BKFI Blog Round Table: Ask A Financial Planner How They Budget
By John Owens CFP, EA, ECA, CPWA and the Brooklyn FI Team
Budgeting comes up often in our conversations with clients. While we often have to focus on big-ticket items like how much home a client can afford, or how we should exercise these Incentive Stock Options (ISOs), the foundation of any successful long-term financial plan is having a solid budget in place that’s sustainable.
So we asked our team of CFPs - how do they budget? Do they track expenses, set targets, use tools? What do they find unique about their budget and what tips do they have to share?
John Owens - Director of Financial Planning
I subscribe to the ⅓, ⅓, ⅓, budgeting methodology - not that I’m certain it’s an actual philosophy. I aim to spend ⅓ of my income, save ⅓ of my income, and have about ⅓ go to taxes. Or to put it more simply, I try to save about half my income after-taxes. I track all this on a custom excel spreadsheet that I’ve used varying versions of for the past 7 years.
This has allowed me to build that (crazy) 24-30 month emergency fund I referenced in my Financial Planning Sins blog. It also has helped me take advantage of my 401(k) and Roth retirement accounts the past few years and get the benefit of compound interest while I’m still (somewhat) young.
When it comes to spending, my largest expenses are housing, my car payment, and living expenses. I try to optimize the large expenses - like housing, as that’s where I get the best bang for my buck. Keeping my housing costs well under 30% of my income has been key to reaching my savings goals. That said, I make sure there’s always room in my budget for ‘something fun’ every month - from a new pair of running shoes to a weekend getaway - building in that section is key. Happy Budgeting!
Katelyn Murray - Senior Financial Planner
Here’s the thing: I hate the word “budget.” They’re restrictive and time-consuming and all-around unpleasant. The word itself doesn’t even sound nice. Seriously, say “budget” out loud right now and see how it makes you feel.
BUHDGE-IT. Ew.
So instead, I have a spending plan, and it’s exactly what it sounds like: a plan for how I will spend my hard-earned dolla dolla bills, ya’ll. It seems inconsequential, but reframing how I view expense planning really makes a measurable difference in my willingness to, well, actually DO it.
There are three main steps that I follow when creating my spending plan:
Figure out how much to “pay myself,” meaning, how much of my income I will allocate towards my 401(k) and Roth IRA retirement savings, how much I will contribute to my Health Savings Account (HSA), and how much will go into a taxable investment account.
Allocate funds to keep the lights on. These are the non-discretionary expenses like my mortgage, electric bill, etc. The super boring stuff.
Spend the rest.
I realize you may have been looking for something more complicated from a financial planner, but that’s really the bones of the thing. At the beginning of each year, I set financial goals for myself—things like maxing my 401(k), funding a backdoor Roth IRA, saving $20k to my taxable investment account, etc., and these goals are what guide my decision-making in Step 1 above.
Step 2 is pretty quick and painless, considering the dollar amounts here don’t change much from month to month.
Once I’ve paid numero uno and covered the “like it or not” expenses, I can feel free to spend whatever’s leftover on whatever I want. Cocktails with friends? A trip abroad? Yet another pair of roller skates? Count me in for the adventure.
Jason Hoffman - Senior Financial Planner
Tracking expenses on an ongoing basis can feel really daunting and time-consuming - as a financial planner, I was fixated on doing this for YEARS, but now I’ve realized that tracking every single expense is NOT the answer. Instead, I’ve found that setting up a general spending/savings framework and automating as much as I can works the best for me, and it also creates simplicity.
My personal financial mantra is: save money and focus on living my best life! To achieve this I built out a framework and think about my budget in 4 big categories:
Savings
Non-Discretionary Expenses (relatively fixed expenses such as a mortgage, utilities, phone bill, insurance, etc…)
Discretionary Expenses (expenses I have more control over such as groceries, eating out, entertainment, etc…)
Sinking Expenses (these are irregular expenses and can sometimes be pretty large - vacations, new car tires, taking my dog to the vet, my annual credit card fee)
I have a pre-determined savings goal for myself, and I have an automatic transfer to my investment account set up each time I am paid so I stay on track with my savings goal and don’t even have to think about it. My 401(k) is also factored into this goal, but it is less work since 401(k) contributions are deducted from each paycheck. This is THE MOST important part of how I budget!
To allocate the remainder of my paycheck to the other 3 categories, I do some very loose expense tracking a few times per year in a tool called Tiller so I actually know what a realistic amount to allocate to each of those categories is, or where I might be able to adjust my spending and thus increase my savings goals. Each of my paychecks is then split into various accounts I use to pay for those expenses. My favorite part of this is having a built-up sinking fund for vacations :)
I’ve found this method makes it REALLY easy to save money while always making sure my spending isn’t out of control, and it also doesn’t feel restrictive AT ALL. The TLDR is; tracking expenses is painful, so instead of doing that, automate your savings and use the rest of your money to live your best life!
