Millionaire Next Door and Budgeting

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carofe
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Millionaire Next Door and Budgeting

Post by carofe » Fri Mar 18, 2016 9:05 pm

I have been reading this great book Millionaire Next Door and something very interesting to me is how he keeps saying that millionaire s have annual budget. And they keep track of expenses to make sure they are on track and they know the remining, annually.
I have never seen that before. What I hear all the time is monthly budgets.

I'm curious about annual budgets as a method. Do you do annual budgets instead of monthly budgets or in addition to? And if you do it annually only, how is it working out?
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Toons
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Re: Millionaire Next Door and Budgeting

Post by Toons » Fri Mar 18, 2016 9:11 pm

I have been using a budget for decades.(monthly)
Quicken financial software is my assistant.
You will find,on this forum,a basic tenet of wealth creation,
is living beneath your means,saving,investing.
To aid in this process,budgeting is a necessity.
At least in the early years so one can establish good spending ,saving habits.
Thomas Stanley is correct regarding budgets

:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

carofe
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Re: Millionaire Next Door and Budgeting

Post by carofe » Fri Mar 18, 2016 9:14 pm

Toons wrote:I have been using a budget for decades.(monthly)
Quicken financial software is my assistant.
You will find,on this forum,a basic tenet of wealth creation,
is living beneath your means,saving,investing.
To aid in this process,budgeting is a necessity.
At least in the early years so one can establish good spending ,saving habits.
Thomas Stanley is correct regarding budgets

:happy
Yeah I have been doing monthly budget for a little more than a decade too, I was just curious about the annual budgeting Mr Stanley kept mentioning.
US Total Stock Market + Intermediate Term Bond. That's it.

Traveler
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Re: Millionaire Next Door and Budgeting

Post by Traveler » Fri Mar 18, 2016 9:18 pm

I use a monthly budget that adds up to an annual budget. For things such as property taxes or car insurance that are only paid once or twice a year, I just include them in the budget for the month they're due. December is also higher due to holiday gifts, etc. For vacations/travel, I use a monthly average and then spend it in a handful of months because when I make the budget, I don't know when I'll go on vacation. I use a relatively simple excel model that I've refined over time. While I don't nickel and dime myself on a monthly basis, unless something truly unexpected arises during the year, I'm usually quite close to the annual budget.

KlangFool
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Re: Millionaire Next Door and Budgeting

Post by KlangFool » Fri Mar 18, 2016 9:19 pm

OP,

I don't budget. I do "Pay Yourself First". I auto-deduct / deposit my paycheck to Trad. 401K, Roth IRA, Vanguard Taxable account, and my bank checking account. I spend money from my bank checking account. When my bank account money run low, I spend less.

When you decide how much that you want to save and you auto-deduct / deposit to the right accounts, you can spend the rest. Why do you need a budget?

Save 1/3, spend 1/3, pay 1/3 in tax. It is very simple.

KlangFool

carofe
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Re: Millionaire Next Door and Budgeting

Post by carofe » Fri Mar 18, 2016 9:24 pm

KlangFool wrote:OP,

I don't budget. I do "Pay Yourself First". I auto-deduct / deposit my paycheck to Trad. 401K, Roth IRA, Vanguard Taxable account, and my bank checking account. I spend money from my bank checking account. When my bank account money run low, I spend less.

When you decide how much that you want to save and you auto-deduct / deposit to the right accounts, you can spend the rest. Why do you need a budget?

Save 1/3, spend 1/3, pay 1/3 in tax. It is very simple.

KlangFool
Well I have a wife and a baby, and my wife doesn't work. We do need to sit down and make a plan every month so we make sure we don't overspend and we priorize what to buy first.
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KlangFool
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Re: Millionaire Next Door and Budgeting

Post by KlangFool » Fri Mar 18, 2016 9:38 pm

carofe wrote:
KlangFool wrote:OP,

I don't budget. I do "Pay Yourself First". I auto-deduct / deposit my paycheck to Trad. 401K, Roth IRA, Vanguard Taxable account, and my bank checking account. I spend money from my bank checking account. When my bank account money run low, I spend less.

When you decide how much that you want to save and you auto-deduct / deposit to the right accounts, you can spend the rest. Why do you need a budget?

Save 1/3, spend 1/3, pay 1/3 in tax. It is very simple.

KlangFool
Well I have a wife and a baby, and my wife doesn't work. We do need to sit down and make a plan every month so we make sure we don't overspend and we priorize what to buy first.
carofe,

My wife was a homemaker for 20+ years and she just went back to work last year. I have 2 children. My son went to college last year and my daughter is going to college this year. Their college education will be fully funded by my savings. We never had a budget. We have a very simple plan. We decide how much to save and spend the rest. Please note that we live in a HCOL area (Northern VA).

<<so we make sure we don't overspend and we priorize what to buy first.>>

You cannot spend the money that you do not have. With "Pay Yourself First", the saving is in 401K Plan, Roth IRA, and Vanguard Taxable account.

In your case, you decide what to spend and only save the rest. The priority is inverted.

