An Anti-budgeters Approach to Budgeting
You may favor a root canal over going through the process of budgeting. I get it. I dislike the process of budgeting myself. However, there are other ways that you can accomplish what budgeting does for you without a formal budgeting process. I am sharing what works for me.
Start by making sure you are investing an appropriate amount into your employer sponsored retirement plan at work (usually a 401(k)) or IRA. For most people, this amount is at least 10% of income. It may be more if you’ve started saving later in life. Then automatically invest 3% to 5% of your income in a side fund that is liquid, such as a money market fund. After you’ve built up at least 3 months of expenses in this side fund, you can start investing your side fund in something like a low-cost index fund or ETF. Choose one that doesn’t have much turnover and doesn’t result in a big tax bill.
You will use the side fund as an “emergency fund” in case there is an unforeseen large expense (hospital bill, new roof, etc.) or as a smoothing account. A smoothing account is used to pay additional expenses in months that are more expensive (think December). This will keep you from going into debt. If you are already in debt already (especially credit card debt), you may want to use the side fund dollars to pay this off as fast as you can*.
Once you’ve done this and “you’re paying yourself first”, you can spend the rest without too much worry or guilt.
If you find that you still have money left over each month, you know you can spend more or increase your savings. On the flip side, if you find that you are going into debt each month, then you have some adjustments to make. You may need to do some formal budgeting to find out where your money is going and where you need to cut back.
If you are “forced” to do a budget because of monthly shortfalls, consider charging just about everything you purchase for a couple of months on a cash back credit card. The statements will organize the details of your spending habits. Be sure to pay off the balance each month. If credit card debt is a problem for you, avoid doing this. Otherwise, do your best to keep track of your spending on a budgeting spreadsheet.
The whole point of budgeting is to live within your means, avoid bad debt, save for your future, and have your income provide you with what’s important to you (things, experiences, etc.). Living within your means (or below it), is possibly the most important step that will lead to a secure retirement.
Enjoy the journey!
*There are 2 approaches to paying off credit card debt. In the first approach, aggressively pay down the smallest account balance first and the minimum on the others. Once the smallest is paid off, target the next largest account balance, and pay the minimum on the others. Repeat until they’re all paid off. The second approach would focus on the account with the highest interest rate first. Use this approach if one account has a significant higher interest rate than the others. If the interest rates on the various accounts are similar, use the first approach. You’ll feel more satisfaction in seeing the cards being paid off over time and this will motivate you to continue.