Ryan Furlong - Senior Financial Planner
Budgeting means a million different things to a million people. In my time as a financial nerd, I've learned there is no one right way to budget. We often get hung up searching for that silver bullet solution. Whether you’re looking for an app, strategy, or spreadsheet, there are endless options to choose from in the budgeting universe. I used to avoid budgeting for this exact reason! Once I realized that budgeting is different for every person or family, I built the proper framework for ME. While tracking every penny and updating a spreadsheet works for some, it does not work for me one bit because I don’t stick to that commitment! Be honest with yourself as you build your process, starting backward with the end goal in mind.
Fast forward to today, and I now use the 50/30/20 rule! No fancy apps or spreadsheets. Simply a high-level framework that I can stick to long term. What exactly is the 50/30/20 rule? Well, 50% of my income goes towards necessities, including housing, food, transportation, or minimum loan payments. 30% of my income towards wants, including monthly subscriptions, travel, going out to eat, or other entertainment. Lastly, I allocate 20% towards savings or debt. I focus on my savings first and make sure that 20% is as automated as possible as the other two categories fall into place much easier if I’m at or exceeding that 20% rule. This strategy keeps me in line and helps ensure I review wants like subscriptions and other non-necessities. The end goal is to save adequately for your future and pay down your high-interest debts so that the rest can be enjoyed or invested! This framework helped me pay down debts, maximize my investment efforts, and eliminate the guilt of spending without a plan. All while freeing me to spend money on experiences or products (golf clubs) that enrich my life.
While this method works perfectly for me, it may not work for you. Remember, the most impactful cash flow system is one you can stick with long-term! Pick and choose various rules and tools and apply them to your budget. Keep what works and eliminate what doesn’t. When you develop a plan that works and that you can stick to, you’ll find budgeting isn’t so painful after all.
Mishaela Albright - Senior Financial Planner
Early on I realized that money gives people security and having that security is very important, so I took advantage of each opportunity I had to save. Whether the opportunity was as silly as stashing away the couple of dollars my mom gave me for lunch while in High School (which got added to my piggy bank) or more significant like when I got my first job at 14. I had always viewed income as a way to save for my goals and get me towards a better financial position, rather than a “budget”. I actually found it exciting to see how much I could save while working low paying jobs, even if that meant I needed to live on rice and broccoli!
Rather than forecasting out on a piece of paper (or putting money into a piggy bank), my accounting of how to divert income later evolved into an excel sheet that I keep current to this day. I am happy to report that all the savings did pay off and I have my ‘security blanket’ of funds safe and secure in a HYSA. Now that I have that major savings goal accomplished, I work towards a different set of goals and allocation of funds. The way I go about splitting up my paycheck is very simple, and I will get to that, but the real importance is knowing what you can afford and what your priorities are (hence the rice and broccoli diet throughout my teens to mid-20’s … which eventually led to affording two months of backpacking around Europe and other great adventures).
Step 1: Can you afford your lifestyle? Well, if your monthly living needs + lifestyle expenses are more than your current net income, you cannot afford to keep this up. There must be a balance between taking care of your needs, having fun, and saving towards your future.
Step 2: What are your priorities? For example, if after accomplishing my savings goals I could afford to upgrade my car or live in a larger apartment - maybe somewhere cooler like in the heart of Little Italy - I personally wouldn’t. I prioritize travel/food/experiences over these things, and I choose to save on housing and cars in order to have more room in my travel budget.
Step 3: Now that I know my priorities and what I can afford, I start from top to bottom:
What do I want to save for the long-term – these assets are invested in a mixture of my 401(k), Roth account, and taxable accounts.
What do I absolutely need to have – fixed expenses such as rent, cellphone, car payment, insurance, an estimate for groceries and gas, etc.
What would I like to have – this is where Netflix, Amazon, gym subscriptions, and other ‘nice to haves’ come into play.
What could come up that I don’t want to dip into my Emergency Fund for – car expenses, medical bills, etc. I allocate a small portion of each paycheck towards a slush fund to pay for unexpected items.
The remainder goes into a HYSA for short-term savings (cash for travel or other fun experiences).
Side note: I am a huge fan of mental accounting and like to break everything out into different savings accounts so that I can keep track of my various balances/goals. Not to be confused with using multiple banking institutions, which ruins the goal of simplicity in my opinion.
Really, though, it all boils down to this: I want to enjoy my life today, while not compromising my tomorrow. It just like Destiny’s Child says, “Do what I want, live how I wanna live – I worked hard and sacrificed to get what I get.”
Mark Stancato - Senior Financial Planner
Count me in the camp who does not like the word budget. Seems restrictive, prohibitive, judgmental, and downright nasty. I prefer a comfortable phrase like “lifestyle expenditures”. A lifestyle that elevates me to do the things I want/need/should do however within a few gentle guidelines.
Those guidelines include: putting enough away for my future self, giving Uncle Sam his fair share (working every angle on that one), spending for my needs today, keeping cash on hand, and measuring the inflows and outflows. Money comes in, money goes out. We’re like walking inflow and outflow buckets.
