I don’t like using detailed budgets because of the time involved in monitoring and entering expenses in multiple categories. Using a detailed budget also conflicts with my continuing goal to simplify my life. On the other hand, I like to know and confirm that my pre-retirement outgo is less than my income. That brings a peace of mind that is important to my “big picture” goal of increasing my net worth while I am still in the accumulation phase of retirement planning.
First, I have comprehensive net worth spreadsheet that I update regularly, at least at the end of each month. This is a Google Sheet maintained in the cloud so I can access it on all my computers and other devices, whenever and wherever I have access to the internet. (I also keep it offline on some of my devices.) On a portion of this sheet, I group all of my bank accounts together so that a collective total of their account balances is automatically calculated and displayed.
I have the following bank accounts:
- A brick and mortar checking account from which I pay most of my monthly bills and expenses. This is a rewards checking account currently earning 1.5% on balances up to $25,000. Therefore, I try to keep this balance as close to $25k at all times, to maximize interest earned.
- A checking account at an online-only bank. This is the account where my payroll checks are automatically deposited. It functions as a clearinghouse for my other accounts. I also use it to pay extraordinary expenses, such as for major house remodeling projects.
- A savings account at the same online-only bank. This account earns me the highest interest on funds in excess of the $25k limit in the rewards checking account. It is my emergency fund and currently holds enough to fund about about 24 months of expenses at my current spending levels.
- A checking account associated with my brokerage account. The sole purpose of this account is to temporarily hold taxable dividends paid by stocks and mutual funds that are not inside my retirement accounts.
All of these accounts are connected online so that it is easy for me to move money between them with a few mouse clicks. Similarly, it takes only a few seconds to monitor the balances in these accounts.
This brings me back to my “simplified” pre-retirement budget strategy. Again, the primary purpose of my “budget” is to confirm that I am spending less than I am earning. Because all of my regular cash flow involves the four accounts listed above, the sum of the balances in these four accounts becomes a valuable metric to monitor. If that total stays the same or increases from month-to-month, it tells me that my spending has not exceeded my income for the previous month.
Now you may be wondering about retirement saving if my “budgeting” strategy merely involves making sure that the total cash balances in my four bank accounts doesn’t decrease from one month to the next.
The answer is that this bank account cash flow is net of my: (a) 401(k) contributions which are automatically withheld; and (b) HSA contributions which are also automatically withheld. (You may recall that I use my Health Savings Account solely as a retirement investment account. ) I’m also buying I-bonds with surplus cash, typically at the end of the year.Thus, as long as my net worth is also increasing over the course of a year, my retirement savings plan is also working. (There will be monthly ups and downs due to market variability.)
This works for me, for now. It is simple and easy and relieves me of the burden of tracking daily, routine expenses. This will change if I reach a point where my bank balances show a regular decline. I will then have to drill down into the spending numbers to identify and fix the problem.
My budgeting strategy will also probably change when I retire. In fact, I maintain a separate retirement budget spreadsheet as part of my Failsafe Retirement Plan. This spreadsheet contains multiple detailed spending categories, with budgeted amounts in them that are estimates of what I will be spending when I actually retiree. I update these numbers periodically based on changing conditions and real world experiences. When I stop working for income completely (I’m still not sure when that will be), it will be very important that my spending stay generally within the category parameters in that spreadsheet.
But for now in pre-retirement, simplicity is the goal and I’m achieving that goal with this new strategy.
What about you? Do you operate a monthly budget plan?