #7 on: October 23, 2023, 06:59:38 AM »
DW and I find value in budgeting and tracking. We both want to save a lot but we also feel pressure to keep up with the joneses in our homesteading kind of way and to indulge in convenience.

First, DW and I decide how to spend our money together. We decide if we want this or that and how much we are willing to spend on it.

Second, we don’t spend money that we don’t have and we reserve the emergency fund for true emergencies.

Third, we set goals and challenge ourselves to meet them. Keeping spending down in grocery, restaurant , home improvement, heating, electricity, health care, gas. All of these goals change our daily activities and choices.

Our budgeting, which we do monthly, is also our tracking. We look at our income for the month (we consider the previous months income as the current months budget). We allocate all income each month with consideration to yearly goals which are typically tax and saving goals, but also home improvement and kid raising goals.  We enter all purchases into a tracking spreadsheet and compare how we spent against how we planned to spend. Then we think about the coming months (and further) needs and wants and we allocate money based on them. Sometimes mid month, we make a big purchase and we decide to amortize that over the next several months. Sometimes, we have accumulated cash because we were under budget for several months and we put that as extra into savings.

It is an important activity that keeps us regularly talking about what we want our life together to look like.

Louise

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Re: What's the point of budgeting?
« Reply #8 on: October 23, 2023, 06:59:55 AM »
I make a budget that shows we should be saving X amount each month. I track expenses and they explain why we don't sometimes.

jnw

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Re: What's the point of budgeting?
« Reply #9 on: October 23, 2023, 07:42:23 AM »
"I have a very large emergency fund (which I am also earning about 10-15% APR on)"

@jnw - can I ask where you are earning this return?

Churning checking, savings and brokerage accounts.  (As well as credit cards.)
« Last Edit: October 23, 2023, 07:46:08 AM by jnw »

rothwem

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Re: What's the point of budgeting?
« Reply #10 on: October 23, 2023, 07:46:21 AM »
I never budgeted before I got married, I always just tried to spend as little as possible and I tossed the leftover money at the end of the month into savings.   However, since I am now married with kids and my wife makes dramatically less than me, we've had to pool our resources to ensure that our standard of living is equalized.  The budget has become a really good communication tool for us.  We share *similar* values about what is important to spend money on, but its impossible for any two people to be completely aligned--the budget drives that discussion and helps us come to a consensus about where we should be putting our discretionary money. 

GuitarStv

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Re: What's the point of budgeting?
« Reply #11 on: October 23, 2023, 07:48:04 AM »
I've never budgeted.  If you have your spending in check, I don't think there's really any point.  If you've got difficulty controlling spending though, then it can very helpful.

charis

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Re: What's the point of budgeting?
« Reply #12 on: October 23, 2023, 07:53:32 AM »
You already identified why people might budget with your grocery example.  It is simple as that.  If one doesn't have a goal to lower spending and/or keep it in a certain range for certain categories of spending, they obviously wouldn't create a budge because it's pointless. 

We don't budget, but when we first started to really examine our spending in an effort to pursue FI and other financial goals, budgeting was helpful because we had a clear "cap" on spending and could see whether we were butting against that cap or comfortably below it.  The benefit was twofold, we were more thoughtful in spending and it gave us data to guide savings goals.  I think a LOT more people IRL could benefit from setting a budget (thinking of several family members).

I also agree with this point about marriage:
... but its impossible for any two people to be completely aligned--the budget drives that discussion and helps us come to a consensus about where we should be putting our discretionary money.
« Last Edit: October 23, 2023, 07:55:12 AM by charis »

reeshau

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Re: What's the point of budgeting?
« Reply #13 on: October 23, 2023, 08:23:23 AM »
"Plans are worthless, but planning is everything." -- Dwight Eisenhower

I find tracking spending and budgeting to be a feedback cycle: if some spending item is beyond its budget, it isn't "wrong;" it might be a necessity.  But as others have said, it's a red light for me to think about the total, and whether or not I need to make a tradeoff.  It's also a means for me to discuss money with DW, so that we can talk about money in terms of our goals and desires, not in terms of "Why did you..."

When money was tighter, or budget was more granular.  Food was broken down into a number of categories, for example.  We back off as we find categories no longer useful in the process.

Now that we are retired and living off our investments, I also "budget" for those: that is, a decade-long plan showing a long-term average 10% return on investments for the year, and whether we are on track or behind.  So far, 2020 and 2021 were great, 2022 was a little nerve-wracking, and 2023 started great, but we'll see.  I'm an active investor, so this is more impactful to me than most; but I thought I would point out it's both sides of the ledger you have to keep track of, when you are on the other side.

