Evolve Your Money Management Beyond the Budget
Budgets are a lot like diets — a lot of people know they should be on one, but the thought of it is met with a collective "Ugh" (cue heads hitting the table and exasperated sighs). All this budget angst has me wondering — does budgeting really even work? Just off the top of my head, I can think of a handful of ways traditional budgeting is a less-than-perfect system for managing our money and living within our means. (See also: 8 Ways for Improving or Starting a Budget)
How Budgets Let Us Down
Here are just a few of the ways.
Creating a Budget Requires Discipline and Time
Let’s face it; most would-be budgeters never get past the header row of their spreadsheets. Confusion, intimidation, or boredom sets in and prevents people from estimating and tracking their expenses successfully. In this way, budgets are the financial equivalent of a treadmill — they represent the very best intentions, but seldom get used.
Budgets Are Difficult to Stick To
Even when budgeters create a viable, realistic system to keep their spending in check, they seldom stick to it. Budgets bend, expand, get tabled, and eventually abandoned.
Budgets Are Designed to be Inflexible
Budgets are usually stagnant, even when our incomes aren’t. Successful budgeters train themselves to live and die by the parameters they’ve established on paper and seldom retool, rework, or rethink their approach. As our incomes, expenses, and opportunities fluctuate, our budgets usually remain locked-in.
Budgets Don’t Teach; They Only Modify Behavior
Budgets may be a great temporary tool for financial training (or retraining), but they don’t work well for long-term strategic money management or for creating and seizing dynamic financial opportunities.
Budgets Don’t Encourage Innovation
Most budgeters focus heavily on the expense side of their personal financial equations without giving the same level of attention to the income side. It’s important to innovate — not only by cutting expenses, but by being challenged to increase income. If your income and expenses never vary and you stick to the plan, you’re a gold-star budgeter. But that rote approach isn’t necessarily the recipe for long-term financial success.
A Better Way
So, is there a better way to keep tabs on our spending and live within our means long-term without the constant number-crunching and sense of deprivation? I think so. Instead of siloing every last dollar, I think it makes much more sense to adopt a four step money management approach that saves first and rewards last (with more saving).
1. Artificially Reduce What’s Available to Spend by Paying Yourself First
Skim off or divert 15-20% of your income before the money even hits your checking account. This would be the same as the "savings" column of a traditional budget. Direct the funds to whatever investment vehicles you’ve chosen based upon your level of risk, goals, savings horizon, etc.
2. Next, Pay All Fixed Expenses
A portion of the remaining funds is used to pay overhead like mortgage, cell phone, electricity, etc. (according to pay schedule and billing cycles).
3. Live on What’s Left
No complex spreadsheets, no rigid guidelines, no robbing Peter to pay Paul. The remainder of your variable expenses gets paid via the balance. Overspending in one area either depletes the rest, or becomes a call to boost income quickly. Make an unwavering promise to yourself that padding the process through the use of credit is not an option.
4. Save the Rest
Any money that’s leftover gets cycled right back into savings, rather than accumulate for next month.
Granted, this method isn’t for newbies or the faint-of-heart. I think of it as Budgeting 301 after prerequisites like 101 and 201 have been mastered. It accomplishes the same thing as traditional budgeting, but leverages your hard-won discipline and knowledge and allows for more flexibility. Since every dollar isn’t flagged for a purpose, spending can be more fluid.
Over time, even saving becomes easier; the "stealth" goal of pocketing what’s left over becomes a powerful motivator — traditional budget categories expand, contract, or don’t get funded at all. As each spending cycle draws to a close, your motivation to cut back, get creative, or earn more is rewarded by an extra little lump sum that no traditional budget would have factored in.
If you’ve paid your budgeting dues and honed your money management skills, it’s OK to waver a bit from a life ruled by rows and columns. If you know how to avoid temptation or compensate for a splurge without running to plastic, explore a more hands-free system that acknowledges your skill and might even help you save more in the long run.
Do you follow a traditional budget or has your savings strategy evolved over time? What budget tricks or tips do you use that might be considered unconventional?