We are 3-time budget failures. On 3 separate occasions, I sat down with our computer, popped open an excel document and set out on a fool’s quest to build a beautiful manifesto of our monthly spending rules. All three times I got the framework set up and didn’t follow through. All 3 times we failed. Budgets Suck.
So, if a self-proclaimed money nerd can’t get excited enough to maintain a budget, there must be some non-money nerds out there that are in the same boat.
The good news, if you find budgeting unsuccessful, there is another way to manage your money.
Budgets Suck, Build Wealth Without One
Before I lay out the reasons I despise formal budgets if you are currently using a budget and it works for you THAT IS GREAT! This is all about finding a solution that works and I know there are budgeting systems out there that change people’s lives.
If you have tried and failed at building or following a budget or don’t think you can stick to the one you are currently on – I am talking to you!
My Beef with Budgets
Time-Consuming
I am not interested in categorizing every purchase we make every month. It’s the reason I bucket the bulk of our credit card bill into “everyday expenses” when I look at our spending.
Feels Restrictive
I don’t like plotting how much we think we should spend every month on certain things. Our lives are too unpredictable to accurately guess how much everything going to cost.
Putting it another way – we aren’t going to skip out on a great experience because I put some number in a cell on excel. Here are some examples:
- If Mrs. AE has a craving for salmon but we are close to our max grocery budget, we will be eating salmon
- When friends randomly roll through town and they want us to meet them for a Twins game, dinner and drinks – I wouldn’t check my computer to make a decision for me
I know people will say “why not just transfer money around in your budget as these things happen?”
My answer….Why write it down, and put effort into it if I am not going to follow it? If I can change the rules in the middle of the game, is a budget adding any value? Is it holding me accountable?
Ultimately they failed for us
Why keep trying something if it’s not working? After 3 failures we decided we needed another solution, something more flexible that still enables us to hit our goals and build wealth.
You can build wealth without budgeting
Over the last three years, we have been working a different system and it is definitely working. If you need to see the proof (it’s ok, you shouldn’t trust everything you read on the internet) you can look at our Net Worth progression over the last 5 quarters and see the progress.
Before we get too far into this post let’s review a few terms I will use moving forward
- After-Tax Income: Take home pay, for the purpose of this post we will use 2 paychecks every month
-
Unavoidable Costs: Costs that are difficult or impossible to cut and can be estimated monthly
- Mortgage, heat, water, electric, insurance, cell phone, internet, car loan, gas, student loans
- Variable Costs: Costs that are not mandatory for survival and could be cut out if necessary, these vary heavily month to month and are hard to estimate.
- Savings Rate: % of after-tax income saved
Turning Terms into a Plan
After Tax Income – Unavoidable Costs* – Savings Amount = Variable Costs Bucket
How we make this work
- We set a yearly financial goal for our savings rate and set up automatic transfers
- 401K, Roth IRA, Brokerage, Emergency Fund
- Without thinking or any manual intervention, 39% of our After Tax Income is moved to savings and investment accounts
- Whatever is left in our checking account after Unavoidable Costs and our automatic savings is guilt-free spending money. We do whatever we want with and do not separate it out from entertainment, food, drinks, buying non-essential products etc.
- I periodically check our credit card balance throughout the month and if it starts getting out of hand, we take it easy for a week and then resume our normal spending
Our philosophy: Set a goal on how much we want to save, automate the savings, anything left over can be spent guilt free.
You can use either a dollar amount or a percentage as a savings goal and start working towards it. If you have debt, set a goal on how much extra you want to pay off this year and start increasing your payments by that amount.
We have found success with small, incremental changes over time, we didn’t start out with a 39% savings rate. It has taken us a few years to figure out what we actually care about and eliminate wasteful spending.
An example of a small, incremental change – Increase your 401K contribution 1% every quarter for a year.
Reviewing Spending is still important
Don’t confuse my hate of budgeting with controlling your spending. Even after using this solution for 3+ years, I still think there is value in periodically reviewing where our money went. If you are just starting out you should review your spending monthly to make sure you are spending on things you actually value. Systematically cut out the expenses that don’t bring you happiness.
Overspending will kill any budgeting solution you try to implement. You will only find success if you systematically cut out expenses that do not make you happy. A good rule of thumb, if you don’t remember the expense, chop it.
Take Aways
If you have tried and failed at budgeting or uttered the words BUDGETS SUCK on multiple occasions, give this a shot and see if it works for you.
