Creating The Perfect Budget For FIRE Enthusiast

Creating The Perfect Budget For FIRE Enthusiast

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perfect budget
Creating the perfect budget!

In this post we’ll show you how we’ve tackled one of the most elusive personal finance subjects out there: BUDGETING.

One of the five financial goals we laid out at the beginning of the year was to:

Fully fund our lifestyle expenses solely using Mr. Dollarman’s paycheck

Mrs. & Mr. Dollarman 2020 financial goals #4 of 5

When we initially developed this plan, we figured everything will work out because mathematically everything lined up in our “budget.” What we’ve come to realize since putting our budget together was that we needed a system that allowed for us to have the flexibility to change. By infusing flexibility in our budget, it would allow for us to account for the unpredictable events in life (emergencies), and the chaotic nature of our behaviors (needs & wants).

Like many other people, we followed the quintessential budget advice often toted by everyone in the personal finance sphere. This involved listing out all of our monthly expenses by budget category, followed by closely monitoring our progress each week to ensure that we were not overspending in each respective category. This form of budgeting was quite burdensome, and hard to maintain.

So, over the past couple of months we set our sights on creating the perfect budget (… well at least for us…). In doing so, we came up with the following criteria:

  1. Must be simple to maintain
  2. Automate to the fullest extent possible
  3. Flexible to our changing priorities

Why do we need a budget in the first place?

A budget is “the amount of money that is available for, required for, or assigned to a particular purpose.”

Webster Dictionary

We think of a budget as a plan for our money. With a plan (budget), our money is working hard at accomplishing our goals. With the notion that money could either be available, required, or assigned to a particular purpose we went about broadly grouping our expenses towards particular lines of effort in order to achieve our goals (as seen below). Two guys we’ve found to do a wonderful job at explaining this concept brilliantly are Nik Halik & Garrett Gunderson, authors of the 5 Day Weekend: Freedom to Make Your Life and Work Rich with Purpose. In their book they classified expenses as falling into either one of four categories:

goal setting
  1. Lifestyle – expenses that are fun and build memories, but that don’t build assets or income
  2. Protective – expenses that protect our property and human life value
  3. Productive – expenses that allow us to build assets, expand our cash flow, and grow our businesses
  4. Destructive – expenses that take away value from our lives instead of adding to it

How are we going about budgeting?

To simplify our life, we try to automate every aspect of our financial affairs to the fullest extent possible. After all deductions/expenses are removed from our paychecks/checking account for various lifestyle, protective, productive, and destructive expenses we’re left with an amount that we can either pay off debt, invest, save, or spend. We try our best to have all of our expenses rolled into a payroll deduction, or automatically withdrawn from our checking account on the first (1st) of the month.

On the income front, I receive my pay monthly as oppose to the 1st & 15th. This covers all our fixed monthly expenses, and keeps us from spending money allocated for bills. Any additional income that comes in like Mrs. Dollarman bi-weekly paycheck, rental income, TDY (travel) reimbursements, etc.. is used to pay off debt, invest, save, or spend.

How do the numbers look?