KlangFool

carofe
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Re: Millionaire Next Door and Budgeting

Post by carofe » Fri Mar 18, 2016 9:47 pm

KlangFool wrote:
carofe wrote:
KlangFool wrote:OP,

I don't budget. I do "Pay Yourself First". I auto-deduct / deposit my paycheck to Trad. 401K, Roth IRA, Vanguard Taxable account, and my bank checking account. I spend money from my bank checking account. When my bank account money run low, I spend less.

When you decide how much that you want to save and you auto-deduct / deposit to the right accounts, you can spend the rest. Why do you need a budget?

Save 1/3, spend 1/3, pay 1/3 in tax. It is very simple.

KlangFool
Well I have a wife and a baby, and my wife doesn't work. We do need to sit down and make a plan every month so we make sure we don't overspend and we priorize what to buy first.
carofe,

My wife was a homemaker for 20+ years and she just went back to work last year. I have 2 children. My son went to college last year and my daughter is going to college this year. Their college education will be fully funded by my savings. We never had a budget. We have a very simple plan. We decide how much to save and spend the rest. Please note that we live in a HCOL area (Northern VA).

<<so we make sure we don't overspend and we priorize what to buy first.>>

You cannot spend the money that you do not have. With "Pay Yourself First", the saving is in 401K Plan, Roth IRA, and Vanguard Taxable account.

In your case, you decide what to spend and only save the rest. The priority is inverted.

KlangFool
Those are good points. We do save for retirement every month with auto-deposit and we save for other goals, but then after that we plan the rest. It may be an income thing, if we don't plan we may end up not having enough for groceries or other basic necessity at the end of the month. I don't know, I have never gone the route of not having a budget since I'm employed.
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Grogs
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Re: Millionaire Next Door and Budgeting

Post by Grogs » Fri Mar 18, 2016 9:59 pm

carofe wrote:I'm curious about annual budgets as a method. Do you do annual budgets instead of monthly budgets or in addition to? And if you do it annually only, how is it working out?
Different tools for different situations. I find monthly useful for cash flow. I know how much my normal non-discretionary spending (i.e., mortgage, utilities, car, etc.) are, and that gives me an idea of how much I have left to work with. Annual budgets capture less frequent things like home repairs, insurance, etc. The annual is also good for calculating how much things cost as a % of income, and it's a good start for forecasting retirement needs.

I can build a monthly budget from the bottom up. That is, I know the 10 or so recurring payments, and I can even add in a really close guess on what gas, groceries, etc. will cost in a month. For annual, I tend to do more of an empirical approach. I just tally up the expenses for last year, and I make assumptions about how much each category will change from one year to the next.

KlangFool
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Re: Millionaire Next Door and Budgeting

Post by KlangFool » Fri Mar 18, 2016 10:06 pm

carofe wrote:
KlangFool wrote:
carofe wrote:
KlangFool wrote:OP,

I don't budget. I do "Pay Yourself First". I auto-deduct / deposit my paycheck to Trad. 401K, Roth IRA, Vanguard Taxable account, and my bank checking account. I spend money from my bank checking account. When my bank account money run low, I spend less.

When you decide how much that you want to save and you auto-deduct / deposit to the right accounts, you can spend the rest. Why do you need a budget?

Save 1/3, spend 1/3, pay 1/3 in tax. It is very simple.

KlangFool
Well I have a wife and a baby, and my wife doesn't work. We do need to sit down and make a plan every month so we make sure we don't overspend and we priorize what to buy first.
carofe,

My wife was a homemaker for 20+ years and she just went back to work last year. I have 2 children. My son went to college last year and my daughter is going to college this year. Their college education will be fully funded by my savings. We never had a budget. We have a very simple plan. We decide how much to save and spend the rest. Please note that we live in a HCOL area (Northern VA).

<<so we make sure we don't overspend and we priorize what to buy first.>>

You cannot spend the money that you do not have. With "Pay Yourself First", the saving is in 401K Plan, Roth IRA, and Vanguard Taxable account.

In your case, you decide what to spend and only save the rest. The priority is inverted.

KlangFool
Those are good points. We do save for retirement every month with auto-deposit and we save for other goals, but then after that we plan the rest. It may be an income thing, if we don't plan we may end up not having enough for groceries or other basic necessity at the end of the month. I don't know, I have never gone the route of not having a budget since I'm employed.
Come on. How could that be possible? Don't you have emergency fund?

I have one year of emergency fund. I do not need count that closely. I can spend less next month if necessary.

KlangFool

carofe
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Re: Millionaire Next Door and Budgeting

Post by carofe » Fri Mar 18, 2016 10:16 pm

KlangFool wrote:
carofe wrote:
KlangFool wrote:
carofe wrote:
KlangFool wrote:OP,

I don't budget. I do "Pay Yourself First". I auto-deduct / deposit my paycheck to Trad. 401K, Roth IRA, Vanguard Taxable account, and my bank checking account. I spend money from my bank checking account. When my bank account money run low, I spend less.

When you decide how much that you want to save and you auto-deduct / deposit to the right accounts, you can spend the rest. Why do you need a budget?