Advantages
- Guilt free spending of any money left over after we hit our savings rate
- Automation makes it easy to pay yourself first
- Easy to maintain
- Set a savings goal, make it happen automatically, wing the rest
- Clear focus on the only number that matters, your savings rate
Disadvantages
- Certain expenses can build over time unchecked (part of the reason we still do a spending review every few months)
- If you like to have a lot of control, it might be tough to let your spending go un-categorized
After doing this for a few years, we are in a pretty good groove and we haven’t struggled to pay off our credit card at the end of the month. Over time your “Only spend on the important stuff” habit will form and you will only need the occasional check in.
Budgets suck 🙂 Be rich without one
We are right there with you but I know many disagree. We will try a budget when I leave full-time work and we downsize our house – just so we know what we are spending. It won’t be as complicated then. But I’m not sure how it will go either. We are likely to do what you do and just use our frugal habits and follow our accounts, rather than every line item or receipt. I’m going to push the budget idea hard on my kids (20 and 18) though!
Totally fine for others to disagree, gotta find what works – I think building sound saving/spending habits is more important than anything else.
Thanks for the comment Vicki!
Thanks for sharing your philosophy on managing money. I’m a huge fan of this philosophy as my strategy is more or less the same. I decide on a minimum savings percentage, save it, pay my bills, and spend the rest guilt free. The only difference is that I do create a budget so that I’m aware how much I spend on the other categories. I usually try to review my spending every one to two days. Also, I try to set a savings target that doesn’t overextend me and I try to be realistic. As long as I’ve saved my minimum target amount and I’m in a better spot financially each time I get paid, I can go through my week guilt free. Thanks again for sharing!
Thank you, Graham
Guilt free enjoyment after paying yourself first feels pretty great
::clap clap clap clap:: Totally agree. We equally suck at budgets (which, admittedly, will get more interesting in a few months when we retire early and no longer have paychecks coming in — but that’s a different challenge). But we’ve had great success doing almost exactly what you’re doing. Pay ourselves first (aggressively), live off the rest. Check in on spending occasionally and trim the stuff that doesn’t make us happier, pay ourselves a little more, live off the slightly smaller remainder. Repeat, repeat, repeat. 🙂
The incremental increase in savings! Boooooooooyah!
Be curious to see if you switch your approach after the paychecks stop coming in.
Thanks ONL!
This is a good point, but I argue that you need to have discipline to follow this approach. I didn’t have a budget once upon a time and that’s how I got into debt in the first place. A budget-free approach works better if you already have strict money habits and are already on the road to FIRE. A majority of people could definitely benefit from a budget of some type, since most of us aren’t aware of our spending habits. But yeah, after a while, it’s completely feasible to dump the budget if it’s not working for you.
I think you have to be disciplined to follow any approach, if you don’t actually want to change you won’t and I don’t think a budget or any solution changes that.
If you’re able to achieve your goals, that’s awesome. I agree budgeting is not for everyone. Automating and paying yourself definitely helps in the process. This is a thought-provoking post. I think one of the reasons why I use budgets is to constantly find ways to optimize passive income, and reduce spending. But it can become addictive too!
I track, but don’t really budget – there are no limits on any one category. We tend to spend approximately the same each month, one way or another. But I do like to keep tabs on spending (it sounds like you do too – when you check your statements), so we can scale back if spending higher than usual. Like you, we automate ALL of our savings – this is the key to consistency.
Years ago I attempted the Dave Ramsey envelope system. It failed miserably. I think it lasted a couple of weeks. Now I pretty much do what you guys do. Much easier! Automate savings and keep track of your spending. That’s the way to FI!
I basically follow the same system: focus on savings rate and then just spend the rest without worrying about all the different category limits. But I also think I’ve had a lot of practice in terms of honing “spending on the important stuff”.
What would your advice be for those who aren’t really intuitive spenders yet?
Thanks for the comment
For non-intuitive spenders
Start with a spending review – at least monthly and see where your money is going today. Take aim at spending that is due to poor planning/laziness (eating out every day at lunch) and spending that didn’t bring you any true value (unused subscriptions, items in your house that are never used, etc).
I prefer to work off goals that connect directly to my specific problem “only eat out once per week” for example if I eat out a lot.
I also throw this disclaimer out, its not going to happen overnight, changing habits is a process
We use basically the same strategy and have found great success with it. I always felt kind of guilty being a money guy but not having a budget. Like I was fraud or something. Glad to hear you and others are using similar strategy.
haha, I know what you are talking about and can relate to that feeling.
We run a very similar approach where we automate most savings and then go under that line instead of budgeting. Still like you noted we do a yearly spending review where we cut expenses in certain areas. It works well once you are in a groove, but I wonder if budgeting is a better approach when starting out just because so many don’t even know how much they spend monthly.
