The Bombproof Budget
Short on time? Skip to the Action Steps!
Are you tired of feeling like your finances are constantly on the brink of explosion?
Well, fear not! I've detonated my budget enough times to know what it's like when nothing seems to work.
- I've somehow managed to live month-to-month while making six figures at a w2.
- I've filled emergency funds only to drain them DAYS later for fix-and-flip rehab costs.
- I've told my wife that we should go FULL Dave Ramsey, only to justify our loans because, "We pay 4%, but I can make 15% on this investment."
- I've argued with my wife about whether we should fund a vacation or buy an equally expensive online course.
I could go on...
My problem has always been that there is just too much contrasting advice when it comes to personal finance, and every time I learned something new, my shiny object syndrome would kick in, and send me off in a new direction.
Being the engineer that I am, I decided it was time to create MY OWN framework. One that would combine Dave Ramsey's "Baby Steps" with Robert Kiyosaki's "Cashflow" board game.
This framework has gone through several iterations to satisfy:
- The entrepreneur in me, who understands that the further you live below your means, the faster you can expand your income.
- The husband in me, who knows that quality of life is sometimes more important than the cost of living.
- The investor in me, who knows that for every dollar sitting in our bank account, we are losing not only to inflation but also to the opportunity cost of not putting our money to work.
- The father in me, who knows that having little to no cash in our bank account puts my family at unnecessary risk and adds stress where it otherwise is not needed.
I've created The Bombproof Budget framework over several years to address the multiple contradictions I've experienced when managing my family's finances.
Here are some benefits that I believe my framework provides:
- Following a decision tree forces us to take consistent action without deviating from the original goal.
- Automatic investment in personal development stimulates income growth.
- How money flows for discretionary spending puts a rev limiter on my family's lifestyle creep.
- Zero-Based budgeting forces us to visualize our sacrifices when discussing with my wife what to spend our money on next.
- Focusing on cash flow allows us to visualize how close we are to achieving financial freedom.
An Overview
Before you get to the action steps, you first need to understand the components that make up The Bombproof Budget. It will consist of the zero-based budgeting method, ten category groups, runway, overage funds, a flow chart that guides decision-making, and the software I use for my family's budget.
The Zero-Based Budgeting Method
The Zero-Based budgeting method means that I give every dollar a job. Any good entrepreneur knows that we need to make money work for us, instead of allowing ourselves to work for money.
This method is a habit that requires repetition. We still don't always get it right, but we certainly get better with the more reps we put in. My wife and I sit down for 15 minutes daily to process new transactions and see what's left in each spending category.
Category Groups
These are the category groups that house the sub-categories which we use to track both income and spending:
🛐 GIVING (Builds Character)
🧾 TAXES (Income Withholdings)
🏠 NECESSITY (Cost of Living)
🛡️ SECURITY (Safety of Mind)
😅 UNPLANNED (Shit I Didn't Think About)
💸 CONSUMER DEBT (Ouch, My Cashflow)
🌱 DEVELOPMENT (Grow Our Income)
🎉 LIFESTYLE (Fun & Adventure)
⚔️ WAR CHEST (Business & Investments) < – – OOOOooooo what's this???
⚖️ LOANS (Bridge Loans & Notes)
🛐 GIVING (Builds Character)
It accounts for the 10% of my income I set aside for giving. Giving has developed into a habit that I believe has shaped how I conduct my business into leading with service and integrity.
🧾 TAXES (Income Withholdings)
Accounts for the 30% of my income that I deduct for Uncle Sam, but once I've already set it aside, I do everything within my power to reduce the amount I spend.
🏠 NECESSITY (Cost of Living)
Accounts for the expenses that make up my family's monthly cost of living. This category puts food on the table, keeps us warm, provides modern necessities, and gets us to where we need to go. Nothing more.
🛡️ SECURITY (Safety of Mind)
Accounts for everything that protects my family when shit goes wrong. This covers everything from insurance payments to deductibles, advisory fees, healthcare, and our emergency fund.