Save 1/3, spend 1/3, pay 1/3 in tax. It is very simple.

KlangFool
Well I have a wife and a baby, and my wife doesn't work. We do need to sit down and make a plan every month so we make sure we don't overspend and we priorize what to buy first.
carofe,

My wife was a homemaker for 20+ years and she just went back to work last year. I have 2 children. My son went to college last year and my daughter is going to college this year. Their college education will be fully funded by my savings. We never had a budget. We have a very simple plan. We decide how much to save and spend the rest. Please note that we live in a HCOL area (Northern VA).

<<so we make sure we don't overspend and we priorize what to buy first.>>

You cannot spend the money that you do not have. With "Pay Yourself First", the saving is in 401K Plan, Roth IRA, and Vanguard Taxable account.

In your case, you decide what to spend and only save the rest. The priority is inverted.

KlangFool
Those are good points. We do save for retirement every month with auto-deposit and we save for other goals, but then after that we plan the rest. It may be an income thing, if we don't plan we may end up not having enough for groceries or other basic necessity at the end of the month. I don't know, I have never gone the route of not having a budget since I'm employed.
Come on. How could that be possible? Don't you have emergency fund?

I have one year of emergency fund. I do not need count that closely. I can spend less next month if necessary.

KlangFool
Thank you for your replies, but I think it is going beyond my original question.
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carofe
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Re: Millionaire Next Door and Budgeting

Post by carofe » Fri Mar 18, 2016 10:18 pm

Grogs wrote:
carofe wrote:I'm curious about annual budgets as a method. Do you do annual budgets instead of monthly budgets or in addition to? And if you do it annually only, how is it working out?
Different tools for different situations. I find monthly useful for cash flow. I know how much my normal non-discretionary spending (i.e., mortgage, utilities, car, etc.) are, and that gives me an idea of how much I have left to work with. Annual budgets capture less frequent things like home repairs, insurance, etc. The annual is also good for calculating how much things cost as a % of income, and it's a good start for forecasting retirement needs.

I can build a monthly budget from the bottom up. That is, I know the 10 or so recurring payments, and I can even add in a really close guess on what gas, groceries, etc. will cost in a month. For annual, I tend to do more of an empirical approach. I just tally up the expenses for last year, and I make assumptions about how much each category will change from one year to the next.
That's the way I do it too... a mix of monthly with annual budgeting. I guess Mr Stanley used the annual budgeting to basically say millionaire have some sort of budgeting and annual includes pretty much all periods.
US Total Stock Market + Intermediate Term Bond. That's it.

GoldenFinch
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Re: Millionaire Next Door and Budgeting

Post by GoldenFinch » Fri Mar 18, 2016 10:19 pm

Like KlangFool said above AUTOMATE investing because "you cannot spend the money that you don't have." Very good advice!

I know our yearly expenses and figure out what we can save, then I automate the savings. We are a family of six, but I have been somehow able to easily figure out a yearly budget. Savings automatically go into 401ks, Roths, 529s and taxable each month. Easy, and it works.

Grogs
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Re: Millionaire Next Door and Budgeting

Post by Grogs » Fri Mar 18, 2016 10:42 pm

carofe wrote:
Grogs wrote:
carofe wrote:I'm curious about annual budgets as a method. Do you do annual budgets instead of monthly budgets or in addition to? And if you do it annually only, how is it working out?
Different tools for different situations. I find monthly useful for cash flow. I know how much my normal non-discretionary spending (i.e., mortgage, utilities, car, etc.) are, and that gives me an idea of how much I have left to work with. Annual budgets capture less frequent things like home repairs, insurance, etc. The annual is also good for calculating how much things cost as a % of income, and it's a good start for forecasting retirement needs.

I can build a monthly budget from the bottom up. That is, I know the 10 or so recurring payments, and I can even add in a really close guess on what gas, groceries, etc. will cost in a month. For annual, I tend to do more of an empirical approach. I just tally up the expenses for last year, and I make assumptions about how much each category will change from one year to the next.
That's the way I do it too... a mix of monthly with annual budgeting. I guess Mr Stanley used the annual budgeting to basically say millionaire have some sort of budgeting and annual includes pretty much all periods.
Plus I think another important point is that having an annual budget gives you a 30,000-foot view that isn't always apparent from day-to-day spending. For example, I used to smoke and never thought a thing about walking into the store and paying $4 for a pack. When I actually starting compiling annual expenses and saw that I had a $1500/yr category for tobacco, it motivated me to quit. It was a large enough number that it made me realize I was giving up a good bit of retirement savings for something that had no benefit, and even had a very good chance of killing me prematurely.

ny_rn
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Re: Millionaire Next Door and Budgeting

Post by ny_rn » Fri Mar 18, 2016 10:47 pm

KlangFool wrote:OP,

I don't budget. I do "Pay Yourself First". I auto-deduct / deposit my paycheck to Trad. 401K, Roth IRA, Vanguard Taxable account, and my bank checking account. I spend money from my bank checking account. When my bank account money run low, I spend less.

