Posted by Robert on March 11, 2013
This is a guest post by Robert, who lives in Calgary and worked as a financial adviser before retiring at age 35. He is married, has three kids and has returned to school with the goal of eventually living and working overseas.
No matter how much money a person has, they need to live within a budget. The word budget, in this context, signifies a constraint: a level of spending that cannot be exceeded. In this case, I’m only looking at the total amount, not the categorization that helps some people to impose discipline on their spending. The reason that I see a constraint on the total amount of monthly spending a given person can engage in is the negative consequences inherent in overspending. Yes, it can last for a period of time, but at some point either loans will stop or the amount of interest due (monthly) will severely limit spending.
Having an upper limit on spending isn’t a bad thing. In fact, it produces a situation that calls for critical thinking. If I could spend an unlimited amount, there would be no room for decision-making, trade-offs or optimization. The first step is to recognize the upper limit. For my family, we can spend up to $4000 (although I try to stay under $3500 to leave a buffer). To find this amount, start with total net income (deposited into the bank account) and remove any amounts for debt repayment or taxes (which are non-negotiable). The amount that’s left is what you have to work with.
The fun part is coming up with ideas of what you could do with your money. Some are pretty obvious: meeting physical needs such as food, shelter and clothing. I put them in this category, rather than with debt and taxes, because you can be creative with where you live or how you eat in order to fit within your budget. My family probably spends around $500 – $600 per month on food because we like to eat fresh meat and fresh produce, but we don’t eat out often. We could eat far more cheaply (like when I was in university) or spend far more by eating out, but our choice fits with what’s important to us.
After the basic needs are met, we can be come up with ideas for the rest of the money. Some of the other things we’ve spent money on include travel, sports lesson, theatre class, clubs, donations, books, or entertainment. There’s no requirement that each month needs to be like the last. For example, summer is a time when we spend more on travel and in December we spend more money on celebrating Christmas. Critical thinking comes in when we ask ourselves: did that work for us? For a while, we spent money regularly on horseback riding. It was something my wife loved and I was okay with. But when the time commitment got in the way of more important things, she decided to give up the cost (in time and money) and do other things. We have one son who’s a very enthusiastic swimmer. He has regular swim lessons, while the other son has switched from soccer to basketball to swimming and wants to try tae kwon do next. The evaluation of whether or not our spending is meeting our needs and our goals is an important part of making spending decisions.
In what ways do you try new things with your spending? How do you decide whether or not it’s working?