Laura33

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Re: What's the point of budgeting?
« Reply #14 on: October 23, 2023, 10:01:20 AM »
First, what Metalcat said.  Why would you assume that everyone else is just like you and thus doesn't need to budget unless it's for some ego stroke or wastefulness?  If you don't find budgeting useful, than don't.  If you do, great.

For most of us, our wants outstrip our means.  Budgeting is a way of prioritizing those wants: how much for things you want now, like going out with your friends; how much for medium-term things, like saving for vacation or replacement vehicles; and how much for longer-term things, like a house, kids' college, or retirement.  For the vast majority of people, the first category is by far the most compelling.  So if they don't impose some sort of discipline on their monthly spending, they will spend everything on the "now," and the future gets the shaft.

You also have a healthy EF.  Which is great, but most people don't start out that way.  I remember starting out and having to save up to make sure I had enough in the bank to pay the insurance bill every 6 months.  As I worked and saved, I built up more of a cushion in my bank account, so I didn't have to worry about that, but it took a while before something like a major car repair wouldn't have thrown me for a loop.  And I had a really good salary and reasonable expenses for a 25-yr-old.  Most people have lower salaries and higher expenses, so that "do I have enough to cover that new set of tires my car needs" question remains very real and very pressing for a long time. 

Also, I personally found budgeting fun, because once I set the amount in a particular category, I played a game with myself to try to come in under budget each month.  It was my silly husband who had the strange idea that if you budgeted for something, that meant you were actually allowed to spend all that money.  ;-)

FWIW, I'm very conscious of this because my DD just started her first job and so is going through all of this.  I worked with her to develop a budget that helped her decide how much apartment she could afford, how much she could save for medium- and long-term needs, and how much she could spend on more fun stuff.  Understanding the financial impact of all of those different things helped her make the best choices for the life she wanted (e.g., forgoing the super-swanky apartment she wanted for the nice-but-not-swanky one that had just as good a location and was $150 less each month).

Money is a tool.  A budget is a roadmap for how you plan to use that tool to get the life you want.  That's it.

Cranky

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Re: What's the point of budgeting?
« Reply #15 on: October 23, 2023, 10:31:06 AM »
I find budgeting most useful when things are changing. A few years ago, our finances ran pretty automatically.

Then we retired, moved twice, and all of our income and expenses were different. We needed to track everything and discuss what amount was reasonable (and feasible!) to spend in every category.

Eventually I hope things will be pretty automatic again.

reeshau

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Re: What's the point of budgeting?
« Reply #16 on: October 23, 2023, 10:47:54 AM »
I find budgeting most useful when things are changing. A few years ago, our finances ran pretty automatically.

Then we retired, moved twice, and all of our income and expenses were different. We needed to track everything and discuss what amount was reasonable (and feasible!) to spend in every category.

Eventually I hope things will be pretty automatic again.

Too true.  When we moved to Ireland, we did a ground up budget with new research and no assumptions, even though we had plenty of resources.  In that case, it was part of deciding to accept a job offer.  And coming back, we did similar, in particular since we were headed to a different state.

jnw

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Re: What's the point of budgeting?
« Reply #17 on: October 23, 2023, 11:51:51 AM »
Thanks for all the replies I appreciate it!

Dreamer40

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Re: What's the point of budgeting?
« Reply #18 on: October 23, 2023, 12:34:43 PM »
Budgeting isn’t only about controlling spending, it can also be a tool used to encourage spending in line with your values. Like deciding ahead of time that you want to participate in a particular activity that costs some money but adds a lot to your life, despite a potentially-miserly tendency to never spend money.

Whether it’s to encourage savings or spending, budgeting is about making a plan and deciding in advance. Being intentional, rather than living purely in the moment. That doesn’t mean everyone needs to live that way. But that’s why it’s useful, even when you have extra money.

zolotiyeruki

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Re: What's the point of budgeting?
« Reply #19 on: October 23, 2023, 12:37:40 PM »
It sounds like your question is "I'm living within my means and reaching my savings goals without budgeting.  Why would I want to budget?"

Well, for someone in your situation, budgeting might not bring a benefit.  For someone whose wants (including savings goals!) exceed their income, or for someone who is not meeting their savings goals, it provides a big benefit.  Monitoring our spending helps DW and me to be accountable and more mindful of how we're spending our money.  We take time each week to sit down and review our budget, noting areas where we've overspent, etc.

There's a saying that "when performance is measured, performance improves."  Normally, that's applied to a business or academic environment, but it works for budgeting too.  The effect for us isn't always a conscious one, but we find ourselves opting for less expensive restaurants when we eat out, or I'll defer a home improvement project to the next month because I realize I won't have time in the current month to finish it anyway, or we'll pick the smaller car when we're driving about.