When you decide how much that you want to save and you auto-deduct / deposit to the right accounts, you can spend the rest. Why do you need a budget?

Save 1/3, spend 1/3, pay 1/3 in tax. It is very simple.

KlangFool
I do not budget either. I follow this same process.

In fact, I treat my taxable account like a bill that I must pay twice per month.

Jackson12
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Re: Millionaire Next Door and Budgeting

Post by Jackson12 » Fri Mar 18, 2016 11:35 pm

carofe wrote:I have been reading this great book Millionaire Next Door and something very interesting to me is how he keeps saying that millionaire s have annual budget. And they keep track of expenses to make sure they are on track and they know the remining, annually.
I have never seen that before. What I hear all the time is monthly budgets.

I'm curious about annual budgets as a method. Do you do annual budgets instead of monthly budgets or in addition to? And if you do it annually only, how is it working out?
We have a monthly budget and my know how much we have available to spend on required expenses-utilities, auto and home insurance, gas for the car, including commuting to work , food, etc. This is our basic budget and that part is mostly very predictable (barring a polar freeze and insane hearing bills) . We're on budget plans, with fixed monthly payments, for utilities, phone, etc.

It is working fine and -at least in my opinion- avoids the time required to compile our annual expenses ( if we didn't have a monthly budget)

heyyou
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Re: Millionaire Next Door and Budgeting

Post by heyyou » Fri Mar 18, 2016 11:54 pm

Some advocate "Save More Later" by holding the spending steady in nominal dollars and saving most of any future pay raises. That worked well for us after a few years of tuning the budget. At early retirement, we were living on half of our income, and 25x our spending was already saved. Millions of people live happy lives on that amount of income, so we lived like they do, and saved the rest. Another one of those simple, but not easy solutions.

birdy
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Re: Millionaire Next Door and Budgeting

Post by birdy » Sat Mar 19, 2016 12:03 am

I am with Klangfool and ny_rn, I have never budgeted BUT I always keep track of what large bill will be coming in (car/home insurance, LTC insurance etc.) so I have enough in my savings account to pay them. From teen years on I have always "paid myself" first. My spouse and I have always been able to live below our means but still take vacations, eat out, and add some other modest splurges. I LOVED The Millionaire Next Door. That book just reaffirmed that my financial way of life was the key for early retirement ( goal just reached at age 61!) and a secure retirement. I think the key is to ENJOY living modestly!

birdy

jackholloway
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Re: Millionaire Next Door and Budgeting

Post by jackholloway » Sat Mar 19, 2016 12:05 am

We have roughly forty budget categories that we allocate every paycheck, tracking in a spreadsheet. That is after saving for retirement and taxable investing. Envelopes and saving half each raise have worked well for us.

delamer
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Re: Millionaire Next Door and Budgeting

Post by delamer » Sat Mar 19, 2016 12:21 am

I have always done budgeting on an annual basis, in order to account for expenses and income that don't occur on a monthly basis. For us, that is true for many things: bi-weekly paychecks, annual bonus, weekly groceries, semi-annual auto insurance payments, etc.

I am pretty anal so except for a small cash weekly allowance for both me and my husband, every expenditure gets categorized (in Quicken). Since we have cash savings, I don't worry if a bill comes along early in the year. The savings can be replenished as cash flow permits.

I use the prior year's expenditures as the basis for the next year's budget.

2comma
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Re: Millionaire Next Door and Budgeting

Post by 2comma » Sat Mar 19, 2016 12:22 am

I have found using budgeting software a very useful tool from time to time. Our first budget taught us we had a lot of things categorized as "miscellaneous". We gave each an allowance for "miscellaneous" and that solved that. I haven't thought about an annual budget but with 12 months worth that's your annual budget. We are the millionaire next door and we have used budgeting off and on as needed - once we were maxing out our savings and knew we had our spending under control we didn't need to budget to make ends meet but the historical info has come in handy several times. We pretty much use credit cards now and have different spending categories set up in Mint so we get long term historical spending info without much effort.
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unclescrooge
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Re: Millionaire Next Door and Budgeting

Post by unclescrooge » Sat Mar 19, 2016 1:19 am

KlangFool wrote:OP,

I don't budget. I do "Pay Yourself First". I auto-deduct / deposit my paycheck to Trad. 401K, Roth IRA, Vanguard Taxable account, and my bank checking account. I spend money from my bank checking account. When my bank account money run low, I spend less.

When you decide how much that you want to save and you auto-deduct / deposit to the right accounts, you can spend the rest. Why do you need a budget?

Save 1/3, spend 1/3, pay 1/3 in tax. It is very simple.

KlangFool
KlangFool and I finally agree on something! :sharebeer

When I was younger, I kept a meticulous budget that I updated every month. Those were the days when I could only put $5k in my 401k, and just $2k in my Roth.

Once your income passes a certain level and you have enough assets, you can split your income three ways as Klangfool mentioned. And then just a cursory glance a couple times a year to make sure everything is in place.

