Pretty much every Freaky Frugal person on the planet tracks spending. Otherwise how can you measure how you’re doing or estimate how much you need to retire? And the Rule of 25 makes it painfully obvious why everyone should track and reduce spending. It’s a no-brainer.
But not every Freaky Frugal person has a budget and of those that do some are detailed and some are just a single number. Mrs. FF and I’ve done all three at various points in our lives.
To budget, or not to budget – that is the question:
Whether ’tis nobler in the mind to suffer
The slings and arrows of outrageous expenses
Or to take arms against a sea of costs,
And by opposing end them.
– Billy Shakespeare
Approach #1 – No Budget
For most of our marriage Mrs. FF and I didn’t have a budget and only crudely tracked spending. We focused on living well below our means. Luckily we’re both naturally frugal so it worked out OK in the end.
If you’re married, this approach only has a chance of working if both you and your spouse happen to have the same level of frugality. Not all that likely. If you’re single, it’s obviously easier assuming you’re already naturally frugal. So this approach can work for some Freaky Frugal people in certain situations but it’s really risky.
The upside is the time you save that you would’ve spent discussing, creating, and tracking a budget. You can use that extra time to do other productive things – make more money, find new ways to save money, exercise, drink copiously, watch tv, whatever.
Approach #2 – Detailed Budget
I finally decided it was time to create a Detailed Budget a few years before I retired. Why? I was a Nervous Nellie about spending because we weren’t going to generate much work income after we retired.* All our income was going to come from our investments.
I created a spreadsheet that looked like this:
|Category||Annual Expense||Monthly Deposits|
|School Taxes||$4,454||Savings – Home||$371.17|
|Real Estate Taxes||$1,659||Savings – Home||$138.25|
|County Taxes||$878||Savings – Home||$73.17|
|Umbrella Insurance||$353||Savings – Home||$29.42|
|Homeowners Insurance||$1,175||Savings – Home||$97.92|
|Repairs||$2,000||Savings – Home||$166.67|
|Insurance||$900||Savings – Auto||$75.00|
|Repairs||$1,000||Savings – Auto||$83.33|
|Replacement||$2,000||Savings – Auto||$166.67|
|Health Savings Expense||$5,000||Savings – Health||$416.67|
|Total Health Insurance||$5,060||$416.67||$5.00|
|Travel||$5,000||Savings – Travel||$416.67|
|Gifts||$1,300||Savings – Gifts||$108.33|
|Other (pets, tokens, etc.)||$3,600||Checking||$300.00|
|Mrs. FF’s Fun Money||$3,840||Savings – Lisa Fun Money||$320.00|
|Roger’s Fun Money||$3,240||Savings – Roger Fun Money||$270.00|
Yikes – that’s a lot of rows, columns and numbers! But please let me explain because it’s not as complicated as it looks.
The Annual Expense column represents the total yearly expense for a line item. For example we spend $900 per year on Auto Insurance.
The Bank Account column shows the name and type of bank account where money is deposited every month. I bank at Ally so I can easily open as many online savings accounts as I want. I use this capability to help me track buckets of saving and spending. For Auto Insurance, we put $75 every month into a separate Savings – Auto account.
The Savings and Checking columns show the monthly deposits made into each type of account. Why 2 columns instead of 1? To make it easier to see subtotals for each Bank Account so that know how much to deposit in each.
To summarize, here’s how much money is deposited each month into each type of account:
- Savings – Home: $877
- Savings – Auto: $325
- Savings – Health: $417
- Savings – Travel: $417
- Savings – Gifts: $108
- Savings – Lisa’s Fun Money: $320
- Savings – Roger’s Fun Money: $270
- Checking: $1,697
This created a total monthly budget of $4,430 and an annual budget of $53,160 (this is an old budget).
I accrue the non-monthly expenses in savings accounts until it’s time to pay that particular bill. For example if I needed to pay for a home repair to our furnace, I’d pay for it using the Savings – Home account. Truly monthly expenses like electric, gas, cell phone, and water are just deposited into checking and paid from checking.
So what is Fun Money?
Did you notice the strange line items called Mrs. FF’s Fun Money and Roger’s Fun Money? No? Don’t worry, I wouldn’t have noticed either.
