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Budgeting without Ulcers

Posted by admin on August 7, 2007 in Misc.

I had a good chuckle reading Four Pillars post on the frustrations of tracking every expense and dollar for cash flow purposes and budgeting in general; I experienced similar feelings after undertaking the same exercise for 4 months as I attempted to budget and track and simply stopped (kudos to you Four Pillars for your staying power!). As a matter of fact, I stopped budgeting altogether in the conventional sense. Before you think I am spending willy-nilly, I have modified traditional budgeting to something more palatable for myself. In my mind anyways, it grants me some fiscal discipline and cash flow management while not analyzing every cent I spend. There’s really three items I budget and track and, after that, I am not particularly concerned about where all the other expenses are going. If you are attempting to budget for the first time, feel free to adopt this “system” to budget without ulcers.

The first item I pay attention to is the debt to income ratio. This is simply the percentage of take-home I spend on debt and are the standard figures the bank uses to decide whether to grant a borrower a mortgage. The traditional ratio is 28%/36%; the 28% refers to the maximum % of your take-home income you should spend on housing costs (mortgage/rent, insurance, property tax etc.). The 36% refers to the maximum % of your take-home income you should spend on all debt- your housing costs plus credit cards/student debts/line of credits etc. If your mortgage is insured by the government, the numbers are increased to 29%/41%. I spend 36% of my take-home pay on paying off debt- however, this figure is made up 100% of housing related expenses (I am, thankfully, otherwise debt free); Anything over 40% and you begin to feel the squeeze. All my housing costs are automatically deducted from my chequeing account so I am on track for my “budget” and I don’t need to track it per se.

The second item I pay attention to is my savings rate. We have all read or heard of the pay yourself first made famous by The Wealthy Barber/David Bach. You save 10% of your take-home pay by pre-authorizing a withdrawal to your retirement account/emergency funds/investment fund. The Millionaire Next Dollar found that financial independence is achieved if you are saving 15% plus of take-home. I budget 22% of take-home for savings which is all deducted from my chequeing account through pre-authorized payment so I don’t have to worry about meeting this goal or tracking it. In case you are wondering, I always keep at least 2 months fixed costs in my bank account so I never put my account into over-draft; in a round-about way, this focus me not to spend all my excess cash which leads me to…

The third item I pay attention to is my bank balance on the 1st of every month. If it is: (a) greater than last month; (b) the same; or (c) decreased by less than $100.00 (but only for 1 month only; if it keeps going down by nominal amounts month after month, I am in trouble) than I am fine and I do not give it a second thought. This third item is the unconventional aspect of my budgeting exercise. I am supposed to budget and track food, entertainment, travel etc. etc. but, as I mentioned above, this became a huge exercise in frustration trying to do this and have a life. While in theory I should be doing this, real life tends to take over and concessions had to made somewhere. Most of my “budget” items are pre-authorized which makes my life much easier; everything else, I lump into “other” and make sure it doesn’t leave me with a smaller bank balance each month (to be clear, I don’t budget this way for my business). It is not elegant but it gets me through the night.

If you want an alternative method of budgeting, here is another strategy posted on MSN Money. If you have real problems controlling your expenses, I would read this article for some sound tips.

If anyone else has budgeting alternatives for the budgeting challenged, please feel free to share by posting a comment. Thanks.

One programming note- next week’s posts are all on books dealing with personal finance. If anyone is dying to write a review or recommend a book, please email me here or at thickenmywallet@gmail.com. If I get enough responses, I may do a compilation post on books readers recommend. Thanks.