The single most essential part of retiring early comfortably is determining your Bare Bones Budget (BBB). Without a BBB, you’ll always feel you must work to pay all of your bills.
What is a Bare Bones Budget? A Bear Bones Budget is the minimum amount of money your household needs to thrive every month.
Notice how I used the word “thrive” and not “survive?” We don’t want to plan to struggle throughout our golden days of retirement.
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Once you have taken stock of your BBB, you’ll have a much higher chance of exiting the workforce successfully using passive income.
Why is determining your BBB so important? You can’t retire without knowing exactly how much you need to live.
Once you know your BBB number, you can patch together a passive income plan to support your living standard. Without a BBB, you’ll think you need much more to survive and thrive.
When I dropped my retirement papers from the Marine Corps, I believed I would need to work again. I earned $13,000+ a month, while my wife made $3,500.
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My military pension would be roughly $8,000/month, and I thought losing $9,000+ per month would be detrimental to our household budget.
However, we started to do the math and realized most of our income was going to savings and investing, and there were many other things we could clean up or eliminate.
Once we wrote down our BBB, we quickly discovered we could both retire and live the life of our dreams. Let me tell you, retirement is fantastic, especially if you can achieve it before 50.
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Elements of Your Bare Bones Budget. Although this is a BBB, you must still factor in your creature comforts—your personal spending allowance.
Let’s review all the elements of a BBB and then briefly explain each. It may take you a month or two to finalize your numbers because things can fluctuate from month to month.
- Housing
- Bills (Primary, Secondary, Tertiary)
- Debt Service
- Food
- Personal Allowances
- Savings & Investing
Housing. Housing is often the most significant expense in your BBB. If you rent your home, this number can jump anytime.
If you own your home, the insurance and property taxes are increasing at the highest rate in recent history.
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Prepare yourself for the number to keep jumping upwards at least annually. That is why we must have an emergency fund, and our passive income streams make more money every year.
Bills. Your bills are how you pay for services to support your living situation. I divide my bills into Primary, Secondary, and Tertiary. Ensure you have a detailed spreadsheet to document every bill entering the household.
- Primary bills include electricity, water, sewer, car insurance, lawn maintenance, cable, internet, cell phones, etc.
- Secondary bills are bills that are important but usually come around annually. These anklebiters can stick it to you when you least deserve it. Secondary bills include car registration, HOA fees, annual credit card fees, website subscriptions, termite service renewals, etc.
- Tertiary bills are monthly bills for “nice-to-haves” such as Disney +, Netflix, HULU, streaming music, Google Drive, Photos, Apple Subscriptions, etc. We separate these because these are the first to go in a pinch.
Debt Service. How much debt do you service every month? Last year, I had to buy a car to travel to San Diego for my final duty assignment.
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Now, I am retiring with a $500/month car payment. However, my goal is to pay it off over the next year. Debt sucks the life out of your BBB, so eliminate it at all costs.
Credit card debt, as well as student loan debt, can truly destroy any chance you have of retiring early. Discovering your BBB numbers while aggressively paying down debt using snowball or avalanche methods is crucial.
Food. The most elusive number of your BBB will be the food budget. Why is it so hard to discover how much you spend on food?
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People simply want to eat what they want, when they want, and not document it anywhere. I guess it gives a sense of freedom to drive up to a fast food chain, dine in at a restaurant, or get food delivered to your home.
I tackle food in three different ways: home food budget, dining out budget, and work days budget.
The home food budget is purely for grocery shopping and eating at home. Put this amount inside its own checking account.
The dining out budget is for when the family “eats out” or “delivers in” together. That means everyone agrees to this purchase. It should have its own checking account and debit card.
The work days budget is for when the parents eat alone during their work days. This money should come out of their personal allowances.
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Personal allowance. Personal allowances are the part of the budget that most people need to remember to include. People assume anything leftover after bills go towards themselves—not so fast.
We must keep our own spending in check. My wife and I each have $750 monthly (roughly $25 daily) for our personal allowances.
This allowance includes gas for our cars, personal food spending, cosmetics, video games, subscriptions, and trinkets.
I like to document my spending on a daily basis, while my wife just uses her checking account as a guide. Either way, you must keep yourself in check for lifelong spending success.
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Saving and investing. The most exciting part of your BBB is saving and investing because it will help grow your income every year.
The more you invest in dividend-paying stocks, the more income you will have outside of BBB to do things you enjoy.
Your goal should be to invest at least $500 monthly during retirement, ensuring you continue to build wealth as you relax and enjoy the view under the palm trees.
Putting it all together. I will review my retirement Bare Bones Budget in a follow-up article. The idea is to separate your income into as many pots as necessary.
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I like to create a checking or savings account for each pot. This way, I can visibly see the remaining cash when one budget requires less for the month.
It becomes addicting to have cash spread across many accounts, meaning you are doing something right. Your Bare Bones Budget is the first step to living your Happy Cash Flow Retirement.
Conclusion. Most people don’t live on a single budget, let alone five or six. I can tell you that you cannot succeed financially without a strict budget.
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Money loves discipline. The more restraint and care you show for your money, the more it will come to you.
Eventually, you can invest extra cash from other budgets into more dividend stocks. Once you have your BBB, you can use any extra passive income that arrives for new experiences.
My wife and I have a BBB of $8,000/month, but we bring in over $4,000 more from other passive income sources. This gives us more than enough to live on our terms. Good Luck!
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