When I created the budget Mrs. FF felt she had little spending autonomy. She wanted some spending money for fun things without accounting for every penny and reporting it back to me, the Budget Bookkeeper. Or as she referred to me – the Spending Police. I’ve been called worse.
Anyway we came up with the concept of Fun Money for both of us. We’d each spend our Fun Money however and whenever we wanted without discussing it with the other. This money was primarily used for entertainment, restaurants, sports, tech gear, and clothing. For fun stuff!
This Fun Money idea sort of worked. She spent it mostly on her favorite hobby – running races – and eating out with friends and family. I spent very little of my Fun Money because most of the things I enjoy are free. My money just kept piling up and I began to feel bad about how much Fun Money I had versus what she had. We eventually dropped the idea when we switched to a Single Number Budget described below.
I found Detailed Budgeting has a bunch of pros and cons:
Detailed Budgeting Pros
- Accurate: You have an accurate plan for spending money.
- Smooth: The multiple savings accounts smooth out the monthly spending.
- Controlled: It feels good to have money set aside for known or quasi-predictable expenses. A real sense of control.
- Obvious: You can tell roughly if you’re staying on budget as long as all bank accounts stay above zero.
Detailed Budgeting Cons
- Tedious: It’s tedious keeping track of spending categories and how much money to move between accounts.
- Delusional: It creates the illusion that money is different depending on the category it’s in. You’ll see what I mean below but I realized money is still money regardless of how it’s used!
Approach #3 – Single Number Budget
Some of you know I’m a big fan of the great Mr. Money Mustache. He’s awesome! Anyway he’s written several articles** where he philosophized about how money is just money. Deep, eh? His point was that it doesn’t matter how or what the money is used for – a dollar is still a dollar.
According to Mr. Money Mustache, the problem with putting money into savings buckets, cash envelopes, budget line items, or whatever is you begin to think it’s OK to spend all the money allocated even when you don’t need to. You no longer think of a dollar as just a dollar, but as a dollar allocated to something specific. You can trick or delude yourself into suboptimal spending.
I noticed I stopped caring about how much we spent on vacation because that’s what the Savings – Travel account is for. For example I’d spend more money at restaurants (more dessert, anyone?) during vacation than I normally would because, hey, there’s plenty of money in the Savings – Travel account. But a dollar is still a dollar whether it’s allocated for Travel or Real Estate Taxes. My attitude wasn’t very Freaky Frugal! 😯
I finally started seeing things Mr. Money Mustache’s way. I created a single annual budget number to shoot for – $58K including rent. I also got rid of all the bank accounts for different spending categories described in Approach 2. Mrs. FF and I dropped the whole Fun Money idea. This is working well so far.
Mrs. FF and I also started using Mint to track spending instead of a clunky spreadsheet. I love Mint, Mrs. FF not so much. She just doesn’t care for that level of detail while I REVEL in the flows of our expenses, income, and net worth. I guess that makes me a Nerd or Geek – take your pick.
These days everyone should use Mint or similar software if you really want to understand where your money is going. Kind of obvious, right?
We started out with No Budget approach which I probably wouldn’t do again. It really only works in rare circumstances. We luckily had those rare circumstances.
The Detailed Budget approach served it’s purpose and I don’t regret using it. Mrs. FF and I followed a natural evolutionary process for budgeting and spending. I initially needed a Detailed Budget because I really didn’t trust myself or Mrs. FF to lower our spending without it. You can see precisely where spending goes over or under and make small adjustments as you go along. It’s comforting. The Detailed Budget is a necessity if you’re not certain your Freaky Frugal or you’re in the midst of a Retirement Emergency.
Once I started trusting that we’re both Freaky Frugal, there was really no need for a Detailed Budget and we switched to a Single Number Budget. I knew that we would consider each expense and do whatever we had to to minimize it and maintain a solid Happiness ROI.
Thanks for reading! Do you have a budget?
* Mrs. FF still works a few hours per week as a Yoga Teacher and Personal Trainer. She just does it because she likes doing it.
** I can’t find any specific Mr. Money Mustache articles that describe this but I know I read the idea on his blog. If you know of any, please let me know and I’ll happily credit you with the link.