If you struggle remaining disciplined with your spending, you are not alone. Many of us arrive at the beginning of the month with little to show for the previous 30 days. From my observations, budgeting simply doesn’t work for the vast majority of people.
I’ve observed budgeting cultivates frustration, disappointment, and “I’m not good/smart/rich enough” syndrome. Yet an alarming number of personal finance blogs, books, and personalities encourage this very ineffective method for gaining control of our money. I deeply believe that we need to turn this advice on its head.
In general, humans dislike constraining their choices and following rigid rules. We all know we should save more, but so many of us don’t. As with most large-scale change, we need to design a system that works for us, not against us. One that makes saving automatic while remaining more flexible than the current budget model. It’s time to budget our savings, not our spending!
Why Budgeting Our Spending Doesn’t Work
Most budgets begin by taking a monthly income and dividing it into little buckets (which you have to estimate on the 1st of each month), essentially directing all the spending of your life. If you spend too much, you’ve broken your budget! If you spend too little in a category, now the math has gone to hell. What should those categories be anyway? And if your life goes according to plan, you might have enough money left over to “save”! Oh boy, what a deal!
In a spend-first model, it’s difficult to quell our desires and often prevents us from saving at the end of each month. There are many ways we try and fix this broken system, such as using physical envelopes to store money, allowing applications to track out spending, permitting a partner to keep us accountable, or resorting to a cash-only existence. So why isn’t this working?
It’s no secret that us humans seek control and choice. All actions we take are to create order our of chaos and prevent suffering in our own interests. And when we don’t feel jurisdiction over our financial choices, it’s quite frustrating. Pile on the shame and guilt of monthly failure, it’s no wonder we send our budgets straight to the trash after a couple tries. By their very nature, budgets are reactive. They mainly teach you how to spend your money. Listen to the following thought process many budgets create:
Budgeting Your Spending: “I earn $3,000 per month. So that’s 20% to taxes, 25% to rent, 15% to groceries, 15% to utilities….etc. Anything I have leftover will just go to my savings…hmmm, never seems to be anything left.”
Does this sound like you? More importantly, does this line of thinking get you to the worry-free, debt-free lifestyle you’re seeking? Are you afraid of thinking about saving at all? Read on.
What Budgeting Your Savings Looks Like
The budgeting your savings approach is proactive. It’s a savings-first model that directs us to save our money in an automatic manner. In a traditional budget, savings is an afterthought. In this revised idea, saving is the cornerstone. As an added bonus, there is less “spenders guilt” too:
Budgeting Your Savings: “I earn $3,000 per month. So that’s 20% to taxes, 10% to retirement savings, 5% to travel savings, and the rest I spend as needed, guilt-free. Anything I have leftover is nice, but not necessary for me to sleep easy at night.”
In six-months, this person will save $2,700, and no longer be living paycheck-to-paycheck. That’s over one month of expenses. I’ve seen this time and time again, but the added relief of financial security will far exceed the 15% they ‘sacrifice’ each month. All without the conventional idea of a budget.
Do you want this for yourself? Who wouldn’t?
If it seems simple, perhaps it is. However, this is a fundamental shift in what budgeting is, and what it’s supposed to achieve. This approach is turning the stuffy practice of budgeting inside out and upside down. We are designing a human system, one assumes our habits and increases our chance of success.
Rewiring our philosophy in this way accomplishes a couple thing key things. First, automation will override our tendency to spend what we have. Furthermore, it’s hard to feel guilty about our spending once our savings is already accounted for. Although, as you grow in financial smarts, your spending should be evaluated as well.
Create Your Savings Budget
From now on, you will budget your monthly savings, not your monthly spending. For example, Desiree wants “5% per month towards her emergency fund”, Erik desires “7% per month towards his future honeymoon”, and countless others shoot for “15% per month or more” because they want peace of mind. No longer should you attempt to fit a circular-shaped grocery bill into a square-shaped budget. Throw away the categories and actually budget the one thing budgets intend to create: savings.
After aligning your values with your spending, set a simple goal of 5%, 10% or 15% per month. If you are in a relationship, I encourage you to have this conversation with your partner or significant other. Opening the door for conversation in a healthy way can do wonders for people’s thoughts surrounding money.
Remember, nothing is set in stone, and you can always adjust down the line.
Many Americans receive their income through direct deposit and fully appreciate the nature of automatic payments. If you are one of those people, congrats! You are already halfway there. Now it’s time to take that one step further. Budget your savings and pay yourself first with any of the following methods:
- Split your paycheck into multiple accounts…automatically
- Schedule a recurring transfer between bank accounts…automatically
- Contribute to an employer retirement plan…automatically
- Deposit cash into multiple accounts…automatically
Budgeting your savings is about recognizing the need to create financial sanity and stability, not about causing distress or fear. Allocating funds at the right time (before you can spend them) is the best way to ensure you successfully achieve your life goals. Say goodbye to traditional budgeting, and hello to a new method of savings.