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A Discretionary Fund, Not a Discretionary Budget

March 29th, 2014 at 04:16 am

I separate my retirement spending, practically -- and even more importantly psychologically -- into a baseline budget and optional disbursements from a discretionary fund. My baseline budget* covers what I have decided is the minimum lifestyle acceptable to me. The discretionary fund functions as a super flexible pot of money -- distinct from my baseline reserve** -- from which I can pay for goodies, fun, extras, whatever without having to worry about what that spending will do to my budget. Here is how that actually works.

The Baseline Budget
My baseline budget defines my baseline lifestyle. I have chosen to include in that baseline budget living in and up-keeping a country house (instead of a cheaper apartment), having internet access and basic drive-around gas money, eating a meat-and-vegetables diet (instead of a rice and pasta diet), drinking Chivas Regal instead of a cheaper brand, as well as a few other items that distinguish my baseline budget from the minimum budget I could probably survive on. My baseline budget raises my retirement lifestyle from minimal survival to my own personal level of baseline living comfort.

My annual baseline budget* ($18,000) is what I had to have as passive income before I could stop working and retire. I had to keep working until I had crossed that passive income threshold. This is an important point, given that my key financial objective has been to retire as soon as possible in order to free up as much of my remaining life as possible. Life is a zero-sum game, after all. I -- like you and everyone else -- have a set and finite number of days to live. One more day working is inevitably one less day free.

I have taken one more step before turning loose my discretionary spending. Even though my entire baseline budget is covered by my Social Security payments, I sleep better knowing that I have a baseline budget reserve** "just in case." So I have one year's baseline expenses set aside in a savings account. With that in place, I have become very comfortable with my discretionary fund spending.

And here is how a discretionary fund works for me.

My Discretionary Fund
My passive income over and above my $18,000 annual (or $1500 a month) baseline budget gets moved over once a month into a separate discretionary fund bank account. Those discretionary funds accrue there. Whenever I want to do something optional -- book a trip, buy a gadget, hire out something I could otherwise do myself -- I check my discretionary fund balance. If I am comfortable withdrawing from that balance the cost of whatever it is I am considering doing or buying, I go ahead. And I never have to question whether "my budget" can afford the extra cost. Because that is all off budget.

And what if an unexpected unavoidable expense comes up? What if my truck dies... or the well pump goes bad... of I have to travel to see ailing family? Well, my uncommitted discretionary fund stands there ready to bail me out.

This way of handling my finances has had a lot of benefits for me.

Benefits of a Fund Approach
To My Discretionary Spending

First and foremost, separating my wants from my baseline needs*** made it clear to me that I could stop working much sooner than I had thought. So this budgetary approach allowed me to retire years earlier to what I knew I would consider a comfortable baseline lifestyle (for me).

Second, keeping a discretionary fund -- essentially an uncommitted pot of money -- has given me maximum flexibility as to what I can do with that money. If, instead, I had developed a discretionary budget the result could have been becoming committed to recurring expenses just because I could afford them. Expenses such as car payments, time-share payments, club memberships, obligatory annual trips to destination X, and so on. And an expense one becomes committed to can no longer be considered discretionary.

The flip side of this is that keeping my discretionary funds uncommitted allows me to pounce on and take advantage of unexpected opportunities for fun when they present themselves (like grabbing a super bargain of a boat on Craigs List.)

Thirdly, this financial planning method gives me a very solid psychological safety net regarding my financial future. It is a lot less worrisome to think about -- and plan for -- an unexpected drop in passive income when I only have to consider how to continue to cover my baseline budget. On that basis, it would be extremely unlikely that I would have to make any adjustments at all to that budget. Anything else would be, after all, just discretionary.

# # #

*My $18K Annual Baseline Budget:
http://retired-to-win.savingadvice.com/2013/12/29/my-18k-ann...
**Making Over My Emergency Reserves:
http://retired-to-win.savingadvice.com/2014/01/04/making-ove...
***My Financial Independence Key:
http://retired-to-win.savingadvice.com/2013/12/17/my-financi...

6 Responses to “A Discretionary Fund, Not a Discretionary Budget”

  1. Mooshocker Says:

    Love your blog.

  2. Retired To Win Says:

    And I LOVE your support, Mooshocker!

  3. Mooshocker Says:

    Soooo...via your inspiration I have decided to separate my accounts into three. My operational account will maintain my salary direct deposit. This will also house tenant number ones rent for the duplex mortgage. This account is money in money out for all expenses. My current savings account has roughly $13k in it. I average about $800 per month in savings. I also deposit $650 per month rent from tenant number two in this account. What I am going to do is open a third account and name it duplex escrow. I will start it by transferring $2600 from savings into it as an escrow cushion. Then each month I will deposit $650 from tenant number two into this account to cover taxes, insurance and upkeep. Although it psychologically shows less in savings, the earmarking of monies will be much better defined. Operational income, true savings and duplex taxes/insurance.

    After all calculations this plan should net out roughly $1500 per year in the duplex escrow of which I will let ride in the account for an EF and when I sell it, should be a tidy little planned windfall.

    I have worked really hard to budget my hard money expenses. By this I mean I do not budget auto gas, food, auto insurance, or discretionary spending. I find it too difficult dealing with the emotional swings food, auto gas and fun money used bring. I just let these expenses unfold. As long as I save a minimum $500 per month I consider it a blessing. That said I do find myself pushing the envelope of too lean versus extra savings...lolol

  4. Retired To Win Says:

    Mooshocker, that sounds like a good plan.

    As far as budgeting goes, I don't do it either. You can refer back to my earlier post, Budgeting By Exception (http://retired-to-win.savingadvice.com/2014/03/28/budgeting-...) to see what I mean.

  5. CB in the City Says:

    This is now I plan to handle my post-retirement budget, too.

  6. Retired To Win Says:

    You know what they say, CB: great minds think alike. :O

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