CategoriesMonthly Costs
(1a) Lifestyle (Consumptive Expense) – Electric/Gas Bill$186.00
(1a) Lifestyle (Consumptive Expense) – Personal Residence (PITI)$2,123.01
(1a) Lifestyle (Consumptive Expense) – Water Bill$49.60
(1b) Lifestyle (Consumptive Expense) – Cell Phone Bill$195.32
(1b) Lifestyle (Consumptive Expense) – Internet Bill$73.96
(1b) Lifestyle (Consumptive Expense) – PTO Buy (10 Days)$119.21
(1c) Lifestyle (Consumptive Expense) – Pest Control (Personal)$35.99
(1c) Lifestyle (Consumptive Expense) – Subscription (Amazon Prime)$9.92
(1c) Lifestyle (Consumptive Expense) – Subscription (Google Storage)$1.99
(1c) Lifestyle (Consumptive Expense) – Subscription (Hulu)$12.94
(1c) Lifestyle (Consumptive Expense) – Subscription (iCloud)$2.99
(1c) Lifestyle (Consumptive Expense) – Subscription (Neat Connect)$5.00
(1c) Lifestyle (Consumptive Expense) – Subscription (Netflix)$17.31
(1c) Lifestyle (Consumptive Expense) – Subscription (Xbox Live)$5.00
(2a) Protective Expense – Childcare (FSA)$416.67
(2a) Protective Expense – Dental Insurance$11.54
(2a) Protective Expense – Insurance (Auto + Valuables)$143.62
(2a) Protective Expense – Life Insurance ($100K/Employment)$1.69
(2a) Protective Expense – Life Insurance ($220K/Employment)$22.38
(2a) Protective Expense – Life Insurance ($100K/30 yrs)$26.25
(2a) Protective Expense – Life Insurance ($100K/Employment)$4.50
(2a) Protective Expense – Life Insurance ($400K/Employment)$25.00
(2a) Protective Expense – Life Insurance ($850K/15 yrs)$65.08
(2a) Protective Expense – Medical Insurance$175.26
(2a) Protective Expense -Vision Insurance$12.50
(2b) Protective Expense – Childcare*$0.00
(2b) Protective Expense – Dental Insurance$68.38
(2b) Protective Expense – Health & Fitness (FSA)$216.67
(2b) Protective Expense – Security Monitoring$100.56
(2c) Protective Expense – Legal Plan$17.33
(3a) Productive Expense – Rental Property (HOA Fees)$11.02
(3a) Productive Expense – Rental Property (PITI)$821.40
(3a) Productive Expense – Student Loan$510.09
(3b) Productive Expense – Retirement Contribution (401k – Mrs.)$1,609.38
(3b) Productive Expense – Retirement Contribution (Roth IRA- Mr.)$500.00
(3b) Productive Expense – Retirement Contribution (Roth IRA- Mrs.)$500.00
(3b) Productive Expense – Retirement Contribution (TSP – Mr.)$1,480.05
(3c) Productive Expense – Rental Property (Lawn Care)$22.12
(3c) Productive Expense – Rental Property (Pest Control)$55.79
(4a) Destructive Expense – Debt (Credit Card)$225.00
(4a) Destructive Expense – Debt (Credit Card)$121.00
(4a) Destructive Expense – Taxes (Fed – Mr.)$423.29
(4a) Destructive Expense – Taxes (Fed – Mrs.)$434.00
(4a) Destructive Expense – Taxes (Med – Mr.)$93.31
(4a) Destructive Expense – Taxes (Med – Mrs.)$78.91
(4a) Destructive Expense – Taxes (SS – Mr.)$398.97
(4a) Destructive Expense – Taxes (SS – Mrs.)$337.35
Total $11,767.34

Our budget system

Depicted above is a 1..n list of all of our expenses each year normalized monthly (average). A bulk of these expenses ($6,954.72/mo) are automatically paid via payroll deductions. For the sake of simplicity, we pay most of the remaining expenses ($4,820.95/mo) automatically either yearly in January, monthly on the first, or worst case bi-weekly (see image below of how it works).

the plan

Putting it all together

This system hits all of our criteria for the ideal budget. Simple to maintain & automated to the fullest extent possible. Since everything is automated and separated into one of our four broad expense categories, after all our bills clear on the 1st of the month there’s nothing else we need to ensure we’re on budget. This system is also flexible to our changing priorities, as we can use the remainder of the funds ($4,959.67) in our account to either pay off debt, invest, save, or spend.

Budget CategoriesCategory Cost Per MonthCategory % Per Month
(1) Lifestyle (Consumptive Expense)$2,838.2416.96%
(2) Protective Expense$1,315.777.86%
(3) Productive Expense$5,509.8432.92%
(4) Destructive Expense$2,111.8312.62%
Left to Pay off Debt/Invest/Save/Spend$4,959.6729.64%
Total$16,735.34100.00%

Monthly Budget (Paycheck + Checking Expenses + Remaining Funds)

Where do we go from here?

As you’ve probably noticed at this point, the four broad categories we use classifies everything as expenses (even investments, equity, etc..). This was done intentionally to make things simple, and to psychologically shift our mindsets towards wanting a majority of our “expenses” used in a productive way “...expenses that allow us to build assets, expand our cash flow, and grow our businesses…” vice consumptive or destructively. Another thing to note is that we’ve classified our student loans as a productive expense. We believe that if it wasn’t for our education, we wouldn’t have the cash flow we have today.

In conclusion, it took a lot of trial and error with budgeting to get where we are today. We would often create a system, implement it, and in few short months it would fall apart. Sounds familiar? We were quite surprised to see how the percentages of our broad “expense” categories mapped out. As discussed in our 2019 Net Worth Update, goal #5 of 5 for 2020 was to reduce our non-mortgage debt down to zero. So, we’ll be focusing on that first before we start to automatically shift more our “expenses” towards being more productive overtime. Mini unofficial goal for 2020 is have over 50% in productive expenses. Forthcoming hurdle for us to tackle is the impact childcare will have on our budget once we’re both back at work full-time. But don’t worry, we’ll keep you updated on our journey.

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