I’m a personal finance blogger. I’m a professional Financial Planner and Analyst. I don’t have a personal budget. What? Jeff, stop being dumb, etc. etc. etc. I know, I know. But I’m serious. I don’t have a budget. In today’s post, I am going to tell you what a budget is, exactly. I am going to tell you why you don’t have a budget. AND I’m going to tell you how you can still be very financially smart without a budget.
What is a Budget?
A budget is an allocation of your money before you have it. I’m going to get a paycheck on Friday. You’re thinking “Jeez, brag much?” If I were budgeting, I’d have my money allocated towards my May 2017 expenses. A budget is a great measuring stick of typical expenses. Everyone should budget at some point in life. Budgeting is a great exercise (not a habit). When you budget, your eyes will be opened to all of the ‘sins’ you commit in your finances.
For example, about 4 years ago, my wife and I decided to budget our money. We pulled 3 months of our debit card transactions (we don’t use credit cards) and laid them out on the table. Our plan was to save some money up and buy a new house. We summarized our expenses into 3 buckets: debt, bills, fun.
My wife and I spent over $150 per month on eating out (the entire ‘fun’ budget) EACH. $300 is a lot of money spent on Tim Horton’s coffee and Donato’s pizza. It was eye-opening for us. We committed to eating out less.
Without going through this budgeting exercise, we wouldn’t have realized we were spending nearly $4,000 per year on coffee and pizza. If we had invested $4,000 in the stock market instead, we would have had well over $7,000 in our Roth-IRA instead of in the pockets of restaurant moguls.
Everyone should go through their expenses and establish a budget.
Why you don’t have a budget
Budgets suck. Must I elaborate? Budgets suck, a lot. I don’t like being disciplined. A budget requires me to discipline myself. A budget requires me to hold myself accountable. You don’t have a budget because you don’t want a budget. You’re a grown up. You know what’s good for you. You don’t have a budget because budgets suck.
Most of the previous paragraph is true. But the real reason you don’t have a budget is because budgets DON’T WORK. We use budgets wrong. We use budgets as a way to discipline ourselves. We use budgets as a way to build for our financial future. We use budgets wrong.
A budget is a measuring stick. A budget is an exercise. A budget is a summary. A budget is not a way to manage your life. A budget will not motivate you to save money long term. Disciplining yourself will not motivate you to live within your means long term. Making yourself accountable to a budget will not work. You need something bigger if you want lasting success with finances.
Motivation doesn’t come from yourself. Motivation comes from something bigger than yourself. The reason you don’t have a budget is because you aren’t motivated to build it and stick with it.
How can I stop being dumb without a budget?
Budgets suck. Did I say that already? A budget is a way to manage your money. A budget is not THE way to manage your money. There are hundreds of ways to manage money. Most of us use a combination of these ways. None are right, none are wrong. You have to manage your money. “If you don’t manage your money it will manage you” (sound familiar? Check this out: 7 annoying financial clichés and why you should live by them).
1 Automate Retirement Savings
Enroll in your employer’s 401k plan. If they don’t have one, start an IRA or a Roth-IRA through a discount broker (Fidelity, Charles Schwab, Edward Jones, etc.). Do this automatically once you get paid. This will keep you from stealing the money from your future self. Your employer can route a percentage or dollar amount of your paycheck into an account separate from your checking account. Set it up and never see the first 3-10% of your money in your checking account.
2 Automate Bill Paying
This is a pain in the butt, once. Then it’s completely hassle free until you change banks. Go to the websites of all of your utility and debt companies (cable, electricity, natural gas, cell phone, car loan holder, mortgage holder, student loan holder) and sign up for auto-pay. You’ll give them an account number and routing number OR a credit/debit card number.
Don’t forget charitable giving either- you can automate most of this nowadays. My church allows me to automate my tithing.
3 The power of Patience
Next time you go to the mall, leave your wallet at home. Instead, bring along a pad of paper and a pencil. When you see something you really MUST have, write it down. Maybe you see a great shirt at Abercrombie, or the perfect piece of furniture for your living room. Write it down. The store, the item, even the SKU or Model Number if you can find it. 3 days later, get out your list. Do you still want the A&F shirt? Do you still need the Lazy Boy armchair? Odds are, you do not. However, if you still need it after 3 days, go for it (if you have cash). This 3 day rule is a huge money saver. Go into your closet and count the number of shirts hanging there with a price tag still attached. Count the number of shoes you own. How many have you worn less than 5 times? All of those purchases could have been avoided with the power of patience.
4 Monitor your Spending
There is a HUGE difference between budgeting and monitoring. A budget is a pool of money allocated to a certain company. For example, you might have an electricity budget. The money in your paycheck is partially allocated/budgeted to your electric company. Monitoring your expenses is much more motivating. I pull up my Chase bank account a few times per week. I look over the expenses and sometimes I’m startled by them. For example, my natural gas bill was $100 last month. $100 is a lot for us. We heat the house and we cook with natural gas. Typically, our gas bill is in the $65 range. Monitoring this expense allowed me to do further analysis. What I learned in the further analysis is. We usually go out three or four times per month. By skipping out on those $20 - $50 outings, we increased our natural gas bill by $35. But we reduced our ‘fun’ expense line by $80.
Bringing it all back
Budgets are tough. Every time I’ve created a budget, I’ve gone over it at some point. Then I get mad and scrap the budget or discipline myself into not doing something fun in the future. It sucks. Budgets are great for measuring your expenses, but they don’t motivate you into saving money or planning for the future. You have to motivate yourself outside your budget. Automate everything you can. Build a nest-egg. Monitor your expenses and habits, then adjust them accordingly. Doing these things will help you make smart money decisions and stop being dumb.
If you made it this far, I appreciate you. I know this topic is a little off the wall for a financial blog, so please let me know how dumb I am in the comments. Thanks!