In regards to ‘Keeping Track,’ I’ve been trying out a free platform called MINT. I’ve moved my MASTER spreadsheet into the digital domain and connected every one of my accounts. Credit cards, bank accounts, utility bills, etc.. Two things I learned. One… I have too many accounts. And two… I’m really digging it! I threw the application on my iPad and I can now swipe through all this information to get a top-line view of things when I’m so inclined. I like the visual graphs and charts. It's like a game only it's my life. Hey, works for me.
AJ Ayers - Co-Founder of Brooklyn FI
Ohh good lord John, you're asking a bunch of financial planners to talk about themselves and how they spend their money? Yikes.
The TL;DR is this: 1. track your expenses in a way that works for you (manually or automatically through an app) 2. Save 20% of what you make in investment accounts you can't or won't touch for decades and spend the rest on whatever you want
But there's more!
While I don't have a budget right now, I have in the past. And I do track all of my expenses religiously. I use three different budgeting apps because I'm kind of a messy bitch and get bored with the different UIs. My favorite tracking app is Right Capital because it looks at my budget big picture, and I can directly see how my spending impacts my financial plan (spoiler: at this stage in my life, it doesn't. In the past, it really has). Yes, my bank breaks the feed sometimes, and I have to refresh it. Nobody's perfect.
In Right Capital, I can dig into the transactions and download a .CSV for scrutiny, but mostly I just look at the big picture and start to notice patterns. I can go months without looking at my spending, but I know that I'll have at least a meeting a year with my financial planner to check in on it - we may spend 30 seconds just to do a sanity check. Even financial planners need financial planners.
I also use Personal Capital as a backup to my business and personal transactions. As a business owner, we have professional accountants that track our expenses, but you can never have too much insight. And finally, I use TillerHQ, an app that pulls in your transactions and lets you organize them on a Gsheet however you like. I go through phases with Tiller. Sometimes I'll look every week, other times I'll ignore it for a whole year and do some serious bookkeeping and clean up at the end of the year. I spend a lot on wine.
In this modern age, apps can access your bank and credit card feeds so you have a constant source of your transactions without having to take an accounting class. It's great, but it may take you a few different apps to find what works for you.
Let me take you on my spending journey.
First of all, I'm kinda bougie. Are you surprised? Shane jokes that I'm High / Low - I love stupidly expensive hotels but I also just love junk food. I'll take 5 Guys over 11 Madison Park any day. So my budget has lots of splurges on experiences and I spend comparatively little on things like dining out and stuff.
My entire budgeting journey began with my discovery of the FIRE movement. That's Financial Independence / Retire Early. It's a movement of DIY-ers who aim to live on next to nothing and save dramatic percentages of their income with the hope of retiring decades ahead of schedule. It's an inspiring idea and one I followed religiously for about eight months. I challenged myself to live on as little as I could and learned that I could indeed do it. I ate a lot of soba noodles and missed out on some cool shit. I know that I can live quite happily on a few hundred dollars a month. Good for me! When you're not making enough money to cover your needs, your spending is EVERYTHING. You need to be obsessive about it because the consequences are ugly: credit card debt, shame, and stress. But then the tides turn, you get older, get higher-paying jobs, maybe add a second income to your household, and your financial situation changes. When you are making enough money to cover your needs, spending matters less, and if you're saving a good portion of your income already, it may not matter AT ALL.
Keep It Simple
I've never really had a budget because a budget is a negative, limiting thing. Instead, I've always focused on the positive savings aspect of cash flow. Usually, that means a mix of automatic 401(k) contributions and regularly scheduled monthly debits directly from my checking account to my taxable investment account. I mean think about it: you basically already have recurring monthly debits (a few hundred dollars to Seamless, a few thousand dollars for rent, etc.), so why not add your future self in there as one of the recipients. There are sophisticated models for figuring out much of your income you need to save but a very good rule of thumb I'm sure more than one of my colleagues will share is this: "save 20% of your total income and spend the rest." It's simple; it's easy, and it works. That 20% can be a mix of 401(k) and IRA contributions, as well as regular taxable investment accounts if there's extra. Once I get my rough 20% calculation of my income for the year, I break it up into monthly amounts and allocate that across 401(k)s, IRAs, and taxable. Then, I set up all my automatic contributions. I often challenge myself to save more by being very aggressive with my taxable savings (which, by the way, go RIGHT into the stock market where I won't touch them for a while). Saving 20% of your income is a great place to start. If you want to stop working sooner, save more. I'll start off with a $2,000 automatic monthly transfer and then double it if I find there's money left over in my checking account at the end of the month. Then I spend the rest on life's greatest pleasures: fancy vacations and stacks of books.
Conclusion
Maybe we should have titled this - “7 financial planners walk into a bar”. As you can see, there’s no one ‘right’ way to do budgeting (and even some candid debate as to whether we should call it that!). Regardless of how you track budget, track lifestyle expenses or simply use money as a tool to live, the theme reigns true throughout our responses is that it’s important to make it simple, easy to track, use money as a tool to empower you on your journey.