BabuSoge

In our experience, we have found that the single most important tool to achieve financial well-being is a financial spreadsheet.

No matter what stage of life you’re in, it’s never too late to create a budget. Even if you have an above-average income, pay your bills on time, carry no debt, and have significant savings, it’s essential to keep track of your spending. Writing it down and saving it somewhere, rather than relying on memory is helpful.

We believe the best way to do this is through a spreadsheet. While there are many downloadable templates from personal finance writers, we recommend creating your own using these are a guide. This allows you to tailor it to your unique financial situation. For example, someone might need to track loan repayments, while another might be saving up for a mortgage down payment. Categories in your budget can also change significantly year over year, making a personalized spreadsheet far more powerful than generic ones available online.

Income and Expenses

The fundamental (and obvious) rule of financial well-being is that income must always be greater than expenses. Income can come from various sources: salaries, business profits, dividends, interest from deposits, or withdrawals from retirement accounts. Expenses can range from daily necessities like groceries to periodic costs like insurance, or even rare expenses like buying a snow-blower. In the most simplistic version, What remains after expenses go into savings: Income – Expenses = Savings. We find that maintaining both a monthly and an annual budget works best. We set the annual budget to be a zero-sum budget, while the monthly budget is more adaptable.

Proactive vs Deliberative

Depending on your life stage and spending habits, you might prefer either a proactive or deliberative budget.

Proactive budgeting involves setting a fixed amount of money for each category and ensuring you don’t exceed it. This method is ideal for those who need help controlling their spending. It requires checking your budget before making purchases to make sure you stay within your limits. Proactive budgeting typically also means the money set aside for savings will never reach your spending account thereby ensuring that you only spend what you have after you set aside a minimum savings amount. Savings can take different forms – debt repayment, retirement accounts, short-term goals such as home buying, wedding, cars etc.

Deliberative budgeting, on the other hand, is more about recording your spending after the fact. This approach works well for those who have reasonable control over their expenses and need a system to review and adjust their spending and savings.

A hybrid approach, combining both proactive and deliberative budgeting, can also be effective. Ultimately, it’s about finding what works best for you/your household, as each person’s financial situation and mindset are unique.

That said, it is a generally true statement that a budget will always be in the direction of goodness for any individual/household. The reward for having a budget depends on the efforts to put one in place and the meticulousness of following it.

Needs vs Wants

The biggest impediment to personal finance is distinguishing between needs vs wants. Living on a budget doesn’t mean depriving oneself of happiness, but not every purchase and every desire can be met. The line between needs and wants are continuously blurred with advertisements, peer-pressure, and social media influencing our “must-have” list. In reality though it is a question we must ask ourselves continuously. Larger houses, fancy cars, toys, unused subscriptions, expensive belongings, and “stuff” are wants. These purchases are not inherently wrong or wasteful, but the proportion of expenses that come under “wants” compared to “needs” can tell us a lot about our financial well-being and point towards significant lifestyle inflation, if it exists.

The first step to understanding this balance between needs and wants is having a budget. Budget categories usually start broad, become more detailed as you refine your understanding, and then often simplify again once spending habits stabilize. This journey towards clarity is often accompanied by an irreversible (but good) change in the form of controlled spending and an ability to tell apart needs from wants.

One of our biggest self-discoveries (admittedly we are not the only ones to do it – but we did discover it for ourselves) has been the practice of waiting before buying. The waiting period is anywhere from a few days to a few months depending on the size of the purchase. At the time of buying, if there’s even a small voice in our heads that labels the purchase as a “want” and not a “need”, we will usually add it to a cart (online shopping) or come back home and mull over it (shopping in-person). On several occasions, the waiting period has helped us identify that the item/upgrade is something we can live without.

Miscellaneous Benefits

Travel hacking, which involves using credit card rewards for travel, often requires meeting a minimum spending threshold to earn bonuses. Many people initially worry they won’t be able to spend the required amount within the given timeframe. However, they often find that they meet the spending requirement faster than expected. This realization underscores the importance of knowing your budget. By tracking your expenses with a spreadsheet, you can easily see where you can use a credit card to meet these thresholds without overspending. It ensures that your monthly expenses never exceed your income and also rewards you for everyday spending.

Financial independence is when someone has enough financial resources to support their desired lifestyle without depending on a regular salaried work. If that is a goal, then having a budget is nearly always mandatory and it works even better with a spreadsheet that can help with tracking and organizing finances. Online budgeting apps/tools like YNAB, and Empower can complement the spreadsheets by making it easier to track category based spending.

Concluding thoughts

A budget is always beneficial for individuals or households. The rewards of budgeting are directly tied to the effort that is put into creating and following it. With a well-maintained financial spreadsheet, you gain clarity and control over money, reap rewards in the form of subsidized travel, and ultimately follow along a path to financial well-being.