I used to feel a bit sheepish when clients asked about my personal household budget, because I don’t have one and never have. I always worried that I was being lazy and a poor role model for my clients. I’d see articles, books, or CFP materials touting the benefits of having a budget to be able to track your spending. Some said that without a budget, you would not be able to plan how to achieve your financial goals.
Eventually, I came to recognize that you don’t need to have a budget to accomplish financial goals and that creating a budget would be a waste of time. It’s true, I don’t know how much I spend on dog food, and I don’t have a set amount that I plan to spend on clothing, eating out at restaurants, or for car maintenance. Over the years, I’ve found that many successful investors skip making a budget and that it is not the prerequisite that many people would have you believe.
If you follow these three steps, you won’t need a budget, either:
- Put your saving on autopilot. Figure out how much you need to save to accomplish your goals. Set up your contributions to your 401(k), IRAs, and other accounts. If you are saving your target amount (or more), don’t worry about spending the rest of your income. I think of this as reverse budgeting. Save first, and then whatever is leftover is yours to spend.
- Don’t ever deplete your cash. While I don’t have a set monthly budget, I am aware of our spending and follow our credit card transactions weekly. We pay our credit cards every month and never carry a balance. In months when there are large expenses, we can always reduce discretionary spending or postpone other purchases. We keep an emergency fund, but after 17 years of marriage, we’ve never touched it. We won’t make a purchase if it requires dipping into the investment portfolio; we will have to build up cash in checking before making a large purchase, such as a vehicle.
- Live frugally. Luckily, I don’t enjoy shopping, so I am not often tempted to buy new things. When I do want to make a purchase, it is never an impulse buy. I’ll do my homework, research online, and make sure we are getting a good deal. For me, the knowledge of how $50,000 could grow over the rest of my life is much more attractive than a $50,000 boat. So, I’m not sure I’ll ever be willing to sink huge amounts of money into depreciating assets.
I know that for some people, spending is like a gas that will expand to fill whatever space you allow it to have. For these folks, creating a budget is helpful so they actually know where their money is going. Many people have benefited from having a budget, and if it has benefited you, that’s wonderful. I am all about empowering people to take control of their finances and make informed changes for a better life. My point is not that no one should have a budget, just that not everyone needs to have a budget if you are meeting your savings goals without one.
Not sure how much you need to save to reach your financial goals? Check out the Savings Goal Calculator on Bankrate.com. Enter your current portfolio value as the “first deposit” and your ending goal under “How much do you want to save?”. Want a more sophisticated analysis to consider market fluctuations? Contact me for a consultation; we have terrific goal-based financial planning tools!
