Facebook Rss Twitter Youtube MSN

How not to budget

Jul 02, 2010 | | Comments (6)

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.

Related Posts

  • Strategies for saving on a shoestring
    Dear Liz: I'm a mother of two children and I work part-time. On top of that I go to school full-time. Even though I receive financial aid, I still ha...
  • Use inheritance to pay down debt, boost savings
    Dear Liz: My grandfather gave me his car just before he passed away. I drove it for a few years and now am ready to sell it. My question: What to d...
  • How to prioritize your savings
    Dear Liz: I put 10% of my income into my 401(k) retirement account and my employer matches up to 6%. Should I also be saving another 10% in a regular...
  • How to make saving money easier
    Dear Liz: What's the easiest way to save money? I have the hardest time. I want to save, but I feel that I don't make enough to start saving. Answer...

Categories : Liz's Blog

6 Comments

1

After demand in my industry (commercial construction) collapsed 2 years ago, my company was forced to implement 5 rounds of pay cuts that brought us all down a total of 40% from our gross pay in 2008. With recovery for us still nowhere in sight, it will stay depressed for at least another year. My wife works, but the essentials you mentioned now take up 70% of our net income. For 20 years I lived within your recommended ratio, but we live in NJ where our property taxes are up to $13K a year and they are still rising as our governor cut 100% of our local school aid, which forced them to make cut all extracurriculars and STILL will make them raise our property tax about 13% they are projecting. I think many are going to have a hard time meeting that ratio until we return to something resembling a “normal” economy.

2

Hi, Bob. There are plenty of reasons why must-haves might exceed the 50% mark when people aren’t overspending, and unemployment is certainly one of them. But the fact remains that it’s tough to have a truly balanced financial life when your overhead eats up too much of your income. You may be able to tolerate an imbalance for awhile, but for the long term it’s usually better to reduce your nut, even if it means making some big changes to your lifestyle.

3

I actually have come to love being on a specific budget. It has made my life simpler, easier and so much smoother. I sit down each payday and pay the same bills during the same week of each month. I’ve built automatic savings into my budget along with weekly savings amounts that are used for annual or semi-annual expenses (like auto registration, auto insurance and home insurance). I give myself a certain budget for groceries, gas and spending money. However I choose the total is mine to decide.
I learned how ingrained the habit had become in April when I had five pay periods. That last pay week, after everything was already taken care of, I allowed myself a “week off” to spend what I wanted, where I wanted and how I wanted. Rather as I used to live my life. No budget. No checkbook balancing. Nothing but just to spend money. The “fun” lasted about four days and I began to truly miss having a full picture of my life and where I was headed. But it WAS a powerful lesson. I have changed my life around for the better. If I can do it…anyone can. Thanks for what you do Liz.

4

That’s awesome, Joel. You know your system is working when you notice its absence!

5

This article is right on, these who need a budget are those who are not making ends meet. I know first hand this is true. After a divorce I was deep in debt and was having a hard time paying my bills. I started a budget. First priorities where the must haves food, shelter, transportation and paying off the debt. Ever windfall went to the debt after I had an emergency fund of 6 months in the event of some disaster. With a strict budget I was able to weather the storm, it took seven years, I had a cash reserve, improved my credit, had a down payment for a home and was saving for retirement. All of this because of a simple tool, my budget. Once financially sound I still used the budget and lived well below my means. Eventually I no longer needed the budget in the strictest sense. It became second nature to know the difference between want and need. I am lucky enough to have my current wife see things in the same light. We do much the same as what Liz has written in her article, with a few alterations. If it were not for my budget those, years before I do not believe I would be a financially healthy as we are today.

6

Thanks for sharing your story, John. It’s inspirational. Congratulations!