😅 UNPLANNED (Shit I Didn't Think About)
Accounts for the 5% of my spending added to the budget for all less frequent expenses - the ones we either forgot about or never planned for in the first place.
💸 CONSUMER DEBT (Ouch, My Cashflow)
Accounts for every liability that's not tied to an income-producing asset (except for our home). I'm a cash flow investor, and the lower I can make my monthly expenses, the higher my monthly cash flow becomes. This means getting aggressive with consumer debt.
🌱 DEVELOPMENT (Grow Our Income)
Accounts for 10% of my monthly income that I spend on personal development, which leads directly to income growth. Because the 10% allows this category to grow as my budget increases, it allows my spending to scale as my income scales. Early on, I would buy $20 books, then $500 certifications, pretty soon I'm joining $5,000 mastermind groups, and setting my sights on hiring a $25k performance coach! (all of which provide WAY more value than a $100k college degree btw...)
🎉 LIFESTYLE (Fun & Adventure)
It accounts for 10% of my monthly income that I set aside for lifestyle. This is where we fund ALL of our discretionary spending. From date nights to vacations, new laptops, and that pet chameleon my wife's been eyeballing for a while now 🙄. As with the development category above, our lifestyle scales with our income. Vacations might be road trips for now, but in a few years, we'll be flying 1st class and staying at the Four Seasons.
⚔️ WAR CHEST (Business & Investments)
This is where ALL of our cash flow ends up. The war chest then becomes a resource for my deal-making strategies. When I look to buy an asset, I only underwrite deals that I could buy with the funds that are in my war chest. This prevents me from becoming the buyer that backs out of a deal because I couldn't secure funding. LET ME BE CLEAR. If I find a deal that I like, I do everything within my power NOT to touch my war chest. (This category deserves a deep dive all on its own.)
⚖️ LOANS (Bridge Loans & Notes)
Accounts for all money I loan to any of my ventures which I plan on eventually getting back. The money used is borrowed from the war chest fund and tracked here.
Runway
Our runway is comprised of these four categories:
🏠 NECESSITY (Cost of Living)
🛡️ SECURITY (Safety of Mind)
😅 UNPLANNED (Shit I Didn't Think About)
💸 CONSUMER DEBT (Ouch, My Cashflow)
We determine first our 🏠 NECESSITY, 🛡️ SECURITY, and 💸 CONSUMER DEBT. Once we have that number, we multiply it by 5%, which becomes our monthly 😅 UNPLANNED contribution.
Then we add all 4 of these categories up, which equals one month of runway.
Overage Funds
Overage funds are an excellent way to simplify our numbers while adding just a little padding for the variable expenses. I like to round up to the nearest hundred in each category group.
For example, on average, my 🏠 NECESSITY category adds up to $2,940.19/mo. I want to add an overage fund of $59.81 so that my category reflects a nice round of $3,000/mo.
Flow Chart
As new income is ready to assign, it flows according to the chart below:
Action Steps
STEP ONE: Deduct Withholdings
As my money flows in, it doesn't matter if it's daily, monthly, or quarterly; I take 10% off the top before doing anything else. Next, I set 30% aside for my tax withholdings. If I successfully reduce my taxable income for the year, all excess money is moved into my war chest.
STEP TWO: Fund the Next 3 Months of Runway
Since I don't receive w2 income, I like to keep at least three months of runway funded for the months ahead. In this way, I am reassured that I have time between capital events before worrying about picking up some part-time income to fill in the gaps. If it is January, and I have February through March funded, then I will send any new income to STEP THREE, but the moment February 1st rolls around, all new income needs to be redirected to funding April's runway before allowing the transition to STEP THREE once more.
STEP THREE: Pay Off ALL Consumer Debt
I like to get LEAN on my expenses. My goal is to become financially independent, not to drive a nicer car or live in a bigger house (those will come later). It's much easier to quit your job if you only need $4k of passive income instead of $10k. Not to mention how fast that additional cash flow accelerates wealth building.
