I'd never seriously set a budget before. Basically all of my life can be broken into one of two categories -- broke as shit, when I had almost no money and had to spend almost nothing, and don't have to worry about it at all as long I'm not totally out of control.
See, that's the tricky part of being an entrepreneur. Like most people who freelance or are small business owners of young companies, my cash balance is infinitely more tied to my income than my expenses. You can tweak your expenses down a bit here and there, and get some percentage points. But income is basically uncapped.
When a smart couple hours brings in a few hundred dollars or more, you tend to worry less about ordering a third cup of coffee at the upscale cafe, and more about having a smart couple hours.
And yet, I've never felt more freedom in regards to money since I started budgeting.
I had a good reason to it -- set some investment goals about building a family investment account, funding it up, and looking to have enough cash on hand to buy a house if and when there's a market correction in housing in Taipei.
So, if you do decide to start budgeting, that's my first recommendation -- have a good reason to do so, something exciting that's on the horizon.
Second? I'd track your expenses for at least a couple weeks. I do that anyways, because I've found Peter Drucker to be right when he said: "What gets measured, gets managed."
You could try setting a budget before figuring out what your previous expense baselines are, but I'd be wary of the initial guesses as to where cash actually goes.
After some tracking? It's fantastic. If you're feeling adventurous, you might try setting one category considerably lower than seems reasonable. It'd actually incredibly a lot of fun, and I feel wiser and much more connected and understanding of money after doing this.
I set my food budget at 300 Taiwan dollars per day (about $10 USD).
Suddenly, there's real tradeoffs involved -- I was at a cafe for a late work session that had coffees priced at 120 NTD ($4), 140 NTD ($4.65), and 150 NTD ($5). That's the kind of thing I wouldn't even notice before, but it's the difference between being able to grab some hard-boiled eggs, a rice ball with tuna, a bottle of tea, or some fruit on the way home.
I was out with a buddy at the Zhongshan night market the other night. He had sashimi for 200 NTD -- it looked great, and I do quite like fish -- and yet, I passed. Budget. Felt awesome.
I feel much more sensitive to pricing differences. I also feel more excited to hustle and close deals, bring more income in, and feel much more appreciation for cash in the $100 to $500 range. Checking prices and thinking through the fact that eggs cost 8 NTD each, whereas a solid mini-loaf of bread costs 40 NTD makes you realize that eggs are a much better buy for fillingness per cost, which is a calculation I'd have never done without the budget.
The most interesting thing about the whole budgeting thing? It's making me much more creative and more critical of my decisions. When your entertainment budget is slashed, parks and art galleries and museums become de rigeur instead of the more well-worn movie theater. Food, housing, transit? Start thinking of new things to eat, new ways to live, new ways to get around.
It's glorious. More of my income is dropping down to my net worth, it's enabling future plans, and I'm having of a lot of creative fun. If you haven't budgeted before, do consider giving it a whirl. Start by figuring out what you're building towards, and go from there -- you might just find yourself as a more creative and informed person... and with a lot more cash in your pocket.
I use YNAB, budgeting software, for tracking expenses. For the first few months, I just tracked everything without changing my behaviour, just to see where my money was going. My big realisation is along the lines you are say: expenses have been pretty steady over the last year, about 1,000 dollars a month when travelling half that when at my base, but my income can double or half in any given month.
I COMPLETELY agree about tracking your expenses. I started doing this about a year ago and it changed the way I think about money. It's so much easier to make conscious spending choices when you actually have to write everything down.
In terms of earning more money, say you're a smart, motivated young guy but with no idea how to increase your income and move towards the type of life you have -- where would you start?
For me personally, tracking my income has not been that much of a dealchanger. I've tracked my expenses pretty extensively since 8 years back and I can't say it's made me a better spender. Periodic poverty did a much better job of making me spend wisely.
What I think MIGHT make my expenses more behavior-influencing would be if it was presented in some nice way. I am thinking of writing some scripts to go through my files and parse out the expense-data (I log it in a format which ought to be machine-readable, or at least I could standardize it so that it would be). Any ideas on that? Maybe present a monthly expense breakdown by category? Or a day to day report.
If you're in the US, you could try using Mint - it gets all the info from your online bank logins and presents it for you (plus they have an iPhone app).
I tend to copy my expenses down in Evernote or something on my phone and take a couple of minutes once or twice a week to put them in an Excel spreadsheet I created, then I can categorise them and see a nice pie chart of my spending over the last week/month/year.
Also, I feel that your argument here is not the opposite of Ramit Sethi's "don't skimp on lattes, the cognitive cost is too high". You are actually skimping on lattes in order to *attain* a cognitive goal. So you are actually espousing a position here which is not quite Sethi, not quite cheapskate, but rather a third option. Very cool.
don't get it exactly how both views are not conflitant. could you elaborate on this?
RS says to forget about skimping on lattes. It is too cognitively costly to make such decisions all the time. The pay off is too small and one should focus on big wins like getting a higher raise, increasing one's credit rating, or renegotiating a mortgage. The cognitive cost is a once-off and the payoff is huge.
The cheapskate is very focused on small wins all the time. He will skip the fancy lattes because he cannot bear to spend $3 when 10 cents will suffice. He spends a lot of cognitive energy fretting over these things. He saves $2.90 once in a while but it is a pyrrhic victory as all of his mental energy is bound up in this task of cost-saving to the max.
Sebastian Marshall is really not in either camp. He is using budgetting here, and the concomitant cheapskating which follows in certain situations, in order to increase his creativity and sense of control of his situation. Ie he is being a selective cheapskate in order to INCREASE cognitive resources. Whereas the true cheapskate is constantly being cognitively drained by having to skimp on everything.
That's how I read the words, anyway. I may be overanalyzing.
I was dead broke for a couple of months this year. I've never felt more in touch with my purchases, or more happy for the stuff I did buy. Making a small amount of cash and going food shopping in bulk for $200 was suddenly a big treat. And filling my freezer with lots of healthy food which I can cook myself for months to come is surely better than using that $200 to buy like 15 lunches at restaurants.
The Internal Scorecard
I think there's a tremendous amount of misconceptions regarding achievement, productivity, creativity, ambition, work, work rate, work ethic, and so on.
So I'm thinking of publishing some analysis weekly with examples of what happened in the week, successes and failures, noteworthy events, what I'm reading and listening to, and so on. If it goes well, I can give you a picture of a workweek for me, intermix tactics and techniques, and give you practical guidance about what's working well and what isn't.
Several years ago I was sitting with a bunch of friends at a restaurant. Dinner was winding down and we were all stuffed.
My friend next to me asked me how I made so much money. I always had the money for everything, she said, and she was always struggling.
The bill came and everyone went down the list adding up their stuff. Before tax and tip mine was around $7. Hers was $30, more than four times what mine was.