Conventional wisdom says that budgeting is a good thing to do because you'll see where every dollar comes from, and where it ultimately goes. The only problem is that budgeting takes time, energy, and distracts us from the bigger picture.
A budget is an idealistic plan. That's it. It does nothing to actually put cash in your savings account, sock away funds for a rainy day, or pay down a debt. When you make a budget, you're writing out your intention to spend your money in a certain way, with the goal of having money left over for savings.
Most budgets are destined to fail because they approach the problem the wrong way. A better approach is to save first, therefore forcing your spending to meet your savings goals.
What you save is the only thing that matters
You can boil personal finance into a very basic equation. Financial success is derived from the difference between what you earn and what you spend. The bigger the difference between your earnings and your spending, the more financial success you'll find.
I don't use a budget and only loosely track my spending, but it works because I make saving a priority. A certain percentage of what I earn is automatically pushed into accounts for long-term goals and retirement. The key here is automation -- I don't have to think about saving because I've made the process automatic. Automating my financial goals enables me to spend my time thinking about how to spend my money, which is far more fun than thinking about ways to save it.
Automating your savings is easy. Here are three ways that virtually anyone can automate some kind of savings in 2018:
- Increase your contributions to an IRA or 401(k) retirement plan. This is one of my favorite methods for saving more money automatically. I don't know how stocks will perform over the next 10 or 30 years, but I do know that people who save 15% of their income will have 50% more money at retirement than people who save just 10% of their income, all else equal. Increasing your contribution is as easy as logging in to your account online, or talking to your employer about increasing your deferral rate.
- Open a second bank account and set up automatic transfers from your existing account to your new account. This is a good way to build up some savings for emergencies and unforeseen expenses. Forget the second bank account exists until you really need the money to pay for a big purchase, like a new transmission for your car, or a new roof on your home. When a rainy day comes -- and it will come -- you'll be glad you had your spare savings account building up for it.
- Schedule automatic payments on consumer debts like car notes and student loans for the next 12 months. Doing this is as easy as calling up your lender or logging into your account online. Paying more than the minimum payment on a debt is certainly saving, even if it doesn't seem like it, since your wealth increases with each additional payment. (This is a great way to "save" because once you make a prepayment on an installment debt like a car note or student loan, you can't "withdraw" it to spend like you could savings in a bank account.)
Forget the spreadsheet and throw away a plan to budget. Pick a number for how much you want to save in 2018, either as a percentage of your income, or in terms of dollars and cents, and set up some kind of automated way to do it right now, whether it's by prepaying on a student loan or making a bigger contribution to a 401(k). If you're serious about saving money, you should make it a priority. Make your spending fit your savings goals, not the other way around.