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mlebuf
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Re: Millionaire Next Door and Budgeting

Post by mlebuf » Sat Mar 19, 2016 2:20 am

I never have had a budget and am not about to begin this late in life. However, I always saved a part of every paycheck after I completed my education. When my earnings were modest, I saved modest amounts. When I had big windfalls, I saved/invested most of what I earned.

For years I have recorded 3 pieces of financial information on 3 types of spreadsheets:
1. I create a portfolio spreadsheet at the end of each quarter that contains the amounts in stock funds, bond funds and cash.
2. I have an annual income spreadsheet where I record whatever money comes in and it's totaled up at the end of the year.
3. Finally, I have an annual spending spreadsheet where I record how much we spend each month, and it's summed up at the end of the year.

With those 3 pieces of information, I believe that's all I need to know to keep my finances under control.
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Bogle_Feet
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Re: Millionaire Next Door and Budgeting

Post by Bogle_Feet » Sat Mar 19, 2016 2:41 am

Millionaires Next Door are just frugal. I look at annual expenses so that I can see if I'm following the 4% rule of spending in retirement. Sometimes I add up monthly expenses and multiply them times 12 to see if I'm on pace to get me below 4%.

KlangFool
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Re: Millionaire Next Door and Budgeting

Post by KlangFool » Sat Mar 19, 2016 5:41 am

carofe wrote:
Thank you for your replies, but I think it is going beyond my original question.
carofe,

1) The goal of budgeting is to control expenses. There are multiple ways to control expenses. Some of them do not require a budget. Some of them do not require a person to check their expense too closely. In my system, I just need to check my balance every month. You can use any system that works for you. I am just showing you another way to do it.

2) On the other hand, if you have to check that closely in order to avoid running out of money, you probably has too little safety margin in your budget. You may need to fine tune your budget further.

3) The money for essential are per-allocated every year/month in a typical budget. So, how could you run out of money for the essential?

KlangFool

wolf359
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Re: Millionaire Next Door and Budgeting

Post by wolf359 » Sat Mar 19, 2016 7:26 am

Dr Stanley used strange ways of stating statistics to make them more interesting to read. He did not say that all millionaires budgeted. His statistic was that 55% of millionaires budgeted, and 45% did not. The way he stated it was "we found that for every 100 millionaires who don't budget, there are about 120 who do."

Half of the non-budgeters "created an artificial economic environment of scarcity for themselves and the other members of their household." "Many call this the 'pay yourself first' strategy.

Of the other half of non-budgeters, they inherited their wealth, or they had such high incomes that it didn't matter. The high income spenders were millionaires, but they were also under accumulators of wealth.

wolf359
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Re: Millionaire Next Door and Budgeting

Post by wolf359 » Sat Mar 19, 2016 7:34 am

The way the typical American household works is that they spend until they run out of paycheck. I was a budgeter until I got married. I found the opposite of you -- I cannot stick to the budget with a wife and children. There is always some extra expense coming up, and my wife will just spend it if it's for the children.

The hard and fast rule we have -- pay off all bills at the end of the month, and carry no debt other than the mortgage. Some months we're scrambling. Other months she tracked the spending and it's easy.

But since we also pay ourselves first, we're still meeting our savings goals.

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StevieG72
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Re: Millionaire Next Door and Budgeting

Post by StevieG72 » Sat Mar 19, 2016 8:06 am

No budget here, but I do live below my means.

I can see a budget as a great tool for couples though! As it turns out I am flying solo.....

It sounds like a big pain in the butt to me.

I would probably faint if I looked at how much money is going out for my precious daughter. Kids are expensive!

I do have an agressive retirement savings goal that is on track!

Millionaire Next Door is a great read and I think of it often concerning homes and cars. I still live in my starter home and drive a modest car. ( its nickname is the hoopty, but that is exxagerating a bit, 2007 Ford Escape with 130,000 miles bought used with 20,000 miles on the clock. My goal is to squeeze out 200,000 miles before replacing it.)

I prefer to spend on amazing vacations which are greatly subsidized by credit card rewards.

When I retire I imagine a budget will be important. Who wants to run out of money in retirement? Not me!
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truenorth418
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Re: Millionaire Next Door and Budgeting

Post by truenorth418 » Sat Mar 19, 2016 8:11 am

I keep a monthly budget AND an annual budget. They are the same thing.

At the beginning of every year I make a budget spreadsheet of 25-30 different categories, broken out by month, for the coming year.

As that year progresses, every month I update the spreadsheet with actuals, review the remaining months and expenditures, and adjust accordingly.

Doing this for the past 15 years, I have always come in under budget, and this approach was instrumental in helping me save enough money to achieve my goal to accumulate $1 million in investable assets at age 43 and retire at age 47.

Of course, while working, like others, I paid myself first. The "retirement savings" line was always filled first, and aggressively. Ultimately I saved over 70% of my after tax income over a 25 year career.

Budgeting discipline was important to achieving my goals while working, it is even more important while living off of my investment portfolio.

It's simple and easy and doesn't take more than about ONE hour a month, and yet I don't think I know anyone personally, other than myself, who actually does it.

(EDITED)
Last edited by truenorth418 on Sat Mar 19, 2016 8:16 am, edited 1 time in total.

