By Amol Desai, CFP®, CFA
Want to live a happy, fulfilling life? Want to pursue all your hobbies and passions, check every item off your bucket list, while taking care of your family’s needs and still have no stress about your financial future? Actually, let’s skip these questions. Of course, you do! But do you give due importance to planning for it financially? If that last question makes you a bit uncomfortable, you aren’t the only one. Planning for the future, managing investments, spending your hard-earned money wisely, and having some fun splurging occasionally is a balancing act that is surely tricky. And then there’s always that possibility of unforeseen expenditures that can hit you without any prior warning. If reading all this has made the stress creep up on you, calm down – there is something you can do about it to make it more manageable – Budgeting or Cash-Flow planning.
Budgeting Paradigm
Our feeling and emotions about budgeting are dependent upon how we view it. The clichéd interpretation of budgeting might make you think that I’m advising you to be a miser and to minimize your expenses all the time. That’s not fun – it is precisely I want to avoid preaching. Rather, I want to focus more on the thought-process of cash-flow planning so that you can feel more in control of and at peace with your spending decisions. I believe, the purpose of budgeting should not be to restrict the spending, but on the contrary it is to provide an actionable framework that liberates us from any worries while we spend on the things that we genuinely care about and are passionate about.
When you shift your budgeting paradigm – from looking at it as a restrictive rule-book to an opportunity to plan a guideline around your spending, and then undertake a thoughtful, realistic cash-flow planning exercise every year, this can offer a great sense of control as you deliberate multiple expenditures. In fact, let’s not call it ‘Budgeting’. Instead, let’s view it as a ‘Spending + Savings Plan’!
Take Care of Essentials and Prepare for the Unexpected
While planning your spending, of course you should start with allocating resources to your non-discretionary (essential) needs first. Ensuring your daily needs like mortgage and rents, utilities, food and groceries, car maintenance etc. are met is a no brainer. In addition, think about a year ahead and set aside at least some percentage (…say ~3-5%) of your household income for any unexpected, unforeseen emergency needs that may come to surprise you. If not needed during the year, these funds can always be rolled over to the same emergency category for the next year or be diverted towards investments.
What About Your Values/Goals?
Don’t just think of your essential living expenses though. Also be aware of your values, goals and interests that you passionately care about. Understand that planning your cash-flow is not just about tracking your annual expenses, but it is an opportunity to plan and ensure you get to do all those activities that are essential to align your life to your core values and long-term goals.
Let’s say that you are passionate about traveling the world and like to explore different cultures. You can make ‘travel’ as a ‘Personal Growth’ category of expenses in your budget. Travel is just an example but it can be any goal or passion that you want to pursue. Don’t look at it as an expense category but instead put it in your ‘Growth’ bucket! Then, allocate a certain percentage (.. say 7%) of your annual income to such category. Make sure that you spend the entire allocated resources on it. Of course, determine the percent number in a way that you can take care of essential expenses first.
When you know at the beginning of the year that you have already allocated money to essential living expenses along with the activities that enrich your life, you will not feel stressed while actually spending on it. Looking at few of the expense categories as ‘Growth’ categories and committing yourself to spend the entire allocated amount rather than trying to minimize costs across the board ensures that you stay on the path to realize your goals without stressing out or hampering your financial future.
Be A Diligent Investor
Planning for your expenses a year ahead against your expected annual household income has another great benefit. It will also give you an idea of potential cash surplus/savings that you will generate over this annual period. You would benefit tremendously if you use this information to implement a systematic monthly contributions to your investment accounts. You will gain from ‘cost averaging’ by lowering the average cost of your investments by spreading them throughout the year as well.
There is a rule of thumb that you would need to invest (not just save) at least 13% each year to sustain your current lifestyle in your retirement. I would recommend try to invest more (target ~20 to 25%) in order to provide for some other life-goals besides just maintaining current standard of living in retirement. Good news – you can count your contributions along with any employer match to the employer sponsored retirement plans like 401(k) as your savings!
Takeaway
I want to convey to you that you can change the way you view budgeting/cash-flow planning. If you look at it from a narrow perspective of just an expense tracker for today, you will feel it as a constraint on your life. It is highly likely that you will never really try to budget meaningfully. On the other hand, if you see a few expense categories as ‘Personal Growth’ categories and commit yourself to spend on the things you really value, if you plan to systematically invest your expected annual surplus little by little each month then it is very exciting to realize that you can spend as per your desires without stressing out while simultaneously securing your future.
Looking a little differently at budgeting is just what you may need to feel motivated and committed towards it and not loose sight of your core values and future goals. Don’t budget – instead, create a Spending/Savings Plan to align with it!