STEP FOUR: Invest 20% into Development (10%) & Lifestyle (10%)
Now that I've cut the fat and my expenses are as low as I can make them, I begin to fund our personal development. We take 10% of our income, which is 5% for me and 5% for my wife, and we invest it in books, courses, subscriptions, etc. We also reward our hard work by funding various trips, date nights, outfits, home renovations, etc. with the 10% that we take out of our income for lifestyle.
STEP FIVE: Save 3 Months of Expenses in a Fully Funded Emergency Fund
The emergency fund is separate from the three months of runway in that we hope never to touch it. It exists purely to provide a buffer against the unknown. Let's say an unexpected event prompts us to spend $10k. We could take care of the emergency without reducing any of the time we have provided by our runway.
STEP SIX: Commit All Remaining Cashflow to the War Chest
With three months of runway, a fully funded emergency fund, and new tactics gained through personal development, I feel as though I have an unfair advantage when it comes to finding and negotiating deals. I'm not in a rush to risk buying a bad deal, I can afford to close even if my creative financing falls through, and I'm protected against any unforeseen obstacles that may arise at home. What's more, is that my deals get bigger and bigger, but my expenses stay the same.
Additional Resources
You Need a Budget (YNAB)
I love YNAB. We've had YNAB for years now, and it's what I've used to test the many iterations of The Bombproof Budget. It was overwhelming at first, but the more I've used it, the more I've fallen in love with this software.
I have nothing to sell you, and I get no affiliate revenue if you click the link. I love the software, and it's my platform of choice for managing our budget!
Sub-Category Examples
These are some sub-categories that my wife and I have used in the past. I've bolded the ones that money flows into.
Examples for 🛐 GIVING:
🛐 The Giving Fund <- money in
💛 Given to Family
🤍 Given to Friends
💙 Given to Strangers
🎗️ Donated to Charity
🏘️ Donated to Community
Examples for 🧾 TAXES:
🧾 The Taxes Fund <- money in
Examples for 🏠 NECESSITY:
➕ Necessity Overage Fund <- money in
🏡 Home Mortgage
🍎 Groceries
🐾 Pet Food & Litter
🍼 Baby Supplies
🧻 Toiletries & Cleaning
⛽️ Fuel
🔧 Vehicle Maintenance Fund <- money in
🌐 Internet
⚡️ Electricity
🔥 Natural Gas
💧 Water and Garbage
📶 Phone Plan
Examples for 🛡️ SECURITY:
➕ Security Overage Fund <- money in
🛡️ The Security Fund <- money in
🏥 Healthcare
💼 Tax & Legal Advisory
🛡️ Term Life
🛡 Auto Insurance
🛡️ Group Health Share
🛡️ Long-Term Disability
🏦 Emergency Fund <- money in
Examples for 😅 UNPLANNED:
🎲 The MISC Fund <- money in
Examples for 💸 CONSUMER DEBT:
💳 AMEX Interest
🚙 Car Loan
💸 401k Loan
Examples for 🌱 DEVELOPMENT:
🌱 Otto's Growth & Education Fund <- money in
🌱 Kiara's Growth & Education Fund <- money in
Ⓜ️ Masterclass Subscription
🔥 Emerge Supercharged Subscription
Examples for 🎉 LIFESTYLE:
🎉 The Lifestyle Fund <- money in
👚 Clothing
🧵 Crafts & Projects
⭐️ Wants & Needs Fund <- money in
🌹 Date Night Fund <- money in
🎄 Events & Holidays Fund <- money in
✈️ Trip Fund <- money in
🔨 Home Improvement Fund <- money in
Examples for ⚔️ WAR CHEST:
⚔️ The War Chest Fund <- money in
🧰 Autobody Shop Aquisition
🇺🇸 USDA Development Project
Examples for ⚖️ LOANS:
💼 Real Estate LLC
🏚️ House Flipping S Corp