How not to budget

Jeff Yeager confessed in his latest book “The Cheapskate Next Door” that he doesn’t keep a budget. Neither do I, in the strictest sense.

A budget is a great (I’d say essential) tool when you’re trying to get a handle on your money and dig your way out of debt. But once you’re on solid financial footing, accounting for every penny can be a real drag and often isn’t necessary. One of the benefits of finances that work is that you can keep a looser hand on the reins.

I use online personal finance software to track our transactions and make sure we’re spending within the broad guidelines we’ve set down. If we start to run out of money before we run out of month, I’ll review more closely where the money is going and make adjustments.

Here’s how Jeff puts it:

Contrary to what most non-cheapskates seem to think, only about 10 percent of the cheapskates polled said that they have a formal, written household budget. For most of us, a budget seems too much like a diet: a plan that’s always looming over you, bringing you down, when what you really need is a lasting lifestyle change that makes the desire behavior effortless.

While we’re not big fans of budgets, the cheapskates next door do place a high priority on keeping score, doing at least an occasional reality check to see how they’re actually spending their money….I’m mostly looking for red flags—expenses that seem high, either higher than I remember them being in the past or higher than I’d like them to be. These are the things I’ll dig into further or try to control more carefully going forward; they’re also sometimes things that I’ll “chat” with my poooor wife about, if she’s the spender in question.

Here’s what it takes to live a budget-free life:

Reasonable overhead. If your must-have expenses exceed 50% of your after-tax income, you’re going to have a tough time making your money stretch as far as it needs to go. Reducing your overhead—shelter costs, utilities, food, transportation, insurance, child care, minimum loan payments—to the 50% mark goes a long way to create a more balanced financial life. The lower your overhead, the more flexibility you have.

Automatic savings. My top priority is making sure we’re saving enough for retirement. We’re also saving for our daughter’s education. I’ve also got a bunch of savings buckets for various goals and irregular expenses, including property taxes, insurance payments, vacations, home maintenance/repairs and car expenses (and eventual replacement). All of these goals are funded with automatic transfers from our checking account to the appropriate savings account. That way I know I’m on track for all our various goals without having to think too much about it. Then if we want something special or out of the ordinary, we save for it. We have a fat emergency fund as well, which is earmarked for big setbacks such as job loss but which is available if a car or home repair exceeds what’s been set aside in those particular buckets.

Automatic payments. Blogger Adam Baker at ManVsDebt makes a valid point that automatic payments can lead to thoughtless spending. On the whole, though, I find paying bills automatically works well for us as long as I subject our spending to a periodic reviews. Recently, for example, I was able to knock $10 a month off our cell phone bill using MyValidas.com and a similar amount by negotiating a discount on our newspaper subscription. (Hey, I’m a lifetime journalist—can’t rid me of my dead-tree addiction.)

A good tracking system. The online personal finance software lets me know what’s left over after all the transfers and bill payments are made (love that cash-flow forecast feature). So I know that what’s left over is available for day-to-day spending. To earn rewards, we put much of our spending on credit cards (which are paid off in full each month, of course) and I’ve set up alerts to let me know when we’re closing in on a spending limit I’ve set for each card. If you’re not comfortable using an Internet site like Mint, Yodlee or Quicken Online (soon to be merged with Mint), then Quicken’s software is a good alternative (the data lives on your computer, rather than in the cloud).

And that’s it. As I’ve said, doing without a formal budget isn’t a good idea until you’ve conquered your credit card  and other consumer debt and are living comfortably within your means. Once you achieve that, though, the reward for all your hard work can be kissing your budget goodbye.