For us, it's about awareness and accountability.  "Yup, we went over in our car budget this month, because I bought a bunch of parts to rebuild my brother's old car."

iris lily

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Re: What's the point of budgeting?
« Reply #20 on: October 23, 2023, 12:47:17 PM »
I agree with you OP ( Original Poster.) I am old now I have lots of money, and I never budgeted. When I was single, I never budgeted. When we got married, we did not budget. We approached everything from a “zero-based budget “point of view which is —do we really need it? Do we really want it? Do we really value it?

People can say “well that’s all very well and good you must have had plenty of money“ but we had modest middle-class salaries, so… No, I didn’t go out and buy all the latest and greatest. we just did not like spending money.

I find the conventional wisdom to “budget “to be  not in line with my values.

Kris

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Re: What's the point of budgeting?
« Reply #21 on: October 23, 2023, 02:29:09 PM »
I never budgeted because I was always sort of a natural "spend less than you make" and somewhat frugal person. But when I met my now-husband, he was... um, not like that, lol. He had debt, was/is very smart (much smarter than me, actually) but has ADD and basically can't focus on stuff that he finds boring so he essentially never paid attention to how much money was going in vs. coming out.

I made it a condition of moving forward with our relationship for him to be willing to change, and he was actually super thankful and motivated to listen to me because money matters stressed him out. So... I put him on a budget. I made him reconcile his checkbook (first time he had ever done it in his life) and then I walked him through thinking about how much money he had, how much his income was and what his expenses were, and how to get his shit together. For a while I even had him doing the cash in envelopes method, using his debit card only to take money out for the envelopes and then keeping that and all credit cards locked away.

For him, it was a good and necessary thing to do because he had literally just never had any self-control. It taught him some stuff, and in the meantime I started working on him with a subtle but constant drip campaign of anti-consumerism. He'll never be as careful or as frugal as I am, but all of this made it so that we could eventually live together, get married and merge our finances. I serve as the benevolent financial dictator, and he is the grateful subject, lol. It works for us, but only because he had the rude wakeup call of the budget and because he had to spend a good amount of time living within it.

JupiterGreen

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Re: What's the point of budgeting?
« Reply #22 on: October 23, 2023, 02:31:43 PM »
We don't strictly budget either. At the beginning of the year, we do look at our yearly spending to see where we spent the most and sometimes that leads to changes in our monthly spending (so that's kind of like budgeting). But the reality is that now that our "cup runneth over" a little extra spending here and there doesn't make a huge impact. But back when we were in poverty we had to budget otherwise we may not have made all our bills. I'm thankful not to be in that position anymore, but I see nothing wrong with budgeting either way.

kite

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Re: What's the point of budgeting?
« Reply #23 on: October 23, 2023, 05:28:22 PM »
I think it's just a word like "Diet" that everyone is actually doing, even if it isn't particularly disciplined or with any goal in mind.

Your diet is the food you eat.
Your budget is what you spend.

Once upon a time I had an income that exceeded my expenses by 4x. Then my income went away. We took a harder look at expenses and found areas to pare down, forgoing some appliance replacements because we could, rather than pull from savings at what would have been the worse possible time to sell investments. We also purged some things that weren't returning a high enough value for what it was.
Awareness made this possible. To me that's the value of thorough documentation, knowing how much is unavoidable and how much is discretionary and whether these are optimal to meet your long term goals.


Tass

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Re: What's the point of budgeting?
« Reply #24 on: October 23, 2023, 05:36:22 PM »
In addition to many of the practical reasons already elaborated, for me it's emotional. Budgeting makes me feel secure.

When I first graduated college, I moved to a very HCOL city with an income of $30k (grad school!) and very little idea how much anything cost; budgeting is how I ensured my money would last to my next paycheck.

Ever since then I have found it soothing. It's nice to put every dollar where it belongs and feel like things are tidy. It makes me feel prepared. I literally do extra financial planning in times of stress, because it's something I can feel in control of.

Right now my partner is not working (family medical/caregiver situation), and we budget our cash cushion to help us plan for when he needs to bring in an income again. When I see the cushion stretching x months into the future, I feel comfortable agreeing that there's no need for him to work right now.

Gremlin

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Re: What's the point of budgeting?
« Reply #25 on: October 23, 2023, 07:19:50 PM »
@jnw, I'm going to point out that every paragraph in your opening post started with the same word... "I".

A lot of responses talk about "we".

