Read Time: 4 minutes
The word “budget” sparks many different emotions.
Some people swear by their budget. Some people swear at their budget. And others swear they had a budget, though they can’t seem to remember exactly what’s in it or where it’s at.
You used to be hard-pressed to find a finance book that didn’t recommend budgeting, but things have changed.
Several finance teachers, like Ramit Sethi and David Chilton, have started to move away from the “everyone needs a budget” mindset, and for good reason. They focus more on big savings and less on fewer lattes.
Today, I’m going to show you both sides.
Here’s why I swear by my budget, and why you don’t need one to be financially successful.
This is Why I Budget
I admit it. I don’t follow every part of my budget, precisely, every month. I’ve fallen off the budget train many times, but I’ve always hopped back on, and not for the reasons you may think.
I don’t budget to invest more, save more or spend less, though it does allow me to all of those things.
I budget for the sake of freedom.
I know that I can buy everything in my budget, when I spend every cent on paper before the month starts. That means I never feel guilty about spending $50 to $200 a month on myself, as part of my “blow fund.” I don’t feel guilty buying a new shirt when I have the clothing fund. I don’t feel guilty when I’m eating out, because I know my limits, according to my budget.
Most of all, I never wonder if I spent more than I earned, because I spent everything on paper first.
I also budget because I recognize that there are three costs associated with every purchase, as Rory Vaden points out in his new book, Procrastinate on Purpose:
- Actual Cost – The amount you actually pay. (Example: $3 for a cup of coffee.)
- Opportunity Cost – What you gave up by buying something. (Example: $3 invested for retirement.)
- Hidden Cost – The potential return you could have earned. (Example: $3 invested over 40 years with an 8% return equals $65.17.) I hope that $65 cup of coffee was good.
To me, this shows just how important it is to save a few bucks here and there on small things, because small wins can equal big wins when compound interest is involved. And I’m not saying you shouldn’t buy that cup of coffee. I’m simply saying that your small purchases matter more than you think.
I’m a finance nerd, so it’s hard to justify not budgeting when I see how much of a difference a $3 purchase can make, but you may feel differently. You may hate budgeting. If so, welcome to the majority! Here’s the good news for you…
This is Why You Don’t Have to Budget
You can be very successful without ever setting a budget.
How so? By taking care of the important matters first, and then spending the rest.
Of course, you can’t spend money you don’t have or you’ll go into debt and you could ruin everything. So if you take this approach, I suggest pulling out your monthly spending cash so you’ll know when you’re out of money. You could call this the Minimal Money Management system. You plan enough on the front end that you don’t have to worry about the back end.
So what are the important matters? Well, aside from paying off all your debt and having a fully funded emergency fund (3-6 months of living expenses on a bare bones lifestyle), there are a few things that you need to take care of.
If you will set these things to automatically come off the top of your income, you will be set up for success, and you can freely spend the rest of your money on whatever you want…yes, you can buy that nice jacket or those yard gnomes you’ve been eyeing, but once you’re out of money for the month, you still have to stop spending. So make sure you can pay for things like food and fuel before you get too attached to those sexy yard gnomes.
First, read my article on budget automation, especially if you have debt, and then follow the process below.
Here’s the foundation that allows you to “spend the rest.” Make sure you’re doing these things first:
- Invest 15% for retirement – After your debt is paid off and your emergency fund is fully funded, set up an automatic draft for 15% of your paycheck to go into retirement investing. (See our free Investing Guide)
- Life Insurance – Buy the appropriate type and amount of life insurance. (See Understanding Life Insurance)
- Other Insurance – Hold enough health, disability, auto and home insurance to cover the things that you can’t afford to replace (including your health). If you have a lot of assets, consider an umbrella insurance policy.
- Create a will – It’s important to know what’s going to happen after you die. If you have stuff, you need a will.
- Save for large purchases – There are always large purchases in the future. You may need a new-to-you car or a down payment for a home. Whatever it is, save an amount every month for this. If you don’t need the money for at least five years, go with some index funds. If you need it before that, go with bonds or a money market account. The important thing is to save.
