Throw Away Your Budget
Budgeting is sometimes hailed as the solution to our financial woes. It is seen as the key to a prosperous life and something that, if you’re not doing, you are irresponsible and failing at life.
In reality, budgeting sucks. But thankfully it should become completely unnecessary for us all, if it isn’t already.
Budgeting is Like Dieting
Dieting is short-term, and important when drastic changes are needed. Restrictive eating and intense meal-planning can help turn things around, but are never the long-term solution.
Similarly, budgeting is the short-term activity used when things are on fire. Planning daily spending and implementing restrictions can help support longer term changes. In addition, certain spending behaviours should be avoided completely, for your entire life. These include using payday loans, relying on credit card debt, and chronic overspending.
When you hear testimonies of how dieters finally got their health in check, for the long-term, you hear them say, “It became more than a diet. It became a lifestyle.” Their food choices became automatic, and other areas of their life supported their healthy eating. Areas like physical activity and sleep improved to complement their eating.
At the beginning, foregoing the calorie-dense fast food and chips required mental and emotional effort. Over time, though, habits were formed and the choice of carrots over french fries was automatic and easy (or at least easier!).
The good news is that, unlike the food we eat, we can turn our money decisions into habits immediately. Habits that will form the basis of a lifestyle. But first, step one.
Do you actually need a budget? Ask yourself this: Are my finances going in the right direction at the speed I want to meet my short- and long-term goals?
If the answer is yes, then don’t change a thing. Don’t track your spending. Don’t track your saving. Don’t sweat it. (Mental sweat that is. Actual sweat is a very healthy thing).
If goals are not being met, then set aside the time and establish your budget. First, look over earnings and spending for each of the past 3-6 months and figure out where your money is going. If earnings and spending are consistent month-to-month, just use the last 3 months. If things are less consistent, due to contract work or irregular expenses, for example, look at a minimum of 6 months. There are many helpful apps and spreadsheets you can use to do this.
Eliminate and reduce overspending where possible. What is “overspending”? This should be obvious when you have your spending laid out clearly in front of you. Commonly, this ends up being bloated cable television packages, restaurant bills, and other entertainment spending. Overspending may also come from a desire to always drive a new car or spend on toys or renovations around the house that can wait.
At the end of the day, month after month you need to be earning more than you are spending. Then, move on. Put the budget aside.
Set Goals and Set Savings
“How much do I need to save?” is always going to get the same answer as “How many calories should I eat?”
Your savings will always depend on your spending goals. And the percentage that you save will depend on your spending goals and your income. For some, to meet every single life goal will require saving 5% of their income. For others, it may be 30%.
You need to take the time to think about the specific long-term spending goals you have. What does retirement look like for you? What will your housing situation be in the future? Are there upcoming school expenses (for yourself or your children)? These all require money in the future, and that money comes continually from the present.
If this isn’t your forte or procrastination tends to get in the way, you can reach out to a professional planner.
The Emergency Fund
Because life happens, you need to have money set aside for the unknowns in an emergency fund. Dishwashers and cars break, jobs are lost, and people get sick. You should always have at a minimum 3 months worth of expenses set aside in a savings account for these emergencies.
When emergencies happen and the fund is used, long-term savings should be diverted to build this fund back up. In this way, you’re never forced to take out a loan and pay interest, or worse, be unable to pay for emergency expenses.
“Pay Yourself First”
Once you’ve established your goals and the money they require, the concept of paying yourself first comes in. This is really the process of putting the money aside for your future self before spending that money on current consumption. When paycheques come in, because you know what future goals will require, a percentage needs to go immediately to another account. This money cannot be touched by current needs and wants.
The best way to do this, and how you can immediately form a saving “habit” is through automatic deposits. Unlike eating, here you just need the discipline once to establish how much you will set aside for the future. You can make it bi-weekly or monthly, and have money transfer to a savings or investing account without lifting a finger. If goals change, just change how much you transfer. When the future need arrives, that money has faithfully been accumulated.
As a result, “living within your means” becomes more complete. It is not just spending less than you make each month. Living within your means also has to take into account your future spending.
Unfortunately, this likely means you have less to spend today. Spending may be tighter. Fortunately, this means you are looking after yourself and your family in the future.
Me and My Wife are Opposites
In school, I was never good at studying. I would put it off, and do what I felt like in the moment. I would have little bursts of studying and discipline, but it was never a part of a plan. In the back of my mind, I would always feel unease that I should be studying more, and this was a constant stress. When I was having fun, the stress was ever present and I could never fully enjoy, or be refreshed in, my downtime. When I tried to study, I lacked the energy to fully apply myself. I found out that constant stress was exhausting.
My wife was the opposite when she was in school. She did school properly. She would lay out all of the assignments and exams she had in her semester, then set aside the time to study that she knew was required. In those blocked off times, she would study. Outside of that time, she would honestly just do whatever she felt like. Simple as that. She would socialize or watch movies or spend hours online. She could fully enjoy her free time because she knew that her school needs were continually being met according to her plan.
Our financial lives can and should be viewed the same. Instead of small bursts of disciplined saving surrounded by living in the moment, overspending, and feeling constant stress, we should all be more like my wife. After we set our plans, put the money aside for future needs first, then whatever we have left is free to use however we want. You can honestly do whatever you want with that money. Go spend it on new toys, on an impulse vacation, on new and unnecessary shoes. Freedom to spend how we want really doesn’t require a huge 6-figure salary. You can throw away you budget.