A Simple Approach to Budgeting Using Just Two Basic Calculations

Want to start a budget to get control over your money? But don’t want to spend lots of time on it and unnecessarily constrain yourself? That is what I wanted to do. I desperately wanted to get my money under control and increase my savings, but got so fed up with the time consuming nature and detailed approach of traditional budgeting (never mind trying to get the rest of my household to comply with it) that I developed a far simpler system for myself.

This approach, which I will share with you below, takes far less time and effort – a token moment every month should suffice – yet delivers maximum results and a feeling of control over your money. It relies purely on tracking your Net Worth and Savings Rate over a longer period of time and steering them to whatever target you set for yourself, without worrying about the detailed breakdown of what comes in or out every month. The point is to become budget-conscious and to save money, while avoiding making the running of your budget into a day job.

Why I loathe traditional budgeting techniques

Google “how to make a budget” and you get 22 million results telling you how to manually set up intricate Excel spreadsheets with 12 tabs and full of macros, gather all your financial statements, download mobile apps or sign up for online services, and to track every cent that comes in or goes out.

These methods help to create a budget-conscious mindset while taking you at most half an hour a month to maintain.

That means that at least once a week you need to spend time to classify every single $3.50 cup of coffee you had during the week to the appropriate category and to assess how you’ve been doing against the budget you had set yourself for coffee on a monthly basis. You can choose to do the budgeting at the end of the month as well, but who is really going to remember what part of that $150 expense you made at Target 28 days ago was for a gift for your niece and which part were regular groceries? Never mind the fact that it will take you hours to complete. So it requires an ongoing effort.

What’s even worse is that a budget tends to make everything overly specific. Just look at the categories used by Mint.com: do I really need to break down money spent on “shopping” to “hobbies” and “sporting goods”? I guess the data could be interesting, if I had some sort of army of helpers available to me to manually key in and carefully think about every cent that goes in or out throughout the day. But I don’t and I can’t be bothered. Tracking every cent spent on coffee, then fretting over whether I spent $4 too much on coffee in March sucks the joy from my soul.

(To be fair, if you google “why I don’t need a budget” you also get 16 million results).

Only two things really matter: net worth and savings rate

This is why I like to look at budgeting from a much, much higher level. At the end of the day, we budget because we want to make sure that we don’t spend more than we earn (or save as much as we can), have healthy financial habits and build up wealth over the longer term. That’s it, those are the two main goals. Note how one of them does not say “making sure that I don’t spend more than $50 on coffee in March”.

The good thing is that in order to track the above you really just need to be mindful of these two metrics:

  • Net Worth. All your assets minus your liabilities. The stock of your wealth.
  • Savings rate. If Net Worth is the stock of your wealth, the Savings Rate is part of the equation that tells you how fast you are increasing its level. Basically the Savings Rate equates to income minus expenses divided by income (more detailed below)

Tracking your Net Worth

To get to your Net Worth is easy: take the market value of your home, your car, your investments and checking/savings accounts. Now subtract the value of your student loans, mortgages, credit cards, back taxes and so on. Store this number once a month in a spreadsheet with a date assigned to it, and set goals and track its progress.

This shouldn’t take you more than ten minutes or so as all you need to do is glance at your accounts (and perhaps on a less frequent basis update your home and car valuation). You want this to go up over the long term, and per the 4% rule you would for instance want it to hit $2.5 million by the time to retire to accommodate a $100,000 annual income in retirement.

In Excel it is fairly easy to model a path towards that and have certain targets at the end of each year or even semiannually. If you are above target, great. If you are below target, better start saving more or adjust your expectations for post-retirement income.


Note that while you can influence Net Worth by saving, part of Net Worth is also the performance of your investments which you only have indirect control over by allocating your assets in the right places (of course we advocate a thematic approach to investing). Once you get to a certain level of wealth, there will be years where no matter how much or little you spend, your net worth will go up or down largely outside of your control as market forces change the value of your investments.

Once you’ve saved up $1 million and are still saving $1,000 each month, a 5% negative return on investments means Net Worth drops to roughly $962,000 by year-end. That’s why I suggest to put a lot of thought into your asset allocation, but subsequently don’t worry too much about changes in Net Worth on a month by month basis. Just set those goals and monitor regularly, and you will know whether you should save more to get to your goals or if you are doing fine. The part you do have control over is the Savings Rate.

Two methods to calculate your savings rate on a monthly basis

I track two varieties of a Savings Rate for every month of the year. At the end of the month I take a moment to sit down and go through my bank accounts, see what their starting and ending balances are, and determine the overall income and expenses I had.

