Sunday, 22 December 2019

How to Make Your Budget Automatic

Just like most things in life budgets aren't for everybody. For some people, it's actually best to not have a budget or at least that's what the author of the best-selling book the automatic millionaire David Bach believes. Let's see if it's true. As you can tell by the title today I'm going to be coring a very intriguing budget known as the automatic budget or sometimes as the no-budget budget.  When you think about being responsible for your money a budget may very well be the first thing that comes to mind. And judging by how many budgeting articles I have made already on this site I would understand if you're a little confused about why I'm writing an article that says for some people no budget is necessary. And the last thing I want to do is misguide you so I want to get this out in the open first...

The automatic budget is not for everybody. And if most of us are honest with ourselves most of us do need some kind of budget. It may not be the zero-sum budget not everyone needs that in depth of a budget but most of us do need some kind of budget. However, that doesn't mean that budgets are for everyone. Some people do have the necessary traits to live a financially successful life without doing budget money.

Let Get Started

What Is The Automatic Budget?

Well as the name implies the automatic budget aims to make as many years financial decisions as possible automatically for you. This is done by setting up automatic payments for things like your mortgage, rent, cell phone bill, savings and retirement contributions, and anything else that you can find a way to automate. And it's actually surprising how many things you can do that with.  After you've automated all the expenses and savings that you can whatever is left over is yours to spend on whatever you want. The idea is that from here on you will be able to just monitor your finances as opposed to setting up every single month.

Who This Type Of Budget Work Best For? 

In my opinion, it works best for those who either already have more money coming in than they do going out or at the very least have a good idea of where they want their financial life to go. In other words, they have a very, very well-established goal. This is because for this budget to work long-term you need to be willing to pay yourself first like David Bach preached but you're also going need to be willing to live on less. Why do I say that? Because just like with any budget you need to be able to invest enough now so that you can support yourself in retirement later. The difference with this budget is that since it's a lot more like a set-it-and-forget-it budget than most because you decide from the get-go how much you're going to allocate to what category and basically just have it done automatically from then on your initial decisions are going to have a huge effect on your financial future.

Let's say for example if you're in your early 20s right now and starting your first job and decide to pay yourself first 10% of your wages and you use the automatic budget throughout your entire 40-year working career. Just to make the number easier.

  • Let's assume that you make $50,000 a year meaning that if you're putting away 10% you're saving $5,000 a year. At an 8% rate of return, you would wind up with $1,351,423.77 when you retire. However, there are a couple of things to consider here first $1.35 million is good no doubt it, but it's not going to be quite as good 40 years from now as it is today.

If we assume inflation is about 3% per year on average that means that the $1.35 million would be worth about $430,000 today. Still not horrible, but not quite as good as the $1.35 million savings. And if you were to get an 8% rate of return on that you would realize that in today's dollars anyway your retirement income would be about $34,4000 a year. Which again if you have no debt you could live on that just fine. It might not be a problem and I'm not trying to use this example to denigrate the automatic budget that's not my intent. But in this example, you were saving 10% of your money and making $50,000 a year which means you were living off of $45,000 a year in today's dollars. So you would need to adjust your lifestyle a little bit in retirement which is probably not what we would do if we had the choice. That's also the great thing about the automatic budget, are you do have the choice. That's why I say your initial decisions are so important.

Let's say that in the same example you decided to save 20% of your income instead of 10% but you still made $50,000 a year. That means you would save about $10,000 a year and would wind up with $2,702,815.10. Once you reach retirement. That equates to about $830,000 today meaning that your retirement income in today's dollars would be a little over $66,000 a year. 

Now, of course, I can hear some of you saying that you can changes your initial decision later on down the line. And you are right.

Let's say if you want your first year saving 10% of your income and then you realize that you could still manage to get by comfortably doing your working life saving 20% of your income, you certainly could do that in the second year of work or whenever you happen to realize it but I'm going to just to say the second year of work for this example.

  • Let's say if you did that. You upped your saving rate to 20% in the second year of work meaning instead of $5,000 invested in the second year you investing about $10,000 given the number in the last example you would end up with $2,597,881.85 when you retire. That's right around $105,000 less than you had if you started at 20%, but it's still significantly better than staying at 10% the whole time. 

In the end, the difference in staying at 20% for your whole working career and switching to 20% in the second year of your working career after doing 10% in your first year, translates to about $32,000 in today's dollar and roughly $215 a month in retirement income in today's dollars. So it isn't necessarily backbreaking if you do happen to catch up early but that initial decision still important and can make a difference when dealing with this budget.

How It Can Fail.

The way I see it there are 2 main ways that this budget could fail. The first is if you aren't already aware of where your money is going and how much of it is actually leaving the house each month. Because you may end up not having enough money to cover your expenses or you may end up forgetting some expenses that you don't pay every single month such as car tabs and other irregular expenses like that. But that does come up every now and then. This also means that the term automatic budget is a little misleading because you do have to set up a budget initially just like with any other budgeting method. It's just that you don't have to do a new one every single month assuming you set up the initial budget properly. 

The second way this could fail is by not leaving you enough money to live on when you reach retirement like I already covered. 

That's how the automatic budget works. I hope you enjoy ready this article.

No comments:

Post a comment