Budgeting and Critical Thinking

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?

4 thoughts on “Budgeting and Critical Thinking”

  1. I’m trying to hit bang-on with my budget this year to figure out where the pain points are. I’ve been tracking for 3 1/2 years now by category and find it quite surprising how close I come out to what I want my spending to be (fortunately the bank s/w does the tracking so I don’t have to).

    I was trying to think of things / experiences that I really really want that I don’t have (except for new windows and the popcorn off the ceiling – which are in the budget) and I just can’t. I’m not sure if that means that I’m satisfied and content, have no imagination anymore or it’s just a common thing that happens as you get older (and generally more content). So I’ve been working less because that’s the one thing I do want – more free time (and to pay less taxes…)

    But I’m not sure sometimes. For example, I would like new deck furniture and found myself looking at the Pier 1 catalog with a friend. I really liked one set but the internal dialogue was saying “wait until it goes on sale at the end of the season” (I said that last year too) and “but you won’t be home this summer anyway if you go RV’ing” (as if I can’t enjoy it in May-June) So it appears I can talk myself out of spending very, very easily. It’s all kind of annoying.

  2. We are budget nerds so we like to see where all our money is going. This has helped over the past few years as we weren’t using a budget before. We simply paid what we had to pay and what was left was what we could spend.Boy was it an eye opener when we started tracking everything and seeing how much we were spending. We’ve cut that back dramatically and are happy to be completely debt free. I don’t think we will ever change how we track our expenses because to us it’s motivating knowing what we can and can’t do with our money to help us reach our goals.

  3. “After the basic needs are met, we can be come up with ideas for the rest of the money.”

    This part sounds like a gateway to lifestyle inflation: expanding spending to income/budget available. My personal style is to only add something to my budget based on the marginal utility. Of course, after reaching 120% of financial independence, the marginal utility of each dollar will almost certainly drop dramatically for me, personally … but anything I add permanently will ideally have $25 in backing assets to sustain a 4% withdrawal rate.

Comments are closed.