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Toons
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Re: Millionaire Next Door and Budgeting

Post by Toons » Sat Mar 19, 2016 8:12 am

truenorth418 wrote:I keep a monthly budget AND an annual budget. They are the same thing.

At the beginning of every year I make a budget spreadsheet of 25-30 different categories, broken out by month, for the coming year.

As that year progresses, every month I update the spreadsheet with actuals, review the remaining months and expenditures, and adjust accordingly.

Doing this for the past 15 years, I have always come in under budget, and this approach was instrumental in helping me save enough money to achieve my goal to accumulate $1 million in investable assets at age 43 and retire at age 47.

Budgeting discipline was important to achieving my goals while working, it is even more important while living off of my investment portfolio.

It's simple and easy and doesn't take more than about an hour a month, and yet I don't think I know anyone personally, other than myself, who actually does it.

+1
Excellent :happy
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Dave1mo1
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Re: Millionaire Next Door and Budgeting

Post by Dave1mo1 » Sat Mar 19, 2016 8:16 am

KlangFool wrote:
carofe wrote:
KlangFool wrote:
carofe wrote:
KlangFool wrote:OP,

I don't budget. I do "Pay Yourself First". I auto-deduct / deposit my paycheck to Trad. 401K, Roth IRA, Vanguard Taxable account, and my bank checking account. I spend money from my bank checking account. When my bank account money run low, I spend less.

When you decide how much that you want to save and you auto-deduct / deposit to the right accounts, you can spend the rest. Why do you need a budget?

Save 1/3, spend 1/3, pay 1/3 in tax. It is very simple.

KlangFool
Well I have a wife and a baby, and my wife doesn't work. We do need to sit down and make a plan every month so we make sure we don't overspend and we priorize what to buy first.
carofe,

My wife was a homemaker for 20+ years and she just went back to work last year. I have 2 children. My son went to college last year and my daughter is going to college this year. Their college education will be fully funded by my savings. We never had a budget. We have a very simple plan. We decide how much to save and spend the rest. Please note that we live in a HCOL area (Northern VA).

<<so we make sure we don't overspend and we priorize what to buy first.>>

You cannot spend the money that you do not have. With "Pay Yourself First", the saving is in 401K Plan, Roth IRA, and Vanguard Taxable account.

In your case, you decide what to spend and only save the rest. The priority is inverted.

KlangFool
Those are good points. We do save for retirement every month with auto-deposit and we save for other goals, but then after that we plan the rest. It may be an income thing, if we don't plan we may end up not having enough for groceries or other basic necessity at the end of the month. I don't know, I have never gone the route of not having a budget since I'm employed.
Come on. How could that be possible? Don't you have emergency fund?

I have one year of emergency fund. I do not need count that closely. I can spend less next month if necessary.

KlangFool
FWIW, we budget meticulously every month with an emergency fund available, but we would never use the emergency fund for every day expenses. Those aren't emergencies. The distinction is important for us.

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ClevrChico
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Re: Millionaire Next Door and Budgeting

Post by ClevrChico » Sat Mar 19, 2016 8:21 am

I believe it's an excellent idea to track savings/spendings, although I don't follow a set budget.

My checkbook register is a workbook in Google Docs. Every taxable dollar incoming or outgoing flows through that, and I maintain a new sheet for each year.

At tax time, I total up annual expenses/savings and convert that to monthly values too. It's easy to track how I'm doing year over year.

I also have a spreadsheet projecting non-retirement/retirement savings into the foreseeable future, that I fill in with actuals to see if I'm on track.

It's very simply done and probably of more value than a lot of fancy finance programs.

rixer
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Re: Millionaire Next Door and Budgeting

Post by rixer » Sat Mar 19, 2016 8:44 am

I was always in the "Pay Yourself First" method like Klang fool. We always took a certain percentage out of every deposit for:
1. Prepaying the house
2. Funding retirement
3. Property taxes
4. General savings

We simply lived on what was left. It worked out well for us this way but everyone is different.

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Re: Millionaire Next Door and Budgeting

Post by Runner01 » Sat Mar 19, 2016 9:10 am

We created monthly budgets when we first started living together in our early 20s but a couple years later we no longer needed to create budgets. We naturally live below our means now (30-40% savings rate) and do not need a rigid budget to guide our spending.

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Re: Millionaire Next Door and Budgeting

Post by fposte » Sat Mar 19, 2016 9:17 am

My monthly budget is my annual budget subdivided. That way I know that what looks like extra money this month is actually a contribution to travel expenses this summer, etc.

It also allows me to know how much to take out of taxable this year so I can max out my retirement accounts, since I'm fortunate to have a lot of tax-deferred space but not so fortunate as to have a huge salary. I guess that puts me in the "pay yourself first" category, but I definitely need to budget to use what's left reasonably.

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Re: Millionaire Next Door and Budgeting

Post by carofe » Sat Mar 19, 2016 9:55 am

KlangFool wrote:
carofe wrote:
Thank you for your replies, but I think it is going beyond my original question.
carofe,

1) The goal of budgeting is to control expenses. There are multiple ways to control expenses. Some of them do not require a budget. Some of them do not require a person to check their expense too closely. In my system, I just need to check my balance every month. You can use any system that works for you. I am just showing you another way to do it.

