Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
Simplifying Your Budgeting Process to Reach Sustainability
Published Date : April 20, 2016
“He who will not economize will have to agonize.” – Confucius (551 BC – 479 BC)
For thousands of years people have been told to adhere to a budget, and today the thought seems as daunting as ever. This can be especially true for those who live in a high cost area such as San Francisco or have seen their income reduced in retirement during a period where fixed income yields are low. You are not alone if you find it difficult aligning your spending with a targeted goal; however, with a slightly modified approach, there is a way to make living within a budget more attainable.
There are many tools available today that will help you efficiently track your spending and project sustainable cash flows from your investments. While expenses can be manually tracked on a basic spreadsheet, it is most productive to invest in user-friendly yet robust data collection software, such as Quicken. Tools like Quicken allow you to track and categorize your spending history in an automated manner. Once implemented, the next important step to managing future spending is to assign each of your expense categories into one of three broad classifications: static expenses, control expenses and dynamic expenses.
Many have found that simplifying expenses into these three broad classifications helps individuals and their advisors efficiently work through what is often an intimidating project. The premise is that your expenses are viewed as three concentric circles embedded within each other:
- Static expenses are found in the inner core of the three expense circles, and are sometimes called “core operating expenses.” They are tied to fixed monthly expenses that keep your home, health and vehicles operating, insured and maintained. Most of these items provide us with a reoccurring and typically fixed bill, such as a mortgage, property taxes, or insurance.
- Control expenses are found in the middle layer of your three expense circles, and are sometimes called “lifestyle expenses.” These expenses are made up of small but frequent purchases made throughout the month that often get overlooked in budgeting. You theoretically have “control” over whether or not, or at what level, to purchase these goods and activities. Many of these expenses enhance our daily lifestyle, such as dining, entertainment, gasoline, recreation, food, or non-essential shopping.
- Dynamic expenses are found in the outer layer of the three expense circles, and are often thought of as “future expenses.” These expenses are typically larger and often tied to vacations, charitable giving, and savings earmarked for education or major home remodels.
The key to reaching a truly sustainable budget is to continuously monitor all your expenses over time and honestly organize every expense into one of the three broad classifications: static, control or dynamic expenses. As you plan to reduce expenses, begin with those in the outer layer of your expense circle, the dynamic expenses, and then work inward through control expenses until you reach static expenses. If the static expenses alone exceed your annual spending budget, a serious look at the sustainability of your asset base would be required. For most however, simplifying expenses into these three broad classifications will help make the budgeting process more digestible and ultimately more successful.
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