I’ve discussed budgeting and its importance in the past. Budgeting is about setting priorities. Even Bill Gates needs to do it. It’s something we all should do – to ensure that our spending reflects our values and desires.
Although I support the concept of budgeting, I have a couple of perspectives that might be thought of as “contrarian”.
1. Don’t waste your time watching every dollar
I should preface this with an important disclaimer. This post (this blog, really) isn’t directed at people who are struggling to make ends meet, for whom it might be important to watch every dollar. This post is for people who are living comfortably, but aren’t being especially mindful about how they spend their money. This post is for people who are busy and don’t have the time or inclination to watch every dollar.
Over the years I’ve tried to develop personal systems for keeping track in real-time of how much money goes out. I’ve also spent a few evenings trying to get my head around budgeting software such as “You Need A Budget”.
Each time I try to do this, I realise how big of a time sink this would be. I don’t want to spend my time and energy watching dollars. My time and energy – and yours – are more fruitfully spend focusing on other things.
However. You still need to keep track of how you’re spending money. Periodically, you should put in the time to look through your statements, and develop a snapshot of where your money is flowing over a set period of time. I do this by exporting statement information for all of my household’s bank accounts, consolidating them into an Excel spreadsheet, and categorising all of my household’s income and expenditure.
I assure you, if you haven’t done this before, or you haven’t done it for some time, you’ll be surprised at how much you spend, and what you spend it on.
2. Over the long-run, it’s the “FIXED” costs that will get you
When you develop your snapshot, divide your expenses into two categories: “Fixed” and “variable”.
This blog is made possible by Fairhaven Wealth, my independent, fixed-fee, advice-only financial advice business.
The “fixed” category relates to items that you are essentially committed to ahead of time, and which you can predictably anticipate what the cost will be. Many of these items will be very regular. For example, rent or mortgage. Insurances. Car expenses. Gym memberships. Some might not be weekly or monthly but annual, such as certain types of insurance or memberships. Others might vary from statement to statement, but be fairly consistent over the longer-term, such as utilities.
The variable category still includes items that you might spend money on regularly – for example, supermarket, clothing, dining, and entertainment.
It will surprise you how much of your expenditure is in the “fixed” category. When I first did this exercise, our household outgoings were hard to believe. This was before we spent money on food or anything “discretionary”!
To a large extent, it’s not the “variable” costs that will impact your long-term financial outcomes. It’s the “fixed” costs.
I intentionally use “quotes” when I refer to “fixed” costs. Because it’s easy to accept them as fixed, but in reality, they’re not. You may not be able to change them overnight (although in some cases you may be able to), but you can change them over the medium- to long-term. To a large extent, many are still discretionary.
Keeping track of your “fixed” expenses and doing what you can to minimise them can make a big difference.
It’s also important to keep this in mind from a “defensive” perspective. Especially when you’re making big ticket purchases, like buying a house or a car. Remember that the more you spend on these items, the more you’ll need to pay, month after month, for years on end.
Cutting your variable expenses can seem quite salient. You’ll notice it when you force yourself not to buy that $4 coffee each morning.
Fixed costs, however? We become anaesthetised to them. The extra $20,000 you spent on that car comes out of our bank account and that is that. The opportunity costs associated with spending less don’t feel like the small cuts to our long-term wealth that they really are.