2) On the other hand, if you have to check that closely in order to avoid running out of money, you probably has too little safety margin in your budget. You may need to fine tune your budget further.

3) The money for essential are per-allocated every year/month in a typical budget. So, how could you run out of money for the essential?

KlangFool
Because we are still young and starting our life with no a ton of savings and there are so many things we are still wanting to buy that we have to plan for, furniture, more clothing, computer parts, car (mine is 23 years old), a trip, etc... Team work with limited income, saving for major finances goal (retirement, emergency fund and a house downpayment) and no debt. We do need to see how much we will need for fuel, groceries and so, so that we can know how much we have available to spend for those 'little' things we want/need and keep it in control.
But really, I'm not asking for an analysis of my budget. I'm asking for opinions of Stanley's work.
Thank you.
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carofe
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Re: Millionaire Next Door and Budgeting

Post by carofe » Sat Mar 19, 2016 10:06 am

Thank you folks for your repies. I see how the annual budget is a great tool that some people even that's all they need. The picture an annual budget gives you is very useful, Grogs example is good.
It make sense that there is a point where millionaire are not budgeting anymore but just keep track for things to make sure they are on track. I guess that constitute the "annual budget", the way he discribes it in the book sounds more like a tracking tool.
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Re: Millionaire Next Door and Budgeting

Post by BW1985 » Sat Mar 19, 2016 10:07 am

StevieG72 wrote:
Millionaire Next Door is a great read and I think of it often concerning homes and cars. I still live in my starter home and drive a modest car. ( its nickname is the hoopty, but that is exxagerating a bit, 2007 Ford Escape with 130,000 miles bought used with 20,000 miles on the clock. My goal is to squeeze out 200,000 miles before replacing it.)

I prefer to spend on amazing vacations which are greatly subsidized by credit card rewards.

When I retire I imagine a budget will be important. Who wants to run out of money in retirement? Not me!
We have an 06 Escape with same mileage as yours! Have you had to make any repairs yet?
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Re: Millionaire Next Door and Budgeting

Post by ColinFCodeChef » Sat Mar 19, 2016 10:26 am

Rather than budgeting, I "Pay Myself First" and automate my savings so that I do not even see the deduction.

I track my budgeting primarily through double-entry software and my pre-defined budget to track down any potential "Budget Busters" and eliminate them. The monthly budget rolls into a quarterly overhead and I use a rolling 4-Q system to see how expenses are trending.

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Re: Millionaire Next Door and Budgeting

Post by Joe_R95 » Sat Mar 19, 2016 10:31 am

Its different strokes for different folks. Yes budgeting is great and you can watch every penny if you would like to. It will also help you track your progress and give you the warm and fuzzies for meeting your goals. It would be helpful for the vast majority of the population to know where the money is actually going. That being said I cant follow one. It takes to much effort for my liking. I use monthly savings goals that I treat like any other payment and put whatever excess I have into a money market account to use for surprise bills, vacations, and funding the investments if I have a weak month. Bottom line is its all living below your means and investing. Try it and see if you like it. It would probably be easy to compile one if you keep records of your past monthly budgeting. If you don't like it there's no harm done and you can drop it any time.

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Re: Millionaire Next Door and Budgeting

Post by Grt2bOutdoors » Sat Mar 19, 2016 11:25 am

Never really set a formal budget. Saved for retirement first, then spent as necessary for rent/mortgage, utilities, food, clothing, insurance. Anything left over was saved/invested. It works, you don't have to have a formal line by line budget like a public corporation does.
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Re: Millionaire Next Door and Budgeting

Post by abuss368 » Sat Mar 19, 2016 11:39 am

carofe wrote:I have been reading this great book Millionaire Next Door and something very interesting to me is how he keeps saying that millionaire s have annual budget. And they keep track of expenses to make sure they are on track and they know the remining, annually.
I have never seen that before. What I hear all the time is monthly budgets.

I'm curious about annual budgets as a method. Do you do annual budgets instead of monthly budgets or in addition to? And if you do it annually only, how is it working out?
Hi carofe,

The Millionaire Next Door is an excellent book. One that I read many years ago and highly recommend.

In terms of budgets, and the frequency of budgeting, it is important to determine what works best for you. That is an individual decision. I would start with an annual, and if that is not as helpful, consider breaking it down into quarterly or monthly. There is no wrong or incorrect decision here.

Quicken provides a budgeting tool and reports comparing your budget to actual. This may provide assistance.

Best.
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Re: Millionaire Next Door and Budgeting

Post by ddunca1944 » Sat Mar 19, 2016 11:48 am

I do a monthly budget because it keeps me focused. I also do an annual summary. With the annual summary, it quickly becomes obvious whether we can afford an expensive international trip or large discretionary expenditure.

I use YNAB for the monthly busget and have a spreadsheet for the annual one. My annual summary goes back to about 2004 when DH started thnking about retiring.