From a financial perspective, MrsG and I don't need to budget.  But we do so because when we review our budgets, every six months, it's a very useful tool to help us articulate our individual and shared needs and aspirations, their comparative values and their timeframes.  The budgeting process, for us, is about much more than simply tallying up incomes and expenses.

Louise

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Re: What's the point of budgeting?
« Reply #26 on: October 24, 2023, 07:02:27 AM »
@jnw, I'm going to point out that every paragraph in your opening post started with the same word... "I".

A lot of responses talk about "we".

From a financial perspective, MrsG and I don't need to budget.  But we do so because when we review our budgets, every six months, it's a very useful tool to help us articulate our individual and shared needs and aspirations, their comparative values and their timeframes.  The budgeting process, for us, is about much more than simply tallying up incomes and expenses.

That's a good point. I don't think I ever budgeted as a single person. Once I married we had two incomes and didn't need to budget either. Once we had a family, it seemed easier to spend money, so I create a budget every month so I can anticipate expenses. I try to put away savings first based on that budget. I do better when money is tucked away first.

iris lily

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Re: What's the point of budgeting?
« Reply #27 on: October 24, 2023, 08:59:08 AM »
Oh! I should Add a very important idea to my early days of young adulthood – I did not have a credit card. Back in those days you could get one, but it wasn’t essential. So I didn’t have one. So that right there acted as a limiter to what I spent because I could only spend what I had.

That wasn’t a problem because I managed to save several hundred every month.

Loren Ver

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Re: What's the point of budgeting?
« Reply #28 on: October 24, 2023, 12:00:23 PM »
You also seem to be limiting yourself to only monthly or yearly budgets.

When DH and I had a total two person income of 36k we still needed to plan for large purchases (replacing cars, large appliances etc) even though be bought them used.  So we took the expected life of the item and divided it over months.  So, 60 months or longer.  Then put money towards it monthly.  Not to guarantee spend, but to make sure it was saved and then rolled over from year to year.  When you are saving for something for 5+ years you don't want to lose track.  Then when an item was purchased and if some was "left over" due to a sale or good deal you could roll it into another needy category. 

When your amounts of money are small keeping track of it can really matter.  When we eventually earned higher incomes doing these exercises matter less since we could soak an HVAC system and replacement car easily with a giant efund, but when you only have a few dollars "extra" a paycheck, you need to make sure they count and get counted.

Now we track our spending in budget categories so we know how much we are spending where and how much we need to up or lower our "income" per year.  If something is out of whack (i.e. car repairs) then we dig in to it to see if we should look into replacing or if there is a systemic problem year over year since we know human memory is bad at recognizing these things over time.   

Duke03

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Re: What's the point of budgeting?
« Reply #29 on: October 24, 2023, 03:27:20 PM »
I've never used a budget. My default has always been to save, so it really isn't necessary. I don't really track spending, either.

We only occasionally tracked net worth in the past. Now that were FIREd we try to make a point of checking quarterly to make sure there aren't any surprises.

I'm the same way.  I'm so cheap and hardly spend money other than essentials.  I mean I buy the same things at the grocery store every week and spend about $900 a month to feed a family of 4.  Why would I need to budget this?  It's been the same for years...

Cranky

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Re: What's the point of budgeting?
« Reply #30 on: October 24, 2023, 04:51:43 PM »
Oh! I should Add a very important idea to my early days of young adulthood – I did not have a credit card. Back in those days you could get one, but it wasn’t essential. So I didn’t have one. So that right there acted as a limiter to what I spent because I could only spend what I had.

That wasn’t a problem because I managed to save several hundred every month.

Yes. When we were a family of 5 living on a single modest income, we budgeted hard. We had no credit cards.

jnw

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Re: What's the point of budgeting?
« Reply #31 on: October 24, 2023, 11:32:43 PM »
My BF lives with me and we keep our finances separate. He doesn't budget at all and doesn't track his expenses either.  He doesn't blow his money, so it works for him I guess.  Although he could save a bit more if he was more careful.  I help him here and there suggesting things like: bringing water to work from home instead of buying bottled water at the convenience store, etc.

EchoStache

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Re: What's the point of budgeting?
« Reply #32 on: October 28, 2023, 01:31:45 PM »

I feel comfortable saying that budgeting and tracking spending would make a drastic difference for the average American.
« Last Edit: October 28, 2023, 03:12:14 PM by EchoStache »

ender

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Re: What's the point of budgeting?
« Reply #33 on: October 28, 2023, 01:53:24 PM »
Alternative wording - "What's the point in doing something that for me comes super intuitively and naturally? Why isn't everyone just <perfectly fit, wealthy/financially responsible, super productive, etc> like me?"

jnw

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Re: What's the point of budgeting?
« Reply #34 on: October 28, 2023, 03:43:28 PM »
Wow.

