Budgeting is Optional (Tracking is Necessary)

If you’re like me, the idea of budgeting is not very high on your list of things you like to do, falling somewhere between going to the dentist and doing your taxes. If you’ve ever tried co-budgeting with a spouse or partner, it’s at best “no fun,” and at worst it’s an area rife with disagreement, judgment and defensiveness. You may think you already know where your money is going (you don’t), or perhaps you don’t really want to know… It’s no wonder we don’t do it.

And yet, most people would agree that spending money wisely in such a way that aligns with our values will bring us greater happiness and lower stress. Getting there starts with simply being aware of what we are spending. Not only that, but tracking spending is an essential part of understanding your financial health. It may be the single most important piece of financial data because it’s a critical input to so many of life’s bigger decisions. Your spending directly impacts your ability to save and pay down debt, and therefore your ability to create wealth and have flexibility. 

Not everyone needs to budget (i.e. figuring out ahead of time where every dollar will go and then adhering to the plan). But at a minimum, we should be tracking our spending habits over time to help us truly understand where we are, how we got there, and what may need to change. What’s important here is awareness of the approximate dollar amounts and where the money is going. It’s especially important if you’re approaching or contemplating a major transition like starting a family, buying a house, starting a business, or approaching retirement. 

What’s your Burn Rate?

Your burn rate is the percentage of your income being spent for personal living expenses. Living expenses excludes debt payments, savings and taxes (in other words, expenses already included in your Debt Rate, Savings Rate, and Tax Rate Elements). 

For example: If you spend $10,000/month and your household annual gross income is $200,000, your burn rate is 60%. If part of the $10,000 is a $1,200 mortgage payment, your spending value is $8,800/month, and your Burn Rate (Br) would be 52.8%. 

An estimate is fine to start, but you’ll want to track actual spending to verify your estimate and get a more accurate spending number. 

Step 1: Get an accurate number

Let’s face it, you think you know where your money is going, but unless you track your spending, you don’t. It’s always enlightening to write down what you think you spend on a monthly basis, and then actually try tracking your spending for 30 days. I’ve never met a client who was not surprised by some aspect of this exercise, usually in the form of “I had no idea I was spending so much on _______.” 

Use a free app like Mint, or pay a few bucks for Simplifi by Quicken (if you want to avoid being bombarded with advertisements), gather your bank and credit card statements from the last few months and build your own spreadsheet. Look at a minimum of 30 days, or better yet, look at three months. 

Step 2: Assess your Burn Rate

Is your score too high, too low, or just right? Your average burn rate score depends primarily on your gross income. Generally, your Burn Rate should decline as your income rises through your career. Early on, a greater percentage of your income will go toward non-discretionary expenses, but as income rises during higher earning years, Burn rate tends to become a smaller percentage of your income, if you keep a lid on discretionary spending. 

The following chart shows average burn rates based on income: 

Spending as percentage of gross income varies most directly with income, but also depends greatly on your stage of life, lifestyle, and locality.

Whether your Burn Rate is appropriate for your situation depends on several factors. Older individuals or folks with higher savings rates tend to have lower Br scores. If you live in a high cost area, have a larger family, or more healthcare needs, you likely have a higher burn rate. 

Step 3: Now what?

If you’ve got a healthy savings rate and are otherwise on track to meet your financial goals, you may not need to do anything more than periodically update your spending number. For many, the exercise of tracking and reflecting on their spending habits leads to better decision making and lower stress levels.  

However, you may discover that you really do need to make some changes. If this is you, then you probably knew that before going into this exercise, and perhaps why you avoided it for so long. Before determining next steps, you'll need to identify the functional and emotional hurdles that may be holding you back. 

• Functional hurdles are quantitative or situational reasons why you may have difficulty making changes. By tracking your spending, you’re already overcoming the first functional hurdle of ignorance. Perhaps you will discover that you spend very little on discretionary items and a lot on fixed expenses because you live in an expensive area. Maybe you’re just getting started in your career, or just went down to one income after having a baby. These are functional hurdles to making changes.

• Emotional hurdles are the qualitative reasons why it can be difficult to alter your spending habits. We often adopt the spending behaviors of the social circles we run in or the families in which we grew up. These present and past experiences all exert an influence on how we feel about money and how we use it. 

Sometimes keeping a detailed budget is the way forward, but not for everyone. The answer may be to stay the course, and work on the income side of the equation while keeping expenses in check. Or you might need outside help, especially if you’ve tried these exercises and still find yourself overspending, undersaving, and taking on debt. 

Give Tracking a Shot:

Start with this simple exercise: track your spending for 30 days (or look back at the last 30). It won't take very long. Categorize your spending into basic categories. Take an honest look at what you spent and reflect on whether your spending matches what’s most important to you. I guarantee you will learn something, and it will be well worth the time.