Let’s label both of the Savings Rates SR1 and SR2. Each of these should take you no more than 10-15 minutes to calculate on a regular basis:

  • SR1 = (gross income – tax – expenses) / (income – tax)
  • SR2 = (gross income – tax – expenses – projected big ticket expenses + actual big ticket expenses) / (income – tax)

Especially SR1 is rather straightforward as all you need is your net income (gross income – tax) and your expenses. If in a month:

  • Your income was $5,000 gross
  • You paid $1,500 in tax
  • Your total expenses including everything else were $3,000

Your SR1 would amount to:

SR1 = ($5,000 – $1,500 – $3,000) / ($5,000 – $1,500) = 14.3%

Or some 14.3% of your take home salary was used to actually increase your Net Worth during the month (ignore that investment returns may have offset that).


For SR2, big ticket expenses will be different for everyone, but these are the large expenses you foresee to pay during a year which you do not want to distort the monthly figures. This could be education fees, property taxes, insurance premiums, vacations and so on. I recommend not to make the list too long as the system copes with some variability in expenses anyway (i.e. it doesn’t over-categorise things).

For those big ticket expenses, you will want to calculate an annual total at the start of every year and divide it by 12. Then, you will want to remove those same big expenses as they occur from the calculation for each month. Building on the example above, if in this month you had

  • Taken a $1,000 vacation, something which on annual basis you estimate to spend some $3,600 on ($3,600/12 = $300)
  • Paid a $250 life insurance premium, something which on annual basis you intend to spend $500 on ($600/12 = $50)

Your total big ticket expenses in the month would have been $1,000+$250 = $1,250. Meanwhile your projected big ticket expenses would have been $300+$50 = $350. So you will want to adjust your Savings Rate for the difference between these figures, after which the calculation for SR2 would become as follows:

SR2 =  ($5,000 – $1,500 – $350 + $1,250 – $3,000) / ($5,000 – $1,500) = 40.0%

Note that obviously this only works if your annual projection upfront is in line with the expenses that you end up incurring. If that does not happen however, SR1 gives you the real picture of your expenses. SR2 is merely a tool to be able to steer on your savings month after month, including those months with big expenses.

Tracking your Savings Rate in Order to get a grip on your money 

So now we know that:

  • SR1 = 14.3%, so 14.3% of your net income was de facto saved to increase your net wealth
  • SR2 = 40.0%, so ignoring the vacation and life insurance premium for which you intend to save (or have already saved) during the rest of the year, you managed to save 40% of your net income

Note that if the vacation and life insurance had cost precisely $300 and $50, or the monthly amount in fact set aside for them, SR1 would have been equal to SR2.

So how do we use that information? It’s fairly simple really, we want SR2 to be positive at all times while for SR1 we can deal with the occasional negative dip. If for instance all of the $4,000 you’ve set aside for vacations was spent at once during this month, SR1 would have become strongly negative (-71%), while SR2 would have still been 40%. But if you subsequently do not spend any more money on vacations, in the rest of the year your SR1 would systematically be above your SR2.

Why this is all you really need to keep your finances under control

The above described methodology is great because it doesn’t require you to meticulously track every little expense. It creates a sense of control over how much goes in and out without overly going into the details. To see how that would work in reality, picture a situation in which you run a budget with 10 categories and save $10 on 9 of them, while overspending $1,000 on one of them (say Shopping).

  • A regular budget will still show that you did pretty well on 9 out of 10. You were over budget on Shopping, but hey you managed to save money on all of the others!
  • The simple budget on the other hand, will give you a negative Savings Rate, a likely decline in your Net Worth and will make it very clear that you overspent.

Under a regular budget, you will keep doing the same for all your other categories that you budget for, while taking care not to overspend on Shopping any more. The next month you may actually manage to save $10 on Shopping as well.

Under the simple budget, your natural response is going to be to think of ways to bring that Savings Rate down in the next months in order to compensate. If your Savings Rate went to -70%, then you know that one month of +10% is not going to cut it and that you need to make big changes in your spending patterns. Even without a budget you will know what the big expenses were that drove up your spending.


It is probably only in the very few cases where with regular spending you are always saving too little or have a negative Savings Rate, that you can consider to start writing down what you spend your money on in detail to see where you can cut expenses. Even then I wouldn’t advocate tracking it day by day as it creates a false sense of control. Once making a scribble of it and then proactively thinking about it as you go forward should suffice.

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