Saving money did not come intuitively or naturally to me.  It's something I learned to do in just the past few years.  I used to spend my entire paycheck each month, but now am saving about 1/2 my monthly net income.  I'm low income on Social Security disability; I'm not fit and not very productive, but I do try and keep my spirits high regardless.  I'm in my 50's.  The reason I asked the question is so I can get some insight as to why people budget, wondering if I should start doing the same.  But I hardly spend anything on discretionary each month.

My default plan is to spend $0 per month on discretionary.  I just buy the same fixed necessities each month and throw all the rest of my money into savings. When I buy discretionary items, I don't have a fixed amount each month to spend on it; I weigh whether or not it's a good idea to pull that money from savings before buying it, each and every time.

When my last pair of shoes get worn out, or I need some medicine the doctor prescribes me, or pay my mortgage bill, or pay my electricity bill, why do I need to see if the budget allows for it?  Also, I don't have a budgeted amount of discretionary money I can just "throw away" each month because the budget allows for it.  If it is there to throw away each month, then wouldn't the decision to spend it be a little more carefree?  Trying to understand the logic of typical budgeting.   

I manually track all my expenses carefully, to the penny, with the free Gnucash app -- I never used to, for decades.  But I don't use budgeting software like YNAB etc.  Just wanted to know if there was something I am missing out on with my existing methods.  Was looking for a reason to try using it to see if it would help my situation in any way.  I asked the question to be enlightened, but admit I could of been more tactful with the way I phrased it, but my question did accurately depict my concerns about budgeting I guess:  Is it primarily to allow for discretionary spending?  Because my goal is already to spend $0 per month on discretionary.

EDIT: e.g. Does it make sense to budget for emergencies, and then feel like you failed when a big emergency happens? Like I am going to have to get $10,000 in foundation repairs here soon, but say I only budgeted $2000 per year for home repairs.   I have a good amount saved in emergency fund due to saving 1/2 my monthly income each month, and I can pay that $10k no problem.  Not budgeted.. no guilt or feelings of failure.  It has to be done regardless.  I just don't understand budgeting.

EDIT #2: What I do each month is, after my receive monthly paycheck, I pay my mortgage, utilities, insurances and credit card balances down to zero. I throw all the rest into savings.  I buy everything with credit card (both necessities and discretionary items).  I track everything, whether it is discretionary or not in gnucash expense account tree (categories).  If it is a necessity I buy it no matter what, on the  credit card, without thought.  If it is discretionary, then I have to decide whether or not it brings enough quality of life to deplete my savings.  But I save over half my income each month so I kinda know where every dollar is going:  1/2 to necessities and 1/2 to savings.  I hear people talking about giving every dollar a job, a place to go.  I guess I do the same but just group it into necessities and savings.
« Last Edit: October 28, 2023, 06:03:00 PM by jnw »

EchoStache

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Re: What's the point of budgeting?
« Reply #35 on: October 28, 2023, 07:36:13 PM »
JNW, you are very strict disciplined when it comes to spending.  Perhaps budgeting would help with giving you "permission to spend" while staying on track with your goals.  For example, maybe you like to purchase certain things that make you happy that aren't necessarily the bare necessities to survive from day to day, but you feel guilty spending money because it isn't required to live and you can't enjoy the purchase because you can't help but think that you could be saving for the future with that money.

A budget might give you a small allowance that you are comfortable with, allow you to spend it freely without guilt, get some enjoyment from it today, without feeling like you are sacrificing tomorrow.

Just a thought.  Budgets can serve different purposes for people in different situations.  This is what came to me as an idea for you.

I think you do budget.....it's just that your budget other than the bare minimum living expenses is essentially zero.   This isn't the case for most people.  Most people want to eat out some, buy some stuff, spend money doing stuff, etc etc.  A budget helps keep these non-essential expenses from getting out of control.  Sometimes, we base things on our own personal situation or experiences and assume it applies to everyone.  A physician who works 80-100 hours+/week and makes $700,000/year probably considers a great meal at a great restaurant for $300 on the weekend a near necessity while being a nearly meaningless, negligible expense that brings great joy and stress relief.  A $300 meal out for you would cause tremendous stress and guilt.

Gremlin

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Re: What's the point of budgeting?
« Reply #36 on: October 28, 2023, 10:43:54 PM »
Wow.