- Give 10% – This is optional, but In truly believe that giving is the foundation of receiving, and that your finances will never be fully blessed without this piece of the puzzle. Give to your local church or your favorite charity – the important thing isn’t where you give, but that you give.
If you have all of those areas covered, you will be financially successful. Even without a budget.
The bottom line: Pay yourself and make sure you’re protected first, then spend the rest.
If you’re looking for more ways to budget without budgeting, Trent Hamm wrote a great piece on alternative budgeting methods.
I would argue that you will be more prosperous if you include a budget in your planning, but if it stresses you out and makes you crazy, it’s not worth it. After all, budgets aren’t for everyone.
Do you hate budgets or live by them? Or somewhere in the middle? Share below!
The criticism of budgets by some is wrong. A budget isn’t a punishment or to be used solely as a means to restrict expenses. It is a PLAN on how you will spend the money that you have. Ramit Sethi bashes budgets, but his so-called “Conscious Spending Plan” is what I’ve been calling a BUDGET for the past 10 years. I LOVE Ramit’s current work, but I think his budget-bashing is just another case of saying something just to differentiate oneself from the crowd when the alternative is actually not much different. There was an article going around from Medium a few months ago criticizing SMART goals, and a few of commenters described that article the same way. Challenge conventional and time-tested wisdom to get a click, and the alternative isn’t much different or better.
Buying lattes multiple times a week isn’t bad. But when someone is $40K in student loan debt, trading in their car every three years, spending $5 a day on restaurant coffee and then telling the government to forgive their student loans and complaining about the 1% trampling over everyone, then the “personal finance experts” are FULLY justified in telling them to “shut up latte breath.” A budget allows you to allocate your expenses to meet your financial goals.
Wow, I couldn’t agree more! I’ve thought the exact same thing about Ramit before. I also love most of his work, but he does bash budgets to be different. It’s all about saying something new, getting views and making sales, unfortunately. But yes, a budget is not a punishment, it’s freedom to spend the money you have wisely, and sometimes that includes lattes!
Great comment! Thank you so much for contributing!
Great info here, Kalen, and what a great comment from Sunny.
I like doing budgets because I’m a numbers nerd and I love analyzing the spreadsheets, devising new equations, and tracking metrics. But I hate doing budgets because it creates so much work for myself with data collection every month. I started to simplify my budget process with automation anywhere possible. Still have lots of work to do, but getting there. Your article here helps for inspiration. Thanks.
Absolutely! Sunny said a lot of what was already in my head. Things I probably should have added to the article, and that’s what the comments are for!
Man, I feel the same on budgets. The nerd is me loves them, but not all the time. I’m glad I could help!
Unlike Kalen, Sunny and Brian, I’m not a self confessed numbers nerd. The idea of doing a budget does not appeal to me. Despite this, I decided to work out where our money was going when I read a blog that suggested everyone should track their speding from time to time. I liked most of the author’s other advice so I thought I’d give it a go.
I tracked our spending for 3 months. I can’t tell you how many surprises I got. Armed with this new awareness we are now saving a lot more, with no obvious change to our living standard. It’s mostly been by reigning in overspending in a few areas and avoiding wasting money on things that didn’t matter.
To be honest the idea of checking a budget before or after I spend money is still not something I want to do but I’d have to say my new found awareness is priceless.
If you are not one who likes following a budget, then at least consider tracking your spending every now and then. I can almost guarantee you a surprise or two. There are apps to help you with this and having all your spending done on the one debit or credit card also makes tracking an easy job. As long as you have the disciplin to use it properly, going through one statement doesn’t take long.
Thanks so much for bringing another perspective, John!
I agree with you 100% – I’ve actually given that exact same advice to people before. If someone has never budgeted before, a few months of tracking their expenses will be eye-opening, to say the least. Tracking spending is important to show you where your money goes. It’s funny that it’s almost always surprising!