If you are planning on living off of your Bitcoin, you will need to make some adjustments to the way you handle your money; gone are the days of getting your pay cheque, letting the debit orders go off automatically, and spending the rest on whatever you like and then putting something away for a rainy day.
When you migrate to a Bitcoin standard, you’re going to have to put the work in and get pretty used to doing a lot of mental math on the fly, or your smartphone’s calculator will be your new most used app, step aide Twitter.
Why would you move to a Bitcoin standard?
Only some people can stomach the volatility of Bitcoin, so moving to a Bitocin standard is not for the faint of heart and those without conviction. If you can live on your country’s fiat standard and happily save in Bitcoin, I don’t see why you would want to move over just yet.
If it ain’t broke don’t fix it, right? But it’s a different story if your home nation’s central bank is hell-bent on ensuring you go broke as fast as possible.
Moving to a complete Bitcoin standard requires some serious motivation either:
- The speed at which your local currency’s devaluation is becoming unmanageable.
- You get paid in Bitcoin or choose to get paid in Bitcoin.
- To experience life on a Bitcoin standard
- It’s your only form of savings, with other assets being illiquid (Like Real estate or your pension fund).
The first step is to ensure that you have enough Bitcoin to cover your expenses for a given period. For instance, if you plan to cover your monthly expenses, you will need to calculate how much fiat currency you would need and set aside that amount of Bitcoin to cover those expenses.
Next, you would like asses what portion of your Bitcoin holdings would be required to get through the month and maintain a portion of that in a local currency you transact with daily. This way, if Bitcoin’s value drops significantly, you still have enough to match your obligations and rebalance once that next paycheque arrives.
If you are planning to hedge the volatility each month, you could hold a portion of stablecoins, or try out synthetic stablecoins backed by Bitcoin.
What are synthetic stablecoins?
Synthetic assets are created through the process of collateralising Bitcoin to issue, in this case, a fiat-denominated unit of account like a US dollar, Euro or British Pound. This method involves locking up a higher value of Bitcoin to account for volatility and still allow you to manage your obligations without being liquidated.
If you’re not familiar with synthetic assets backed by Bitcoin, I recommend checking out some of the implementations available such as:
The reason I chose to look at synthetic stablecoins over something like a traditional stablecoin is that these assets are derivative contracts backed by Lightning balances. So the asset you see, while in another unit of account, still retains all the properties of satoshis on the Lightning Network, in that it can settle invoices with any participants using a Lightning wallet.
If we were to use a traditionally issued stablecoin like L-USDT on Liquid, we would achieve the same results for budgeting terms. Still, when it comes time to settle, you might have to deal with additional swapping costs to get it onto a network the vendor accepts, and this adds more friction to your Bitcoin experience.
Another reason I chose synthetic stablecoins is that you can denominate them in various local currencies. If you’re not living in a USD-based country and you’re using L-USDT as an example, you now have to work out the USD to your local currency balance on your expenses, which is a pain. If you’re simply using Bitcoin to create balances of your local currency, it makes it much easier to partition value for your expenses.
Now that you have an idea of how to manage your balances let’s explore different budgeting strategies and how you can use them to manage your finances using Bitcoin.
Incremental budgeting.
Incremental budgeting involves increasing or decreasing a budget based on the previous period’s performance and reduces the workload required to keep tabs on the budget.
Instead, you just take your expense list from a pre-determined period, then adjust based on projections for higher costs in the coming year, predicted revenue growth, etc.
You’d also adjust the new budget based on how under or over budget you were previously.
Incremental budgeting doesn’t require accounting expertise and is probably the method that is most compatible with having a variable income and savings, which comes with the territory when you have considerable exposure to Bitcoin.
Zero-based budgeting.
Zero-based budgeting involves starting with a zero budget and assigning a budget to each expense category down to the last satoshi. This approach works under the assumption that every new fiscal year or at the start of each quarter, the budget begins at zero.
Given how Bitcoin can move in a year or even a quarter, this one can be a challenging budget to stick to, as allocations can quickly get out of wack. You could be drawing down certain regular spending categories in a bear market, and during a rally, you’ll find that those categories with infrequent spending now hold an excessive budget.
Flexible budgeting.
Flexible budgeting involves adjusting your budget based on your actual expenses and making allowances for inconsistent revenue, which works well with Bitcoin as long as you can set a certain margin for error.
If you’re building a flexible budget and you’re accounting for only 10% drops, if Bitcoin drops 50%, your entire budget would be obliterated, so you need to prepare for the worst and know how much volatility you can stomach and then leverage the stablecoin balance as a failsafe.
Percentage-based budgeting
Percentage-based budgeting involves allocating a percentage of your income to different expense categories. For example, you might allot 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment.
Again like zero-based budgeting, your allocations can get out of whack, but with percentage based, you now have the ability to rebalance based on the percentages you set or even change the percentage sizes of each category as Bitcoin rises and falls. In addition, you need to review what requires immediate servicing and maintain appropriate fiat denominated balances.
Envelope budgeting.
Envelope budgeting involves dividing your budget into envelopes or compartments for different expense categories. If you’re not good with numbers or don’t want to put too much thought into your budgeting but want to stick to it, this strategy might be a better option for you.
Envelope budgeting requires you to put a specific amount of money into physical or digital envelopes labelled with a certain category. When that balance for that category is exhausted, it is done; you’ve used up the budget for that department or type of expense for that month or budgeting period. While a bit of a rigid strategy, it might be suited to those with impulse control issues and who like to spend on a whim.
To use this strategy with Bitcoin, you could create sub-wallets for each category and assign the funds according to each. Alternatively, you could maintain an Excel sheet with the different balances per category and update balances as you spend, which will require additional admin.
Build a budget that works for you.
Living solely on Bitcoin requires careful planning and strategy, or you can find yourself drawing down your Bitcoin position faster than you would have liked. You will need to actively manage your finances by allocating a portion of your Bitcoin holdings to another unit of account, identifying your expenses, and using a budgeting strategy that suits your needs.
Whether you prefer activity-based, incremental, value proposition, zero-based, flexible, envelope, or percentage-based, tracking your expenses and adjusting your budget is essential. With the right budgeting strategy and discipline, you can live on Bitcoin and achieve financial stability.
In a world where we’re so used to mindless consumption and needless purchases, it may be a feature, not a bug, that budgeting with Bitcoin requires such attention to detail. It might give you pause on your spending, and force you to consider every purchase you make to ensure that you only acquire the things that really spark joy.
Do you take self-custody of your stack?
If you’re new to Bitcoin and have not ventured down the self-custody rabbit hole, what is stopping you? If you’re already self-sovereign, how has the experience been since you took hold of your funds? Are you on a Bitcoin standard? How do you balance your budget?
Let us know in the comments down below.
We’re always keen to hear from bitcoiners from around the world.