Saving money did not come intuitively or naturally to me.  It's something I learned to do in just the past few years.  I used to spend my entire paycheck each month, but now am saving about 1/2 my monthly net income.  I'm low income on Social Security disability; I'm not fit and not very productive, but I do try and keep my spirits high regardless.  I'm in my 50's.  The reason I asked the question is so I can get some insight as to why people budget, wondering if I should start doing the same.  But I hardly spend anything on discretionary each month.

My default plan is to spend $0 per month on discretionary.  I just buy the same fixed necessities each month and throw all the rest of my money into savings. When I buy discretionary items, I don't have a fixed amount each month to spend on it; I weigh whether or not it's a good idea to pull that money from savings before buying it, each and every time.

When my last pair of shoes get worn out, or I need some medicine the doctor prescribes me, or pay my mortgage bill, or pay my electricity bill, why do I need to see if the budget allows for it?  Also, I don't have a budgeted amount of discretionary money I can just "throw away" each month because the budget allows for it.  If it is there to throw away each month, then wouldn't the decision to spend it be a little more carefree?  Trying to understand the logic of typical budgeting.   

I manually track all my expenses carefully, to the penny, with the free Gnucash app -- I never used to, for decades.  But I don't use budgeting software like YNAB etc.  Just wanted to know if there was something I am missing out on with my existing methods.  Was looking for a reason to try using it to see if it would help my situation in any way.  I asked the question to be enlightened, but admit I could of been more tactful with the way I phrased it, but my question did accurately depict my concerns about budgeting I guess:  Is it primarily to allow for discretionary spending?  Because my goal is already to spend $0 per month on discretionary.

EDIT: e.g. Does it make sense to budget for emergencies, and then feel like you failed when a big emergency happens? Like I am going to have to get $10,000 in foundation repairs here soon, but say I only budgeted $2000 per year for home repairs.   I have a good amount saved in emergency fund due to saving 1/2 my monthly income each month, and I can pay that $10k no problem.  Not budgeted.. no guilt or feelings of failure.  It has to be done regardless.  I just don't understand budgeting.

EDIT #2: What I do each month is, after my receive monthly paycheck, I pay my mortgage, utilities, insurances and credit card balances down to zero. I throw all the rest into savings.  I buy everything with credit card (both necessities and discretionary items).  I track everything, whether it is discretionary or not in gnucash expense account tree (categories).  If it is a necessity I buy it no matter what, on the  credit card, without thought.  If it is discretionary, then I have to decide whether or not it brings enough quality of life to deplete my savings.  But I save over half my income each month so I kinda know where every dollar is going:  1/2 to necessities and 1/2 to savings.  I hear people talking about giving every dollar a job, a place to go.  I guess I do the same but just group it into necessities and savings.

This are genuine questions.  Why do you track your expenses?  Without a view on a potential budget, how will you know that you have 'enough' to FIRE?  What does FIRE look like for you if you are living a life with zero discretionary spending?  What do your groceries look like without ANY discretionary spend?

In response to some of your questions...

We don't think twice about $10k of repairs if needed, even if we 'only' budget $2k per annum.  But having a history of expenditure and a long-term expectation of how much such 'big ticket' items cost, allows us to be confident that we can appropriately plan (or adjust our plans accordingly, if required) for our future.

Personally, I don't think that eliminating all discretionary spend sounds particularly healthy.  The converse of that is not having a frivolous amount of money to waste every month.  Maybe your view of what classifies as 'discretionary' vs 'necessary' is different to mine, but here's an example where discretionary spending was a no brainer for us. 

MrsG's father passed away last year.  Over a four month period either side of his passing, she flew interstate to be with him and her Mum eight times.  A couple of flights were at late notice and all we could get were expensive Business Class flights.  We didn't have to think twice about whether this was worth it, or whether we could afford it.  We had discretionary money for travel set aside and knowing that she didn't have to seek that 'permission to spend', or to rationally justify, gave MrsG incredible peace of mind.


From a personal perspective, we actually found it was easier to be critical of our spending habits without a budget than with one.  Here's what worked for us early on in our savings spree.

We set ourselves a budget that included a pay-yourself-first savings allowance. We then had a budget for various other categories.  These were broadly in three categories:

  • Monthly spend - such as groceries or monthly bills
  • Major Items - these things were on a timetable but not necessarily every month, such as quarterly electricity bills, annual insurance payments
  • Big Items - these were things that you'd want to have money set aside for, but weren't sure if or when you'd have to pay them - things like the fridge breaking down or other repairs.  Often spend was zero and would just carry forward each month

The first two we could measure ourselves against month to month - I liken them to your 'necessary' expenditure.  If we came in under budget on the first two, half of the 'profit' also went to savings (in addition to the pay-yourself-first component) - we were incentivised so that sticking to a budget would mean hitting our savings goals earlier.  The other half of the 'profit' went to an accruing discretionary allowance.

