I Don’t Budget and Neither Should You
Does the word “budget” remind you of the word “diet”? Deprived. Restricted. Desires denied. Do you imagine that if you had all the money you wanted, you wouldn’t need a budget anymore? All of those gross feelings about money usually stem from feeling forced to use it in ways you don’t want to.
Just like diets, budgets can work if you stick to them. It’s sticking to them is the problem.
Habits die hard, and using willpower every day to do the right thing depletes us. In one famous study cited inThe Power of Habit, students were asked to skip a meal, then were brought into a room where they were given a bowl of hot, fresh chocolate chip cookies and a bowl of radishes. Some students were asked to indulge in the cookies, while others were asked to eat the radishes and avoid the cookies sitting right there on the table, smelling so delicious. Then, when given a difficult puzzle to solve, the students who resisted the urge to eat the treat gave up far sooner than their counterparts who got to indulge their craving. In a different study, found there is limited space in our mental capacity to exert self-control. But how does this tie into budgeting and spending?
Stressing about money actually depletes cognitive function and makes us grouchy, unhappy people who are less likely to stay on track with multiple life goals. New studies are showing that the .
What if, instead of trying to figure out how much money you have left to spend daily — for lots of different categories for the rest of the month — you only had to check one account to see how much money was in it? Decision-making made easy: If you have enough, you can spend it and if you don't, you wait until next month. No more fumbling with a half-dozen envelopes full of cash or doing calculations in your head.
The first time I automated my basic finances was after reading Ramit Sethi's bookI Will Teach You to Be Richseveral years ago. The idea of using technology to take control of my finances was a revelation at the time. When I combined the book’s strategies with techniques I learned from DailyWorth's Money Clarity Course, everything clicked into place and the stress I used to feel about daily money transactions completely disappeared.
I no longer budget. I don't even manage. I just monitor.
Let me show you how:
Step 1: Create a separate "Bill Pay" checking account.
This account needs to be separate from your personal spending (“Spend”) checking account. This is the account from which you will automate payment of all your bills. Every month, I put all possible expenses onto my travel rewards card and set up an auto-pay for the full balance out of my bill pay account. Any recurring bills that I can’t put on my card get set up as auto-pays straight out of my Bill Pay account. I know roughly what all of these bills will be, based on past usage.
Step 2: Save up a cash buffer.
I keep a buffer of cash — at least one full month's worth of bills — in my Bill Pay account at all times, just in case any bill is unexpectedly large. It may take a little time to save this up, but do it as quickly as you can to get your system in place.
Step 3: Batch your bills.
Split your bills into two roughly even groups. Then call all issuers and ask that the due dates for the first batch be switched to the 5th of the month and the due dates for the second batch be switched to the 20th of the month. Now your bills are batched.
Step 4: Automate.
If your paycheck arrives in your personal Spend account on the 1st and 15th of the month, set up an auto-transfer of 50 percent of it (or slightly more than enough to cover your monthly fixed bills) into your Bill Pay account on the 2nd and the 16th. Then set up auto-pay for each of your bills to be paid in full on the due date each month (which should now be either the 5th or the 20th).
Step 5: Don’t forget savings.
Set up automatic transfers to savings and retirement accounts on the 3rd and the 17th of every month. If your bills constitute roughly 50 percent of your monthly after-tax income (this is a good target to aim for), then I recommend putting 20 percent of your after-tax income towards savings and debt repayment, which can be split as 10 percent to savings and 10 percent to debt until any debt is fully paid off. This will leave 30 percent of your after-tax income in your Spend account.
Whatever amount is left in your Spend account after these transfers is what you have for purchases for the next two weeks. This does include the groceries, so you can’t just blow the money without taking that into account, but you also no longer have to worry about not having enough to pay bills. What is in that account is there to be spent. Doesn’t that feel good?
Sure, there are a lot of ways I have further optimized my system over the years, adding more accounts and setting more goals, but these five steps got me set up with the basics that have dramatically reduced the stress in my life — which has dramatically increased my happiness.
Jennifer Turrell is a member of the DailyWorth Connect program.
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