Mastering the Art of Budgeting for a Fulfilling Life

Creating a budget is like plotting your course on the map of life. It's not merely about restricting spending, but rather it's about making strategic choices that allow you to live the life you want. So, imagine your budget as your personal financial GPS, guiding you towards achieving your most cherished goals and living a life of value.

First and foremost, you need to identify your life's pillars - the things that matter most to you and contribute to your overall happiness and well-being. It could be your health, relationships, education, businesses, and, of course, room for fun and fascinating life experiences. These are the cornerstones that form the foundation of your budget.

Secondly, it's crucial to figure out your current spending and fixed costs. These include unavoidable expenses like rent, utilities, insurance, transportation, communication, and any fixed recurring fees.

In the next step, you calculate your variable total budget. This is done by subtracting your fixed costs from your net income. The leftover amount is yours to allocate towards the various areas you value.

Now comes the exciting part - the allocation! Food, for instance, is a significant expense. A smart approach is to examine your past spending habits on groceries and dining out and use it as a foundation. Similarly, determine how much you'd like to set aside for other areas like gifts, experiences, discretionary shopping, health, and pet expenses. An effective strategy is to plan your yearly spend, and then work it down to a monthly budget. Try to be concrete as possible. For example, if you want to travel and have two $3000 experiences per year, then your monthly budget allocation would be $500. A holistic approach is key where you pre-determine how strong your pillars will be supported, and how to best achieve that.

Remember, this step is all about creating the life you want. The 'rules' you're setting are your own, enabling you to live a fulfilling, happy, and prosperous life. But, also remember to include an investment budget that prepares you for the future without sacrificing too much of the present.

The pillars of your life should be nurtured at every stage, so it's necessary to assess the activities and experiences that are best suited for your current phase of life. Recognize that time is your most valuable asset, and ensure areas like health and relationships are adequately funded.

When creating an investment budget, consider your future spending needs and retirement goals. After a holistic analysis, you may even conclude you'd be willing to spend less during retirement than you do now.

For financial planning, I use a 7.3% (pre-inflation adjusted) return rate, due to the increased earning multiples that companies have been priced at over the decades. However, this article is focused on budgeting, so I won't delve too deep into this.

Microsoft Excel can be an excellent tool to model your financial plan. This allows you to adjust your contribution rates to account for predictable future expense or income changes, like when you finally pay off that car loan.

For retirement planning, there are several methods. You could use a 4.8% inflation adjusted return in calculations, but this does not inflation adjust your principle. Another way is model your return before inflation, then increase your contributions yearly by inflation (in a case where you assume your real income to remain the same). At the end of the time frame, you would then reduce your ending principle by the compounded inflation. For example, with a 2.5% inflation over 30 years, $100 today would be $211 then; so the ending principle would be multiplied by $100/$211 to determine the value in todays dollars.

I then use a 2.75-3% yearly withdrawal rate to determine the investment cash flow retirement income, and can adjust if there is a defined benefit pension or other predictable steady income. A defined benefit in retirement can allow you to use a slightly higher withdrawal rate where you can increase withdrawals in high return years and reduce in low investment return years in retirement.

Based on this plan, you can determine how aggressively you'll need to invest and whether you need increase your income or reduce expenses.

The next big step is to put your budget into action! Set up automatic deposits into your savings accounts each month, effectively pre-saving your funds. You can also consolidate your regular credit card expenses into a single spending account each month, making it easier to monitor your expenditure. See my post on creating your money system.

Lastly, don’t forget to regularly review and tweak your budget, reflecting on your discipline and changing priorities. This might even involve implementing systems, like a more cost-effective food plan, that drastically reduce your expenses in certain areas. You may determine that you don't have sufficient time to focus on key growth areas, and allocate funding to buy back some of your time.

Remember, a budget is not a constraint, but a tool to turn your dreams into reality. So, start building your budget, and set sail on your journey towards a fulfilling, happy, and successful life!