To Budget or Not to Budget: The Case for Each

The word “budget” sparks many different emotions.

Some people swear by their budget. Some people swear at their budget. And others swear they had a budget, though they can’t seem to remember exactly what’s in it or where it’s at.

The first chapter of every finance book used to be about budgeting.

Several finance teachers, like Ramit Sethi and David Chilton, have started to move away from the “everyone needs a budget” mindset, and for good reason. They focus more on big savings and less on fewer lattes.

Today, I’m going to show you both sides. The case for budgeting and the case for not budgeting.

Here’s why I swear by my budget, and why you don’t need one to be financially successful.

Why I Budget

I admit it. I don’t follow every part of my budget, precisely, every month. I’ve fallen off the budget train many times, but I’ve always hopped back on, and not for the reasons you may think.

I don’t budget to invest more, save more or spend less, though it does allow me to all of those things.

I budget for the sake of freedom.

I know that I can buy everything in my budget, when I spend every cent on paper before the month starts. That means I never feel guilty about spending $50 to $200 a month on myself, as part of my “blow fund.” I don’t feel guilty buying a new shirt when I have the clothing fund. I don’t feel guilty when I’m eating out, because I know my limits, according to my budget.

Most of all, I never wonder if I spent more than I earned, because I spent everything on paper first. That means I know I’m not going to spend more than I earn ahead of time.

We also need to look at the three costs associated with every purchase, as I pointed out in my first book, 10 Branches of Growth:

1. Actual Cost – The amount you actually pay. (Example: $3 for a cup of coffee.)
2. Opportunity Cost – What you gave up by buying something. (Example: $3 invested for retirement.)
3. Hidden Cost – The potential return you could have earned. (Example: $3 invested over 40 years with an 8% return equals $65.17.) I hope that $65 cup of coffee was worth it.

To me, this shows just how important it is to save money on the small things, because small wins can equal big wins when compound interest is involved. And I’m not saying you shouldn’t buy that cup of coffee. I’m simply saying that your small purchases matter more than you think.

I’m a finance nerd, so it’s hard to justify not budgeting when I see how much of a difference a $3 purchase can make, but you may feel differently. You may hate budgeting. If so, welcome to the majority! Here’s the good news for you…

Why You Don’t Have to Budget

You can be very successful without ever setting a budget.

How so? By taking care of the important matters first and then spending the rest.

Of course, you can’t spend money you don’t have or you’ll go into debt and you could ruin everything. So if you take this approach, I suggest pulling out your monthly spending cash so you’ll know when you’re out of money. You plan enough on the front end that you don’t have to worry about the back end.

So what are the important matters? Well, aside from paying off all your debt and having a fully funded emergency fund (3-6 months of living expenses on a bare bones lifestyle), there are a few things that you need to take care of…

If you will set these things to automatically come off the top of your income, you will be set up for success, and you can freely spend the rest of your money on whatever you want. You can buy that nice jacket or those yard gnomes you’ve been eyeing, but once you’re out of money for the month, you still have to stop spending. So make sure you can pay for things like food and fuel before you get too attached to those sexy yard gnomes.

You simply start by automating all of the key elements.

Here’s the foundation that allows you to “spend the rest.” Make sure you’re doing these things first:

• Invest 15% for retirement – After your debt is paid off and your emergency fund is fully funded, set up an automatic draft for 15% of your paycheck to go into retirement investing.
• Life Insurance – Buy the appropriate type and amount of life insurance.
• Other Insurance – Hold enough health, disability, auto and home insurance to cover the things that you can’t afford to replace (including your health). If you have a lot of assets, consider an umbrella insurance policy.
• Create a will – It’s important to know what’s going to happen after you die. If you have stuff, you need a will.
• Save for large purchases – There are always large purchases in the future. You may need a new-to-you car or a down payment for a home. Whatever it is, save an amount every month for this. If you don’t need the money for at least five years, go with some index funds. If you need it before that, go with bonds or a money market account. The important thing is to save.
• Give 10% – This is optional, but In truly believe that giving is the foundation of receiving, and that your finances will never be fully blessed without this piece of the puzzle. Give to your local church or your favorite charity – the important thing isn’t where you give, but that you give.

The best part is, practically all of that can be automated. In today’s world, you can automate:

• Bills – Set them all up for autopay. If the company doesn’t have an autopay option, use your bank’s billpay system to automate the monthly check.
• Giving – Most churches and charities has online giving set up to automate this.
• Investing – A 401k, 403b, or TSP are automated, because they come out of your check. If you don’t have access to any of these, you can automate your own Roth IRA to contribute monthly.
• Rent/Mortgage – If your landlord doesn’t have a system to pay rent automatically, you can set up the check to be cut from your bank’s billpay. Your mortgage company or bank should have the option to set up autopay, and you can include extra principal payments automatically as well.
• Saving – You bank’s billpay likely has an automatic transfer option to transfer an amount into savings each month. Use this to grow your emergency fund, and then use it for vehicle funds, large-purchase funds (e.g. new computer, TV, furniture, etc.).

Now you’re set up, fully automated, to start living on what’s left after all of those bills or paid. Now you’re only responsible for making sure there is enough money in your account to cover these expenses.

The bottom line: Pay yourself (investing, saving) and make sure you’re protected (insurance, will) first, then spend the rest.

If you’re looking for more ways to budget without budgeting, Trent Hamm wrote a great piece on alternative budgeting methods.

I would argue that you will be more prosperous if you include a budget in your planning, but if it stresses you out and makes you crazy, it’s not worth it. After all, budgets aren’t for everyone.

I’m curious to hear how you do it, so drop a comment below and let me know if you’re a budgeter, an automater, or none of the above.

Further Book Reading

• The Total Money Makeover by Dave Ramsey
• I Will Teach You to Be Rich by Ramit Sethi
• The Latte Factor by David Bach