If we were over budget for the month, then the shortfall came back out of our accrued discretionary allowance.

This approach worked for us really well.  It actually allowed us to INCREASE our savings rate, since it took away the constant stress about trying to justify every expense as to why it was necessary or 'valued'.  Maybe you're more disciplined than us or you are clearer in your value trade-offs.  It was the value trade-offs part that was difficult for us without a budget, since we weren't just trading off our own values, but also those of each other and, no matter how well you try, you just can't fully articulate that in a purely theoretical way.

Laura33

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Re: What's the point of budgeting?
« Reply #37 on: October 30, 2023, 08:09:03 AM »
Wow.

Saving money did not come intuitively or naturally to me.  It's something I learned to do in just the past few years.  I used to spend my entire paycheck each month, but now am saving about 1/2 my monthly net income.  I'm low income on Social Security disability; I'm not fit and not very productive, but I do try and keep my spirits high regardless.  I'm in my 50's.  The reason I asked the question is so I can get some insight as to why people budget, wondering if I should start doing the same.  But I hardly spend anything on discretionary each month.

My default plan is to spend $0 per month on discretionary.  I just buy the same fixed necessities each month and throw all the rest of my money into savings. When I buy discretionary items, I don't have a fixed amount each month to spend on it; I weigh whether or not it's a good idea to pull that money from savings before buying it, each and every time.

So you do have a budget:  it's 50% necessities, 50% savings, 0% discretionary.

Serious question:  what are you saving the 50% for?  If I am reading you right, you are currently on SSDI, which is going to then transition into regular SS when you hit your full retirement age.  So unlike many here, you have a secure income source (albeit a rather low one).  So is your savings basically a big emergency fund, in case something big hits? 

On your question of what happens if you've saved $2000 for a repair and it turns out to be $10,000: the answer is to be happy that you have $2K saved, when most people would be putting the entire $10K on a CC.  And then re-adjust your savings going forward to account for the fact that your projections were way low. 

But really, that's what you have an EF for.  All you can do is make the best estimate you can, based on the information in front of you.  But unless you have perfect information, you are sometimes going to be wrong.  So if you can keep an extra slush fund on-hand to cover you in those cases, you're better-protected against inevitable mistakes.

jnw

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Re: What's the point of budgeting?
« Reply #38 on: October 30, 2023, 08:38:56 AM »
Well I only have $26.7k saved for emergency fund, aiming for $50k.  I get a virtually zero risk "guaranteed" 10-20% return on this $50k so it makes sense to have it instead of investing it into VTI.  After I get $50k saved I then want to fast pay mortgage, balance is around $40k.   After that it'll be 100% into VTI.

I fear depending on SSDI because of all the political rhetoric around it, some politicians saying it's going to fail and want to do away with it altogether, etc..   Also there has been talk in the Trump administration in the past about making it more difficult for disabled people on SSDI to keep it.  I just don't count on it 100%.  If I can save 1/2 my paycheck each month for the next 15 years, I'd have enough to survive on the VTI alone -- drawing just 4% per year -- with no social security at all.

EDIT: I want to clarify even though I budget $0 for discretionary I still end up spending on it.  I spent $1700 on it last year. Trying to improve :)  I am at around $478 this year so far.
« Last Edit: October 30, 2023, 08:58:44 AM by jnw »

GuitarStv

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Re: What's the point of budgeting?
« Reply #39 on: October 30, 2023, 08:41:58 AM »
Where are you getting zero risk 10-20% returns?

jnw

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Re: What's the point of budgeting?
« Reply #40 on: October 30, 2023, 08:51:38 AM »
Where are you getting zero risk 10-20% returns?

Churning checking, savings, business checking, brokerage accounts.  [Also do personal and business credit card churning.]

index

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Re: What's the point of budgeting?
« Reply #41 on: October 30, 2023, 12:39:52 PM »
The benefit of budgeting/expense tracking is planning for the future.

We have some friends who have been toying with the idea buying a larger house for the last couple years. Their dream home just came available and they ultimately decided not to make an offer because the new home would double their mortgage payment and they didn't want to give up traveling or be stressed about the money. This couple makes over 250k/yr and could easily afford the new house, but they have no idea where their cash flow goes. They just know they "save a lot of money" and are never stressed about purchases.

Budgeting is not just about cutting expenses; it is about making your money work for you. Money is a tool and MMM is all about optimizing that tool.

