I learned early in life that spending less than you earn, paying yourself first to save, and investing for the long term can pay huge dividends over time. But I never really followed a budget, As I set down to attempt to put something together to help plan for FIRE (Financial Independence Retire Early), I found most of the budgeting advice unhelpful.
I discovered, however, that there are a few simple things you can do once a year or so, and simple things you can do every day that will help you control spending without the complexity of a traditional budget.
The key comes from periodically identifying areas where you can eliminate or trim expenses, and implementing a plan to help you control spending in the comparatively few areas where your day-to-day choices make a difference.
Understand your income and expenses with tracking tools like Personal Capital
If you are not already doing so, immediately start tracking your income and your spending. Tracking your spending over time (and keeping track of it) pays dividends on many fronts. First, it may highlight areas where you are spending more than you thought. Everyone loves Starbucks, but that daily habit, for example, can add up. Second, understanding your expenses becomes critical to planning for a comfortable retirement, whether it is early or not. As I explained here and here, your expenses (properly understood) becomes the foundation for building your plan to Catch FIDough.
Fortunately, there are now many good free tools to do this. Unquestionably, my absolute favorite is Personal Capital. I regularly recommend this free service to friends, who so far have likewise universally liked the service. You can sign up for the service for free (and if you click through here, you will also help support this site and FIDough’s charities at no cost to you).
You may also track spending the old fashioned way (by gathering bank statements, etc.), but there is no reason not to take advantage of the free automatic tools. So if you do not already use a spending tracker, get started by signing up for one today.
Triage your spending into three non-traditional categories
After collecting and categorizing your spending into categories such as rent, groceries, etc., many budget experts recommend dividing expenses into “non-discretionary” and “discretionary” items, or “fixed” and “variable” items.
So, for example, your rent or mortgage is typically considered a “non-discretionary” or “fixed” expense, and your cable TV bill is considered a discretionary expense (which may or may not also be variable).
But putting items into these categories does not help you focus on what really matters and they do not help you identify where to trim. For example, your rent may be considered a fixed, non-discretionary expense. But surely you could move to a cheaper apartment or get a roommate.
And sure, your cable TV bill may be discretionary, but if you have already decided you want cable TV (and you can afford it), does it really matter whether it is “discretionary” or “variable”? In other words, these traditional categories mask value choices that you should make intentionally, and mask that you might be able to make more changes if you are more deliberate.
So, instead of the usual categories, triage your spending into three categories that put you in control:
- Category 1 – spending you are not willing to change or control
- Category 2 – recurring bills you might change
- Category 3 – spending you are willing to control on an ongoing basis.
Before you decide what goes into each of this categories, spend some time exploring sites like Mr. Money Mustache to shake up your existing conception of what should really go into category 1.
Category 1—Spending you will not change.
If you are happy with your residence (and you can afford it), your rent, mortgage, and many other items will likely go into Category 1.
You will, of course, want to revisit Category 1 if your circumstances change. But for the most part, once you have identified what belongs in Category 1, you can largely ignore the items in this category going forward.
Category 2—The recurring bills you might change.
Category 2 typically includes those recurring bills where you signed up for a service and haven’t thought about it since. Typical examples include insurance, internet, music subscriptions, etc. Over time, these bills can add up. Moreover, new and cheaper services often become available. Accordingly, identify all the potential candidates for this category, and decide whether you can eliminate the bill completely, or find a cheaper alternative.
Then do your homework.
Is the $100/month for satellite TV really worth it? What about a cheaper service? Could you eliminate your landline completely, or switch to something like Ooma? Switching service providers for phone, cable, and other similar services (or just threating to leave) will often result in immediate savings. Whitefence allows you to see what the competitors currently offer in your area for such services.
Insurance is also an area where carriers will often raise rates over time, so comparing prices annually makes sense. (Make sure you also pick a company with good claims history.) Generally, once you have worked through your Category 2 items, you only need to revisit them annually or so.
Category 3—The ongoing spending you are willing to control.
Category 3 items include the comparatively few areas of spending where the daily choices you make affect your spending.
It is this final category of items where small choices add up to big savings over time. Perhaps you are not willing to give up your pay-per-view habit, but you are willing to limit your consumption to $10/month? Items like eating out, groceries, clothing, and entertaining also often fall into Category 3.
Each person/family is different, and working through categories 1 and 2 helps identify the items that remain where you can make small changes.
Implement a system that works for you to help control your Category 3 spending
Once you have committed to exercising discipline over your Category 3 spending, implement a system that will make that easy. Perhaps the simplest system is something like Dave Ramsey’s envelope system.
There are also now some good free online/smartphone tools like Good Budget and others that allow you to set up virtual “envelopes” for your discipline categories. Then, if you are overspending on eating out, for example, you can choose to skip the soda at lunch, eat at a less expensive restaurant, or eat at home. You are now in control.
Keep it simple
Although you should periodically examine your larger lifestyle choices, once you have decided you want cable TV, there is no point in dealing with it as an ongoing budget item unless your circumstances or values change.
Spending discipline thus does not have to involve controlling every category of spending to make a difference. It only requires implementing a system to control your spending in the comparatively few areas where daily discipline matters. And make sure to revisit Category 2 once a year or so. Happy saving for FI!