It’s hard for me to admit sometimes that there is more than one way to do many things. For example, I’ve tried to embrace the 50/20/30 budget method, but I’m just not convinced that it’s really the best way for anyone to budget. For absolutely sure, a meticulously detailed budget is the best system for me. After all, I’m a huge budget and spreadsheet nerd and prefer to plan out where I want to spend and save every dollar of income.
However, for those that aren’t complete money nerds, I think a fairly detailed budget is still really important for other reasons.
Here are a few ways that I use my detailed budget for financial planning, other than just in planning out my upcoming month’s income and expenses.
1. Determining Automatic Saving Amounts
In addition to my monthly budget, I create an annual budget at the very beginning of the year. This allows me to determine how much I should set aside each month for savings through automatic transfers. This is in line with the common pay yourself first plan.
Looking at my annual budget that includes a full year of expenses also helps me to see the true picture of what I really spend overall, including those irregular insurance premiums, property taxes, and seasonal outflows. Without my clear budget, I wouldn’t know how much I would realistically be able to save each month and would probably not set aside nearly as much.
2. Comparing My Budget Percentages
If you’re looking to cut back some of your expenses, a great way to start is to compare your monthly budget to that of others. Many professionals have suggested income-based budget percentages that can be helpful for this purpose.
If you find that one area of your spending is much greater than the recommendation (such as food or transportation), that’s a great place to begin your efforts.
3. Planning for Retirement
A common suggestion in retirement planning is to have enough to support 70-80% of your current income throughout your remaining projected lifetime.
A much better plan is to determine an estimate of your actual retirement spending, which may be significantly higher or lower than your current income. If you have a detailed budget, you can base your retirement budget off of this, making adjustments for any projected changes during this next phase of your life. This budget estimate can be used to determine a lump sum amount you need to have saved in order to be able to retire at your desired lifestyle.
4. Determining Financial Independence
Similar to determining a retirement budget, it’s essential to quantify your expenses to determine how much money you would need to be financially independent. Financial independence is defined as the point where your passive income is sufficient to support your basic living expenses.
There are many great resources to help you quantify how much money you would need to be financially independent, but you’ll have to know your true expenses in order to be able to do so. And, you guessed it, you’ll need a budget to be able to quantify your basic expenses.
5. Projecting My Taxes Throughout the Year
Yes, I enjoy projecting my taxes. In fact, I can’t believe that it’s already the middle of July and I haven’t yet completed my mid-year tax projection.
Fortunately, projecting my taxes is pretty quick and simple since I already have a detailed annual budget. It just takes a little bit of updating to my tax spreadsheet and I’m able to get a pretty good idea of what I think I’ll owe for the year.
6. Calculating My Emergency Fund/Cash Reserve Needs
I have a slightly different calculation of total expenses for determining my 3-6 months of expenses I keep in my emergency fund/cash reserve than I do for my monthly budget. I personally aim for 6 months of a low-spending budget in savings.
I start with my detailed budget and then adjust discretionary purchases to a more sustainable level if we were to face something like an extended period of disability or unemployment. The first things to be reduced in this budget are eating out and recreation and entertainment.
7. Planning for Potential Life Insurance Needs
Life insurance is a necessity for anyone that has dependents relying on their income. Similar to retirement planning, there are blanket suggestions such as saving 5 times gross income. There are much more detailed methods as well.
The detailed methods involve determining budgets for several following stages: a readjustment period immediately after death, an adjusted period with kids at home, an adjusted period for your spouse after dependents move out and a post-retirement time. That’s a lot of budgeting! It’s essential to have a current starting budget to be able to analyze just how much your dependents would need.
8. Calculating the Impact of A Home Purchase
Buying a home will have a huge impact on your budget. Before we purchased our current home, I ran a monthly budget scenario for each home that we looked at. It included not only the principal and interest payments but also the property taxes, insurance, utilities, and repairs and maintenance expected.
It’s essential to make sure that you can truly afford the home you’re buying and still be able to pay all of your bills and save for your financial goals. You may not truly be able to afford what the mortgage broker will let you purchase. Of course, this applies to any large purchase where you would be paying monthly payments including buying a car and taking out student loans for further education. The budget will give you the overall picture of your financial situation with the new purchase.
9. Calculating My True Hourly Rate
Reading the book Your Money or Your Life changed my life. One of the key points of the book is calculating your true hourly rate. This factors in all of the expenses that you pay that are related to your job, such as work-related eating out, clothing, commuting, etc.
Of course, a current detailed budget would be essential to determine these expenses and calculate this true hourly rate. This will truly change the way you look at earning and spending money.
10. Determining The Value of a 2nd Job
One reason that I’ve hesitated about going back to work full-time is that I will only earn a fraction of my gross pay due to my work-related expenses, child care, and taxes.
Once I calculated the impact of adding a second income to our family, I saw that it really impacted much more than just a couple line items in the budget. There were some significant increases in expenses from our current monthly budget. This included clothing, eating out, gasoline and many other categories.
Have I sold you yet on creating a detailed budget?
Bonus: if you’re using my budget spreadsheet, you’ll be able to directly copy and paste that budget template into the following related spreadsheets that are linked in the topics above:
- Income-based budget percentages
- Calculating retirement needs
- Calculating emergency fund/cash reserve needs
- Planning for potential life insurance needs
- Determining whether to go back to work (how much a 2nd income will bring)
Do you use a monthly budget? If so, are there other ways that you use your budget other than for planning out your income and expenses?