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Re: What's the point of budgeting?
« Reply #42 on: November 02, 2023, 03:41:34 PM »
I/We had tried budgeting in various fashions over the years, but ultimately, like you, I found it easier to just spend way below my income and save the rest.  Then we had a kid, income went up dramatically, expenses went up less dramatically but still appreciably, bits of lifestyle creep entered, and I simply had fewer braincells, and at some point I realized that while I was still saving (read: investing) every month, I never felt entirely comfortable knowing exactly how much I could invest. Was a $5,000 cushion in my checking account sufficient? Usually, but what about that one weird month when I knew we were about to pay more than that for a house project? And were my estimates of our spending accurate, or was lifestyle creep making FIRE slip further away?


We tried YNAB a couple of years ago, and for me at least the combo of 0-based ("envelope-style") budgeting and pretty decent account integration so even transactions I forget about show up quickly has taken away all of the stress of having to plan/project/keep a mental list of future expenses. I get paid on the 1st of every month, and within 5 minutes of auto-assigning what I'll need for all of my categories, I know to the cent how much is left over to be swept to investments, which I now do consistently on the 2nd.


I also have a crystal-clear picture of our spending, including for the lumpy sort of categories most folks resort to using an emergency fund for, to the point where I no longer have an emergency fund beyond my sinking funds for house maintenance, car maintenance, healthcare, etc. We've been able to fine-tune our spending in some of the "quality of life"-type categories by changing our allocated amount each month until we're happy with where they are (sometimes higher, sometimes lower than what we'd naturally spend without consciously choosing). I'm contemplating some relatively major life changes in the next year, and predicting the financial aspect those will have is dramatically easier than it would have been.


Cassie

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Re: What's the point of budgeting?
« Reply #43 on: November 02, 2023, 08:11:48 PM »
I think each person should do what works for them. I have spent most of my life married but now single for the past 3 years and my income was cut in half. I find budgeting helps to keep me on track. My goal is to live on my income without spending my savings.

10 months ago I went back to part time consulting and my goal was to save this money. I had some unexpected expenses and was able to use the money I earned versus savings which felt good. Now I’m able to put it in savings. It’s nice being able to make my own decisions without anyone else to consider. I set aside 100/month for fun money which includes going out to eat with friends. Some months I spend it all and some I don’t.

Villanelle

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Re: What's the point of budgeting?
« Reply #44 on: November 03, 2023, 10:20:45 AM »
This reads to me a lot like, "why do some married couple have separate accounts? We've always had joint accounts and it works perfectly and I don't understand why anyone would separate things.  (Or "why do some married couples have joint accounts?")

I don't budget.  I never have, even when I as a college student with limited income and savings.  But that doesn't mean I can't use empathy to understand why it works for others.  Some people are really helped by knowing they have $200/mo in fun money.  That means that if they already bought a $150 concert ticket, they know they can't also spend $80 on a night out with friends, unless they have savings from prior months (if that's how they handle it).  Or they know that if they want to go on a $250 excursion next month, this month they need to spend less. There's a pretty clear logic in that, even if it is not how my brain is wired. 

For other people, spending money makes them anxious and they can easily cross over from frugal to cheap.  In that case, a budget gives them a sense of security, knowing that it is okay to treat themselves to one meal out each month, when they could theoretically cook at home, because they have accounted for that in their budget.  It's almost the opposite of the above scenario. The first group needs the limit so they don't overspend, and the second group needs the permission so they know how much they can loosen up, without feeling worried or guilty about it.  Some people over-optimize and it starts to affect their happiness, and the budget sets a limit for what they don't need to optimize.

Some people struggle to step outside their own feelings, lives, and brains and see how other people think and live.  For others, that's easier.  While budgeting as never been something that was right for me, it's pretty easy for me to fully understand and respect how it works for others who thinkg differently.  (And not worse or ineffectively or irrationally--just differently.)  The ability to understand this, or not, is kind like budgeting--everyone is different. 

iris lily

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Re: What's the point of budgeting?
« Reply #45 on: November 03, 2023, 09:34:29 PM »
The benefit of budgeting/expense tracking is planning for the future.

We have some friends who have been toying with the idea buying a larger house for the last couple years. Their dream home just came available and they ultimately decided not to make an offer because the new home would double their mortgage payment and they didn't want to give up traveling or be stressed about the money. This couple makes over 250k/yr and could easily afford the new house, but they have no idea where their cash flow goes. They just know they "save a lot of money" and are never stressed about purchases.

Budgeting is not just about cutting expenses; it is about making your money work for you. Money is a tool and MMM is all about optimizing that tool.

I think of budgeting as being quite different feom tracking expenses.

 

Wow, a phone plan for fifteen bucks!