If you’re aiming for spending 50% and saving 50% of your income, the gap between your structural expenses and the 50% mark is what you’ve got leftover to spend on whatever you want. Honestly, if even the five-category method is too stressful, you can just break it down into 1 and 2. Things that fall into bucket #1 are the predictable, recurring costs that don’t vary, but can sneakily eat up a lot of your income.
Stuff you have to pay for every month no matter what Because when you zoom out even further on these five major categories, what it really looks like is this: At the end of the day, where you file it in your budgeting system ultimately doesn’t matter. What should you do? Well, I’d file it under whatever broad category fits it best. “I got a $30 gift for a friend but I don’t have a gift budget!” * gasp *
All too often I hear people get hung up on the details of where to file expenses It’s simply more efficient to trim the big categories first. It doesn’t make sense to cut from a small entertainment budget to try to buy back space in your budget when you’ve got 40% of your income going to the roof over your head. That’s okay – a 50% save rate may not come easily at first, and it might require shifting around some big, uncomfortable puzzle pieces – but if I had to venture a guess, most of your spending comes from areas 1-3.
For example, if you make $5,000 per month and your rent is $2,500, you’ve already used up half your income on category one. You may be in a position right now where your structural expenses are simply too high to do this. I suggest trying to fit your five major categories into half your income. If you ask me, the ideal split to strive for is this: The sixth, implied category that’s left is investing. If breaking things down into an insanely granular view (coffee shops! Artisan bakeries! BOBA TEA!) stresses you out, try this: You could probably get away with making five broad categories and leaving it at that. The most important part of your budget is that it sets the big picture plans for how you plan to live your life If you struggle with sticking to the well-intentioned plans you set for yourself on Sunday mornings after Saturday nights spent in overpriced restaurants with monosyllabic names like STIRR and HOUSE, it’s possible that you just need to ask less of your budget. So no, it’s not necessary for you to consult your budget for every decision you make – in fact, I hope you aren’t. This is, of course, a Ramit Sethi concept: That too often we focus on the little shit and get caught up in the details, when in reality the big, structural decisions require more intense attention. Name that personal finance guru hot take! “People are too busy asking $3 questions to bother with asking $30,000 questions.” Imagine being so closely attuned to your goals – your values – that you don’t need a spreadsheet to dictate whether it’s a “$5 oat milk latte” or “Folgers-in-a-freeze-dried-packet” day. I think the hallmark of a truly financially independent person with an excellent grasp on their spending is the lack of a budget. That would be like using the architectural blueprints of your house to determine what color the pillows are and what scent the candle is burning in the kitchen – it’s supposed to be a big-picture guide, not an in-depth interior design manual. The purpose of the budget is to give structure to your financial life – like the scaffolding of a building that shows you how big the rooms will be, where the windows are, how you get in and out – you know, the big stuff.Ī budget is not supposed to guide day-to-day decisions. Why people pursuing FI often don’t need budgets anymore If you try to create the budget before you clarify your values, things will feel (and end up) misaligned. The budget is the manifestation of your values in the form of 0s and 1s in a spreadsheet. Most first-time budgeters fail because they start with the budget. You value the wrong things.”), I don’t know that I’d feel so positively about it. If my budget told me a different story (like, “You’re inadequate. The reason I love my budget now is because it reaffirms my beliefs and value system about myself. Wholeheartedly! And it’s not just because my budget and I have become BFFs. They’re restrictive! They require updating! They force you to open Microsoft Excel! I think budgeting has a bad reputation, mostly because we treat our budgets like a set of thrift store shackles that are a size too small.