You already have a basic budget, so adding these two is a super quick process. A lean budget = determining what you can cut if there's a financial emergency. A luxury budget = what you would LOVE to spend money on.

Why You Should Have a Lean and a Luxury Budget

Ever since I began to view my money as a tool to provide freedom and choices in my life, I’ve no longer considered a “budget” to be a four-letter word. Instead, I find that it is something that liberates me to actually look more closely at my values, spend more freely on many things and focus on what actually matters to me on a day-to-day basis (that’s not money!).

You already have a basic budget, so adding these two is a super quick process. A lean budget = determining what you can cut if there's a financial emergency. A luxury budget = what you would LOVE to spend money on.

Indeed, automating my financial processes and simply wanting less also factor into achieving this peace with my budgeting. Living a simple life means that money is not the main controlling factor in my life. I’m largely free to make choices that are independent of money considerations.

Not only is my budget keeping me on track to reach financial independence, but it is also the key to determining what it means to have enough. A budget of some form or another really is essential. If you have issues with a budget, it may be that your definition of budget is wrong. Call it a spending plan, call it whatever you want. Just make some sort of plan to tell your money where to go.

In addition to managing a regular monthly and annual budget for my regular income and expenses, this year I’ve also created two additional budgets. These additional budgets help me in drafting a financial plan that covers the doom and gloom situations but also allows me to set lofty goals for the future.

Budget #1: A Lean Budget

I personally prefer to have a significant amount of money in liquid savings to cover any one of numerous potential severe financial crises:

  • Unemployment
  • Disability
  • Significant home repairs such as roofing, plumbing, heating/cooling or electrical systems
  • Major medical expenses

I have insurance in place to help us cover the risk of financial loss, including extended long-term disability insurance, homeowner’s insurance, and medical insurance. I also have a Health Savings Account that will more than cover the maximum out-of-pocket costs required by our medical insurance company. In addition to that, I have 3-6 months of expenses in an instantly accessible emergency fund.

However, under these specific circumstances and others, it’s not unlikely that we would still need to scale back our budgeted expenses significantly. Identifying the discretionary spending items that could be easily (at least relatively!) cut helps to plan for those events. Unfortunately, it’s not really an “if” but “when” something will occur.

A lean budget is one that cuts down discretionary expenses to the point where you could still survive financially, but spend the minimum it takes to do so. Think of it as providing for necessities but not much more than that.

One way a lean budget can be beneficial is to calculate just how long you could live off of your savings in the case of such an emergency. Likely, you may able to cut out 25% or more from your budget if you really needed to. It wouldn’t be ideal, but it would minimize how much debt you would need to incur, or more ideally avoid getting into debt at all during an emergency.

That’s the doom and gloom scenario. Let’s look at the optimistic side now!

Budget #2: A Luxury Budget

In addition to looking at what I can cut out in the event of an emergency, I also have a budget that lists what I wish my budget looked like if I could spend money on everything I would want to spend on (and save for, such as retirement).

This is a luxury budget: your ideal budget that isn’t constrained by your current income.

My own personal luxury budget adds funds for more travel, a regular housekeeper, more frequent babysitting (hey, don’t judge!), and additional savings to my retirement accounts to achieve financial independence earlier. I heavily value my time and my luxury budget reflects that. I also value being able to see the world, something which can cost a significant amount of money. My ideal budget doesn’t include a bigger home, more expensive cars or other such things. It’s simply not important to me. I’m an aspiring minimalist at heart.

Mad Fientist, an early retiree who blogs about financial independence, presented this concept in a recent summary of his first year in early retirement. Basically, he had extra money coming in beyond his expected income and took some time to think about what he could spend more money on that would make him happier. His conclusion was that with the exception of a couple small items, he simply would not be happier by spending more.

The key for everyone is not just wanting less, which was certainly a major factor for me, but to really decide what your true values and goals are and work toward them. The luxury budget, as an alternative to the lean budget, helps you to identify those values and goals.

For you, maybe you already have enough. Maybe not. If you have quantified your financial goals, take a look at them and see how you would make them happen in your luxury budget. The purpose of this isn’t to foster ingratitude or to dwell on the things that you don’t have, but to determine what you really value. It’s okay if your goals are different than mine. Dream big!

Then look at how it would be possible to get closer to your ideal budget. Can you make some additional side income to help you live more comfortably? What can you do to increase your career opportunities and therefore increase your income? Is it time to look for other companies hiring in your field? Can you cut some other areas of your budget to be able to allocate money to other items that would bring you more joy?

What A Lean & Luxury Budget Look Like

I like to view this as planning for the worst, but dreaming for the best. A good plan, together with savings, can do a lot to smooth out the bumps in the road of life. I can think of many times that having money in savings has made something that would have been extremely stressful just a minor inconvenience. This includes veterinary bills, medical expenses for sick kids, leaky roofs, and many more things.

Once you’ve analyzed all 3 budget scenarios, you can compare all of them side by side, such as the example below.

Final Thoughts

If you’re looking to really get your money situation under control and reach your goals, you likely already have a basic budget set up. Running a couple other budget scenarios only takes a few extra minutes.

A lean budget will help you plan for financial emergencies and distinguish between essential and discretionary expenses.

A luxury budget assists you in quantifying your financial goals and shows your true values when it comes to spending.

I completely agree with the statement:

“Don’t tell me what you value, show me your budget, and I’ll tell you what you value.” (Joe Biden)

Have you prepared a lean or a luxury budget for? How did it help you?


4 Responses

  1. I think this is a great idea. We do something similar, but instead of a totally different budget, we have certain categories flagged as “luxury”. When we run over in a key area (for whatever reason) we move money from these luxury categories.

    When I ran my corporation before selling it, I had my finance person actually manage three budgets (more cash-flow analysis really) – a worse-case “uh-oh things went south” budget, a “we hit a homerun” budget, and one in the middle that was sort of a base “we expect AT LEAST this” budget.

    It provided a sense of peace having those different options documented.



I’m Kathryn Hanna-wife, mother of 3 and a Certified Public Accountant. I love to budget (really, I do!) , build spreadsheets and spend money on travel, sewing supplies and good chocolate.


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