Yesterday I wrote about anti-budgets and how they are both easier to follow and more appropriately focused than a traditional budget. Today, I want to expand on the anti-budget concept and show how you can combine one with a simple traditional budget to get the most information for the least time involved.
A simple example is a a doctor whose net paycheck, after insurance, taxes, and maxing her 401(k) is $12,000 a month. We’ve set up an anti-budget in which the first $2,000 goes towards building up the doctor’s emergency fund, $1,000 is set aside for upcoming big purchases, so ideally it sits in a separate checking account until it is spent, and the remaining $9,000 is for all other expenses. In this example, we do not worry about any particular expense item, and don’t necessary track it month-to-month, so long as we stay under the $9,000 per month, save the $1,000 for upcoming large purchases, and meet the $2,000 per month savings goal.
A regular budget is then tied into the anti-budget on an annual basis or semi-annual basis. My preference is to just download all checking and credit card statement transactions into a spreadsheet, but one of the budgeting programs like Mint, YNAB or Quicken could work too. All we really need to do is group the total expenditures for the year into 3-5 categories. One is for all mandatory expenses, like the mortgage, student loan payments, property taxes, groceries, home/car repairs, and medical expenses. Another is for savings, whether the money goes towards extra debt payments, the emergency fund, or investments. The final category, or up to three categories, is for discretionary expenses, meaning things that can be scaled back if needed. Examples are clothing, entertainment, dining, gym memberships, gifts and vacations. They can all be lumped together or spread out into different categories based on different tiers of importance to the doctor.
The purpose of the traditional budget is to get a big picture view of the doctor’s expenditures, perhaps in comparison to how much others spend in those same categories and her expenditures in past years. A good rule of thumb is the 50/30/20 rule, in which 50% of take home pay goes towards mandatory or fixed expenses, 20% goes towards savings and 30% goes towards discretionary expenses. The traditional budget will help identify areas of overspending so that the doctor can perhaps focus on one or two problem areas throughout the year rather than keeping track of all spending as with the normal use of a budget. Another use of a traditional budget is that it helps set goals for the next year, such as to increase the doctor’s savings percentage from the prior year. Once we have the needed information from the regular budget, we then use the anti-budget to make sure those goals are being met each month. Combining both types of budgets provides the simplicity and correct focus of an anti-budget with the periodic detail that is beneficial from a traditional budget.