We have a formal budget that we set, but I wouldn’t say we are strict about following it. We try to check in on our budget every week (sometimes this slips to once a month.) With a budget set in Mint, it is easy to see where we are overspending. Then, we scale back on the categories we are overspending in. OR, if our food budget, which is broken down into groceries and going out to eat, is high on the going out to eat side early in a month, we adjust and focus on eating all meals at home.
My system is similar to yours. I do think there are those that need a budget though. Not everyone will focus their money in the order you’ve outlined. Congrats on figuring out what works best for you and thanks for sharing!
I’ve used both depending on my goals. When things were tight and every penny counted, I budgeted and tracked everything. But when I’m in my “normal” saving mode, I automate my savings and investing and spend what’s left. Dr Thomas Stanley referred to it as an “artificial environment of economic scarcity” in The Millionaire Next Door.
Dr. Thomas has a fancy way of putting it – I equate it to choosing to live paycheck to paycheck
I have a budget, but I’m not fussed if I go over it at all. I just try to not go over too much or too consistently. If I go over too much, I’ll re-evaluate the amount. For instance, I think I’ve only been under my food budget twice in the last year. I have it set low so I guilt myself into actually doing things I’m supposed to (bringing lunch to work, making dinner, not wasting food, etc). I’m not going to limit myself just because it doesn’t “fit” in my budget. It does take a lot of discipline though!
Oh man, I must be the ultimate nerd! Budgeting is what I look forward to on the weekends. Like you and most bloggers above me, we don’t necessarily need to and for the most part we keep to what you do actually. We just do the numbers because I’m weird and it’s fun counting money. A lot of us PF bloggers are conscious enough to not overspend. But for just as many others, they really need their hand held repeatedly and that’s OK too!
Budgeting your whole earnings is a good thing , but here is the case explained when we we need not budget our amount. Budgeting is not the primary thing , if you can build your wealth without it. But for achieving that the key points to be followed are Use your earnings for anything only after deducting the necessary costs and savings.
We have never budgeted. But we track to a penny what we spend. We also paid ourselves first when working by maxing our Roths and 401K/403B.
Last month I spent a little more on food than I like to. Today we would normally get fresh fish but we happen to have plenty of food in the refrigerator that I need to freeze or use. So I’m not spending an extra ten to fifteen bucks on fish.
Just this week I was thinking I’m so over budgeting i.e. feeling stressed when I ‘overspend’ in a certain ‘category’ on some table. So I’m very glad to have read your article AE. I already track savings rate and maybe building that up without going into debt is enough. I think I might try your approach. It’s not like it’s irreversible.
Outstanding !! I feel the exact same way and have been doing this for years. I have tried budgeting several times and failed every single time. Thanks for articulating my opinion for me 🙂
-Brian
I’ve been basically doing the same thing. Its not always a bad thing to do, but going home a entering every purchase I make at McDonalds or Walmart is too much work. I screen/ filter most purchases on the front end anyway to keep things under control. Occasionally Ill track a category just to see how much im “really” spending over a year just to make sure im not blowing too much money on it. Im always looking to fine-tune my habits so I can improve.
I have mixed emotions about this because I really think it depends on where someone is at with money. First off, it is certainly a valid approach and one we have followed for the most part but it is based off of a budget. As for budgeting, if someone is starting out and has no discipline I really think they need to be aware of every purchase and track it against a budget of what they think they spend. That will serve as a wake up call and in that case the budget worked since it should the discrepancy.
I don’t really get the anxiety of going over a category if you stay within your overall spending limit but if you go over it then you could easily fail at this method as well. I also think you need to have a rough budget to understand what you can automatically save anyways or how it can adjust if you have a change of income. You can’t just set it up without having some sort of understanding what you spend to begin with. Also with mint.com and others it is very easy to track your spending against your budget so it really isn’t as much work as it could be.
I guess you could call it a “budget to not go in debt”
I agree with what some of what you said – in order to set a goal you do need to know where your $ is going today and start working towards purposeful spending.
On the discipline front, if you aren’t disciplined with a budget (or even more so to track/review your spending at a micro level) they won’t work either. Discipline is required for any method.
Yeah, I agree, budgeting is too time consuming. I use several credit cards, and I often make purchases that my boyfriend pays me back a partial amount for (like when we go out to eat), so budgeting would get really tricky!
I like the idea of just spending in moderation while trying to spend only what you actually have left over after diverting some to savings and reserving some to pay the rent, utilities, phone bill etc. (as opposed to putting more than you are making on a credit card).
I HATE budgets! But I’m also not in a position financially where I need one. I have tried to track my spending via spreadsheet and I actually succeeded once four years ago. Then I created a spending plan and it went out the window. Too inconvenient. Now I use Personal Capital to track everything and just TRY to limit my food expenses. That’s where most people can save.
Budgets suck big time! Never been a fan of them, never used them!