It's important for us to be aware of what we can and cannot afford since we are retired and what we have now is all we'll have, and it needs to last the rest of our lives.

My biggest regrest is that I did not budget during most of our working years. We did save first and lived on the rest, but having a monthly budget has been such a powerful tool for cash flow management, accumulating and maintaining a cushion, and forecasting. I am so much more aware than I ever was during our working years.

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Re: Millionaire Next Door and Budgeting

Post by JGoneRiding » Sat Mar 19, 2016 11:51 am

op---like you I had a monthly budget, read Mil next door, and started an annual budget.

I find it helpful in several ways but still use monthly as well. It sets an overall picture. lets me know if I can send a bunch extra to the SL or not and waste that on a purchase of something. I adjust it for inflation, it gives an ongoing picture. Its useful as others have said to see how much total a category is costing. This often helps me stop fussing with that category or decide to eliminate it. (like cable)

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Re: Millionaire Next Door and Budgeting

Post by cowboy » Sat Mar 19, 2016 11:57 am

We use a combination of both monthly and annual budgeting, using Goodbudget (free, can use on the web and/or with apps on your devices) -- an envelope-based budgeting system. In monthly categories, we have things like household maintenance, groceries, dining, fuel, "allowances", education, charity, etc. In the annual envelope categories, we have our larger, more predictable expenses like rent, utilities, insurance, vacation fund, emergency fund, etc.

My wife and I used to argue about our spending. We started using this about 6 years ago (it was formerly named EEBA): no more arguments, and we've been able to bump our saving rate significantly. YMMV.

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Re: Millionaire Next Door and Budgeting

Post by carofe » Sat Mar 19, 2016 12:19 pm

JGoneRiding wrote:op---like you I had a monthly budget, read Mil next door, and started an annual budget.

I find it helpful in several ways but still use monthly as well. It sets an overall picture. lets me know if I can send a bunch extra to the SL or not and waste that on a purchase of something. I adjust it for inflation, it gives an ongoing picture. Its useful as others have said to see how much total a category is costing. This often helps me stop fussing with that category or decide to eliminate it. (like cable)
Lol, I just created a spreadsheet to track stuff annually to get a big picture after reading the book and this thread. I used to do annually just to split and plan the amount to save monthly but I think I need to go beyond that.
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Re: Millionaire Next Door and Budgeting

Post by jnet2000 » Sat Mar 19, 2016 12:20 pm

I used to use the "pay yourself first" method and spend what was left over before I was married. I would look at my annual expenses once but as long as I was saving a good portion of my income and not using debt I didn't worry too much on what I spent. I did this for all my adult life before I was married.

Now that I am married, we budget monthly and are more proactive. My wife prefers it this way and I don't mind it one bit either. I think as long as you live below your means and save you are fine.
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Re: Millionaire Next Door and Budgeting

Post by celia » Sat Mar 19, 2016 12:36 pm

To me, the monthly budget is the same as the annual budget, since every month (besides paying the monthly bills) we set aside 1/12 of the yearly costs of bills that are paid only once a year and 1/6 of those paid every 6 months.

KlangFool wrote:Save 1/3, spend 1/3, pay 1/3 in tax. It is very simple.
We are retired now, but in our working years, we spent roughly:
1/4 on the mortgage, 1/4 on children's tuition/college, 1/4 to savings/retirement account, 1/4 to everything else.
After the mortgage was paid off, the kids were grown up, and there was enough set aside to supplement our retirement income streams, guess what we did?

Now we spend our money on taxes (Roth conversions), health care, travel, and everything else!
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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ray.james
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Re: Millionaire Next Door and Budgeting

Post by ray.james » Sat Mar 19, 2016 1:10 pm

KlangFool wrote:OP,

Save 1/3, spend 1/3, pay 1/3 in tax. It is very simple.

KlangFool
This is my guideline and experience as well. When I was starting career/early years, 33% of total tax is pretty much given due to California + fica. Keeping expenses to 1/3 is a great guideline to start and maintain at most ranges of low to high income.(unless in very low/very high )
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

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Re: Millionaire Next Door and Budgeting

Post by Dimitri » Sat Mar 19, 2016 1:32 pm

Grt2bOutdoors wrote:Never really set a formal budget. Saved for retirement first, then spent as necessary for rent/mortgage, utilities, food, clothing, insurance. Anything left over was saved/invested. It works, you don't have to have a formal line by line budget like a public corporation does.
+1 First, max out your tax-advantaged retirement accounts. Then spend what you need to spend for the necessities of life. Save the rest.

My house doesn't make a budget. That said, we do track every dollar spent in an expense book (this is the one we use - http://search.rakuten.co.jp/search/mall/9784865930160/) and keep a spreadsheet showing same in relatively broad categories.

There is no budget per se. That said, if you ask me what I'll spend on groceries next month I can give you a pretty good idea - it isn't going to be much different than the average month last year. There will be some months that I spend more - maybe I'll buy extra coffee or rice when it is on a good offer. But that gets offset when I don't buy rice or coffee for six months.

Unless money is really tight I don't think one really needs to keep a budget. YMMV
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