A Budget for Today and Tomorrow

Budgets seem like the domain of those who put off enjoying their life for someday, pinching pennies and living a voluntarily deprived lifestyle to stash away as much as possible.  Sure this is how some elect to go about it, but it doesn’t have to be this way.

Note: My first post received a comment from Fabulously Broke saying that she was sick of hearing about budgets.  Sorry, F-B, but I have to do it!  If you happen to be reading this, hear me out on this one. 

A budget can incorporate our lifestyle design, simultaneously giving us the freedom to fully enjoy life now while still building a more prosperous financial future.  The following is a rubric that can achieve both of these objectives. 

Of course this is just my opinion; if you have any suggestions or alternate views, I’d be more than happy to hear them.

I consider five categories when deciding where income should allocated.  Much of it looks like any other budget, but there are key differences. 

1.) Necessities:

This one is self-explanatory; utilities, insurance, medicine, phone bill, food, gas… 

I also include debt elimination here, although it could certainly be considered in its own category.

2.)  Day-to-day spending:

Most discretionary spending falls under this category; things like renting movies, attending a baseball game, and late-night Jimmy John’s sandwiches fall here.  Many people probably fail at budgeting because they tighten the clamps too much, leaving no room for spontaneous, impulse spending.  To the extent that you desire, this category provides such flexibility. 

I like to keep most of this in cash, but I do keep some in the bank.  I simply use a separate account which is specifically for this purpose.

3.)  Investing:

In my mind, there are two key objectives here:

1. Growth of wealth.
2. Create Passive Income.

Tax-sheltered accounts such as 401k’s and IRAs are tremendous for pure wealth-creation, and I certainly advocate taking advantage of tax-free growth.  Their role in lifestyle design beyond long-term net worth growth is limited, however.

Enter a traditional brokerage account.  If so desired, dividends and interest payments can be used as a source of passive income.  Of course, you don’t want to rob your investments of compound growth, so it’s likely that only a small portion of dividends/interest would be used as passive income, while the rest is reinvested. 

To best pursue both of these objectives, I use both a Roth IRA and a taxable brokerage account, both from TD Ameritrade (a broker I highly recommend).

4.)  Financial Security:

Even if you are an adrenaline junkie who savors the risk of living on the edge, there’s no reason to leave yourself vulnerable to life’s inevitable surprises.  You certainly don’t want something like a blown transmission to throw you off course for a significant amount of time, do you? Building a sizable emergency fund, therefore, should be a top concern, and is the primary reason for this category.

5.)  Lifestyle design savings/allocation:

This is what sets this budget apart.  Since many components of lifestyle design cost money, it only makes sense to factor these expenditures in to our current spending plan.

ING Direct is the perfect bank with which to do this.  I create a separate account for each category, which is easy to do with ING’s nameable subaccounts. 

Some accounts, such as one for a future down-payment on a house, are used like a normal savings account.  Money is consistently put away, where it grows untouched and is used when the time comes.

Others, like my recreation account, are more of an ongoing source of funds.  I decide how much funding this account receives, then add to it accordingly every pay period.  Whenever I spend money that is relevant to this category, I withdraw the same amount from the ING account to cover the cost.

The beauty of this setup is that we know exactly how much we have to expend- there’s no more trying to guesstimate how much we can (or should) spend in certain areas.  Those decisions have already been predetermined when we drew up the budget.  If the money is there, we can spend guilt-free.  If it’s not, then we know to forgo those expenditures for the time-being.

Wrap-up:  Implementing or making large changes in money management can be a real pain at first, but once you get in the routine it’s second-nature to maintain it.  Lifestyle design can’t happen without a framework in place, and this is absolutely one of the most crucial pieces in that framework. 

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