You Don’t Need a Budget to Build Wealth and Be Financially Free!
Budgets are like diets. They don’t work and here’s why…
Budgets are like diets. They don’t work because they’re constricting, inflexible, and unrealistic. Whether you use an app, a spreadsheet, or a piece of paper, please stop budgeting if it’s not working for you!
Instead, just automate your bills and pay yourself first.
I used to think budgets were the logical thing to do when wanting to save money and spend less but it never seemed to stick when I used one. I’d be good for a few weeks and then I’d get over it because eventually, I couldn’t do or buy something because it wasn’t “in my budget”…so annoying!
My thought is if budgets worked, more people would use them.
- Budgets take time and are tedious. The reality is, most people don’t have the time or make the time to sit down and do the work to put a budget together. It’s not fun so people won’t do it.
- Budgets require discipline, which most people lack because of all the marketing we are inundated with and the need for instant gratification. I’m thinking back right now to when I was in my 20s and how much money I spent shopping…LOL! Yikes!
- Budgets require you to get real about your spending. When you sit down to review all your income and expenses, it can be challenging to be honest with yourself about your spending habits.
- Budgets can be constricting and unhelpful depending on the type of budget you use and the goals you are trying to accomplish. I’ll explain this more below.
- Budgets can be depressing if it’s too constricting. Some people, including myself at one point, may feel unhappy while using a budget, even if your financial goals are being accomplished.
So what should you do to save money and spend less you ask?
To save money for retirement, pay yourself first and automate in an employer 401K or an IRA account (preferably a Roth in my opinion).
Don’t wait until you receive your income, pay all your bills, buy groceries, fill your car with gas, shop on Amazon, etc., and hope you have money left over to save. That’s where people go wrong! They wait until they pay for what they need (and want) before saving. That’s the wrong way to save.
If you pay yourself last, there will likely be nothing left to save.
What I mean by “pay yourself first” is if you earn a paycheck, have a portion of your check AUTOMATICALLY transferred to your 401K or IRA account, whether it be with an employer or a 3rd party provider BEFORE your income hits your bank account. That way you don’t have to do a thing!
If you are a business owner or entrepreneur, you can set up an automatic transfer from your business account to your IRA so you don’t have to think about it either.
It’s that simple.
To save money in general, for a down payment, an emergency fund, or vacation, you can do the same. Pay yourself first and automate.
I have several bank accounts at 3 different banks and from my paycheck, I have money AUTOMATICALLY directly deposited into 3 different checking accounts.
I’ll reiterate this because there are some people who do not realize they can do this with their direct deposit W2 income.
You can have money AUTOMATICALLY directly deposited into different checking accounts at different banks. Check with your employer’s HR or Payroll department to set this up.
Here’s what I do as an example:
- A portion of my W2 income is transferred to a separate bank account at Chase that I don’t access regularly. This is my emergency fund.
- Another portion of my W2 income is transferred to another separate bank account at Navy Federal that I also don’t access regularly. This is cash for a down payment on a house.
- The remaining portion of my W2 income is then deposited into my “main” or “regular” checking account at Schools First Federal Credit Union. From this account, I pay all the bills and living expenses.
Setting this up is easy and you can transfer a fixed dollar amount of your income or a percentage of your income. Again, check with your employer.
Now to drill down even further, in my “main” account, the money is dispersed between several different savings accounts AUTOMATICALLY for different things.
For example, every two weeks when I get paid from my W2 and the bulk of my paycheck gets directly deposited into my “main” checking account, I have AUTOMATIC transfers set up to save a portion into separate savings accounts for my mortgage payment and housing expenses, gas and auto maintenance, birthdays and holidays, and charity.
My “main” bank accounts look like this:
- Checking
- Savings — Mortgage & Expenses
- Savings — Auto Maintenance
- Savings — Gas Card
- Savings — Birthdays & Holidays
- Savings — Charity & Donations
The money is pooled into separate savings accounts removing it from my checking account so it doesn’t get spent on something else.
My bills are AUTOMATICALLY debited from my checking account and money from my savings is AUTOMATICALLY transferred back to my checking to cover the expense. I literally do not move around much money myself. It’s all scheduled with my bank.
Are you taking notes?
Eliminate Expenses You Don’t Need
This is fairly simple, it’s just tedious and requires you to be honest about your expenses and spending habits.
This is the not so fun part but it must be done because over time you may have accumulated expenses you’ve forgotten about. It’s best to comb through a couple months of bank and credit card statements to see where your money is going to get rid of the expenses you don’t need.
What I find easiest is to download a few months of your banking activity into Excel and create a pivot table to see who I am paying and how much.
Do you have a gym or Costco membership you don’t use? CANCEL THEM.
Have you signed up for subscriptions you forgot about? CANCEL THEM.
What about all your streaming services? Do you use ALL of them? Probably not, so CANCEL THEM.
Your daily cup of coffee from Starbucks or McDonalds?? Just kidding…
I’m not telling you to cut spending on things you enjoy, I’m telling you to cut expenses that you do not need or use.
You should review where your income is going every month to see if you are paying for things you’re not using. If you’re not using the erroneous expenses or you have an expense that is not providing you any benefit, then cancel them before they burn through your income further.
So You Still Want to Use a Budget?
Now for those of you who want to use a budget, I have a recommendation. Use the zero-based budget and not a percentage-based budget with fixed percentages like the 50/30/20 budget.
The zero-based budget is when you itemize all your income and expenses to total zero.
Income — Expenses = $0
I learned about this budget technique from Dave Ramsey, which works very well if you need a budget. The key here is to assign a dollar amount to all your income and expenses so you know where your money is going and at the end, it equals zero.
For expenses, this includes everything from living expenses, debt payments, recurring bills, and savings toward your emergency fund or charity.
What I like about this budget is if you get a raise, your needs technically don’t change. You will always need $X for all your listed expenses and the surplus of cash would just get allocated to something else, like debt if you have debt.
On the other hand, the 50/30/20 budget is where you allocate 50% of your income to needs, 30% of your income to wants, and 20% of your income to savings.
It may seem like the easier option because of the fixed percentages, but the problem I have is this budget does not take into context your financial situation.
For example, if you have massive amounts of debt, you may need to allocate more than 50% of your income to needs to cover your debts. Your percentages may be better at 80/10/10.
Or what if you're debt-free and want to save as much money as possible for retirement? With this formula, you'd only be saving 20% when there's a possibility that you could be saving more. Your percentages may be more efficient at 40/20/40!
Or what if you get a fat raise at your job? Do you really need 50% of it for needs? You’d be inviting “lifestyle creep” into your life, which can easily kill your financial goals. Just because you make more money doesn’t mean you should spend more money.
This is why if you must use a budget at all, I’d recommend a zero-based budget over a percentage-based budget.
I don't believe you need a budget to build wealth and be financially free because I use automation. No budget here. Just set up your bills and savings to be paid or funded automatically.
Automation has been the easiest thing for me because once you set it up, you don't have to worry about it.
Just set it and forget it!
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