I’ve got a confession to make: I’ve never actually kept a budget. Not in the way a lot of people do.
We don’t stop spending in a certain category simply because we’ve reached a budgeted amount for the month.
We don’t spend much time worrying whether individual purchases fit into a monthly budget. Even the big ones. (Actually, especially the big ones).
We look back at our spending to track what we’ve been doing, but we don’t stress about every dollar leaving our account.
It’s a low-stress and low-maintenance approach that doesn’t require much mental energy on a regular basis. And yet month after month we’ve been able to put more into our savings and watch our net worth grow.
I want you to get to this place too, where you can make progress without stress. Here’s how to do it.
Step 1: Automate savings
One of the big mantras in personal finance is “spend less than you earn”.
Or in other words, save money.
And that’s one of the biggest reasons that people budget. By watching what you spend you can make sure that you have enough money left over at the end of the month to put some into savings.
Well a while back I learned a trick from Ramit Sethi that completely bypasses this need. Rather than waiting until the end of the month to “see how much you have left” for savings, you make your savings automatic.
It works like this.
Let’s say I get my paycheck direct deposited into my checking account on the 1st of every month. And let’s also say that I want to be contributing money to my IRA. What I would do is set up a scheduled transaction to move money from my checking account to my IRA on the same day every month, just a couple of days after that direct deposit (I usually do it on the 5th to give myself a little time buffer).
This setup does a few really powerful things for me:
- I set up the transaction one time and then it happens on the same day every month without me thinking about it. This is an incredibly powerful way to build up your savings without having to spend much time or energy worrying about it.
- My savings happen at the beginning of the month, before much spending has occurred. This removes the need to budget in order to allow for savings. I simply have what’s left in my checking account to spend.
Step 2: Regularly save for irregular expenses
What are the biggest budget killers in the world? Those big unexpected expenses that always creep up at the worst time.
Your car blows a tire. Your fridge dies and needs a new compressor. You drop your cell phone in a toilet.
These things suck, but they happen. Not regularly enough to fit neatly into a monthly budget, but regularly enough that if you don’t account for them they can really throw you for a loop.
The easy way to handle them? Make them regular. Treat them like a monthly expense.
Estimate the amount you might need to spend on car maintenance over the course of a year, divide that number by 12, and automatically send that amount to a savings account every month. When your car inevitably needs a repair, you simply draw the money from that savings account to cover it.
Repeat that process for home maintenance, health care, etc.
And this isn’t just for the bad stuff. We also do this for fun things like travel and gifts. So when we want to take a trip, we don’t have to worry about whether it fits into our budget. We simply look at the balance in our travel savings account and see if the money’s there.
Any irregular expense that doesn’t fit nicely into a monthly budget can be done this way.
How do you actually do it? Personally, we actually have multiple savings accounts with Ally Bank, each of which is named for its specific purpose (including a “miscellaneous expenses” account). I find it easy to manage and it works for us. I’m sure there are other banks where you can do something similar.
Some people will just have a single savings account for all of these kinds of expenses. That’s another perfect valid approach.
However you do it, the power in this strategy is the cushion you’re giving yourself to handle the curveballs life throws your way. That cushion makes it much less necessary to watch every single penny.
Step 3: Create rock-solid habits
Habits, not spreadsheets or fancy budgeting apps, are the real key to keeping our spending in line.
When you create a daily life filled with habits that just naturally keep you within your spending plan, it requires much less work to keep your spending in line.
Here are some habits we’ve developed that help keep spending low without much ongoing thought or effort:
- We negotiate to get lower bills. We also cut some out altogether. These are savings that repeat every month without any additional effort.
- We buy pretty much the same groceries every time we shop.
- We make almost all of our own meals.
- We have a number of go-to family activities that are either free, or low-cost.
Some of these habits have replaced other habits over time. Cable was replaced by Netflix. Friday nights out with friends were largely replaced by quiet nights at home with the family.
Not all of these changes are easy to make and they don’t all happen overnight. But if you can dedicate yourself to creating one positive habit at a time, you start creating a daily life that just naturally fits into your spending plan.
Step 4: Track your spending and re-evaluate from time to time
I’ve said that we don’t budget, and that’s true. But we do track our spending.
At the end of each month I sit down and use mint.com to look back through our transactions. I pull out our total spending in each category and put it into a spreadsheet I made that lets us see our average spending over the past 3, 6 and 12 months. Then my wife and I take a little bit of time to look through it together.
What this lets us do is make sure that our long-term spending is in line with our goals. We don’t really stress it if we’re over in a given category for one month. But if we see that we’re consistently spending more than we want to, we have to take some time to re-think our habits and figure out what adjustments need to be made.
The main point here is that the focus is on long-term habits, not short-term spending. This isn’t a crash-course diet. It’s an ongoing effort to create a life where we have to worry about money as little as possible.
All of this takes time to get right
None of this will happen overnight. There are still plenty of aspects of this system that we haven’t perfected and we are regularly working on ways to improve it.
But our stress is dramatically decreased from what it used to be. At this point we know that all of the big things are largely in place, which gives us the leeway to not sweat the small stuff.
And that’s really one of our big goals. We want to make responsible financial choices, but we don’t want to have to worry about every single spending decision. For the most part we’d like to be able to just enjoy our lives without money constantly being in the foreground.
So what do you say? Can you envision living a financially responsible life without truly sticking to a budget? What’s your system for handling all of these things? I’d love to hear about it.