Practical Advice On Budgeting & Spending

When Sofie and I first married (1994), I was a graduate student at Pennsylvania State University working on my Master’s degree in acoustical engineering. The first year of our marriage was my sixth year in university studies and the last push through student life, or so we thought at the time.¹ Consequently, we were fully immersed in the character-building phase of the student lifestyle poor.

While we were deprived monetarily, we were not destitute. We optimistically considered ourselves rich in time, love and potential. Youth has its advantages – fewer responsibilities, fewer expectations, an open horizon, and a splash of naivete. During this season, we were simply grateful to have each other and the treasure of time to explore and embrace the great adventures that lie ahead.

We also anticipated I would soon interview for engineering positions and start working within the year. And that is exactly what happened.

As we transitioned from student life to work routines, we had this idea to maintain an austere, student-like lifestyle for another two years with an unstated aim of building a stronger financial foundation from the beginning of our marriage.

We did not realize this decision would establish a profound precedent for our lifestyle thereafter. In fact, extended family members called us minimalists before that was common parlance. We liked the label. It suited us, and was anyway, considerably better than the alternative… cheap. I suppose we inherited the minimalist title because we generally lived with the philosophical view that:

Less stuff translates to more contentment because assets are life’s anchors.

A Word on Contentment

We often succumb to spending much of our lives chasing things – assets, accomplishments, prestige, associations, positions, authority, power, status, etc. – to faux-fill our true innermost desires.

When we get the things we think we want, we often find they are not what we ultimately wanted, and we are left wanting.

It’s much easier to be a minimalist and save financially when we are content with what we already have. The older I get, the more gratitude I find in my reservoir for this precept.

But this article was supposed to be about budgeting, you say.

Right you are. Let’s get to that…

The Problem with Budgeting

Financial advisors suggest we create a budget and track it monthly. But my stance is…

Tracking monthly spending to adhere to a budget is a strong signal of overspending.

Controversial? Maybe. True? Almost certainly.

A Better Method

I think we can agree without risk of successful contradiction that budgeting, and especially tracking monthly spending, is pure drudgery. Who wants to spend time each month inspecting every spending line item on your bank statements and credit/debit cards to determine where it all went? Not me.

Instead of tracking all your monthly income and expenses like a personal income statement, try a balance sheet approach by monitoring your monthly net worth (assets minus liabilities).

Net Worth = [bank account] + [investments] + [other significant assets] – (debt)

Ultimately, your net worth is the more important metric. If it’s increasing, you’re on the right path.

Further, your personal balance sheet might just be a few numbers (especially for younger people), so it’s much quicker to update each month compared to tracking all your monthly expenses.

Disclaimer – what I outline here has worked well for us. It might not be a good approach for you, or anyone else. Do what works best for you. Ignore my advice if it doesn’t fit with who you are. If you adopt this approach and you find yourself in a financial pickle, that’s still on you. I am not, after all, a financial advisor. And, I frequently have no idea what I’m talking about. Now you can’t sue me.

Tracking Net Worth

I have attached a simple Excel file as a template you can use to get started.

The rows show:

• Assets
• Liabilities (debt)
• Net Worth

The columns are just months through time.

(This is the general format I have used to track our net worth each month since Jan. 2000. I have also added graphs to show how your net worth and debt ratios change over time. Also, I put this template together rather quickly, so double check all the formulas. Again, don’t sue me.)

Hopefully, the net worth trends upward over time. If not, investigate. Maybe you took an expensive vacation. Fine. Explainable. Maybe the stock market dipped. Understandable. But if your net worth is consistently on the decline, or not growing, you’ll find that either your expenses consistently exceed your income, or your assets are depreciating. But most likely, as your income has gone up, so have your expenses. This is the common case of overspending, a trap many people fall into.

Bonus Discussion #1 – Why Spending Outpaces Income

Consistently overspending may reveal deeper struggles.

Overspending is born from our propensity to compare ourselves to others, fueled by a shallow desire to appear as if we are keeping up.²

This is amplified by, and likely correlates to, the time we allocate to TV and social media. Do not underestimate the impact media consumption has on your purchasing patterns and fundamental desires for more stuff.

Further,

Overspending may be an underappreciation of delayed gratification or an underdeveloped love of your future self.

Bonus Discussion #2: Beware of Wealth Accumulation

Here’s a good internal metric to be mindful of…

If we are consistently drawn to evanescent treasures rather than to what we might contribute to improve the lot of others, it may be a sign our maturity as stewards has fallen behind our means.³

We should therefore be careful about accumulating wealth for the sake of accumulating wealth. At some point, we simply have enough. After that, what is the value of an incremental dollar? Zero to us, but potentially significant to others.

Real wealth finds purpose in generosity, not in the mere accumulation of assets.

Sure, our net worth is a metric by which we might keep score of our production efficiency through time. But it can also be a metric to justify everything we sacrificed historically to attain our wealth and to prove ourselves to our imaginary friends who judge us within our own thinking. We imagine the judge is everyone else, but in truth,

We judge ourselves by how we think others might judge us, if they could see within us, and if they cared enough to do so.

Spoiler: They don’t… not really. Besides, we don’t really care what they think. We mostly care what we think they think.

But now I have gone completely off topic, my specialty.

Anyway, download the spreadsheet and see if this balance sheet approach is useful for you.

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Have a budget methodology of your own? Share it in the comments below.

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FOOTNOTES:

1. I would later return to get an MBA from the Stockholm School of Economics in Sweden. But that was further in front of our life-story than we could foresee at this juncture.
2. Incidentally, we try to be the Jonses that are easy to keep up with.
3. “Evanescent treasures” could be material possessions, moments of success, or experiences that, while momentarily gratifying, do not have lasting substance or permanence.