The other day I posted about the key to my current financial position. One of the comments on this post caught my eye. Route to Retire had an interesting comment on how he saved without using a budget. I started to respond to this comment. As I thought about my response, I realized it would need to be a more in depth then a comment would afford. Here we are, with me explaining why I do not use a budget.
The Benefits of Budgeting
So, let me first say that budgeting provides a lot of benefits:
- It can facilitate you tracking your spending if you are not already doing so.
- It allows you to pinpoint specific areas of spending where you can focus. Reducing these items can lead to a more efficient household.
- A budget can also be used as a yardstick to measure your progress against your larger goals. For example, we set a goal of saving 50% of expenses this year. The process of compiling a budget can tell us in any given month where we are against our savings goals.
Our Approach to Cost Controls, No Budget
For many people a budget is the right way for them to manage their expenses, it just is not necessarily for us. We do more of an implied budget approach. Everything our household purchases is paid for by either a single credit card or 2-3 fixed payments a month. We have a very good grasp on our overall spend a month. Knowing this spend amount we have a goal to not exceed a target amount a month. To help with this goal we do things like automate our savings to further drive us to meet these goals. From this target amount we determine how much is fixed (can only be changed with significant life changes) and variable. We then push ourselves monthly to live below the variable portion of that number.
My Targets Control Cost Growth, not Reducing Costs
By now some of you are thinking, this approach probably does not help with reducing your costs from month to month. Well you are right, but in my case I do not use a budget to reduce costs. Instead I am focusing in this step on controlling cost growth. One of the keys of my approach is month to month and even year to year I compare to what came before. This limits lifestyle inflation and naturally increased my savings rate. My income would increase from year to year but my costs stay roughly constant to my average from the previous year.
What about Reducing already Inflated Costs using a Budget?
You might be saying, what about the scenario where I already have inflated my lifestyle? Or in my case what about the higher likelihood where I changed my situation so significantly what came before is no longer relevant? In these cases, I admit my approach is a little more complicated than a monthly budget.
As part of my process I take a step back once or twice a year. This timing often corresponds to the occurrence of a major life change, but I still do so once a year regardless. As I take a step back I look at my spending in various categories and specific items over the course of a year or more of time. This is also when I look at the fixed costs I largely ignore the rest of the year. I then brainstorm how to cut costs related to these areas. In some respects, I am implicitly applying budget methodologies in this analysis, but I’m doing it over a much longer period. I am also only doing it a few times a year rather than monthly. During this time, I also benchmark what I see others spending in this area. Perhaps I check what the average cost for power is in my area? I check for lower cost insurance or phone service options. Mortgage refinancing is also considered. I even read other personal finance blogs and see if my spending on certain areas is way out of whack or in line. The important part here is I am benchmarking against those on a similar path to my own. I’m also only comparing to items that fit my value. It would be no good if I checked myself against the Jones after all. However, seeing where someone else is maximizing their life can help me to maximize my own. This should sound familiar, we talked about similar concepts around analyzing data. I essentially use the same approach to my finances over time.
So What are the Benefits of no Budget?
The benefit to me over normal budgeting is:
- I do not have to spend hours a month categorizing all my spending.
- I also do not find myself obsessing over if I spent 20 dollars extra on toilet paper in January.
- Often budgets are hard to manage over a month as some costs do not fit into a monthly cadence. This is especially true if you are trying to get a good deal. You do not want your costs of paper towels to increase because you are buying it monthly instead of in bulk.
- It works for me.
The last point is the most important. Everyone has a different approach to cost controls that works for them. The key is to determine that method and put it into action as soon as possible. Perhaps you will like my approach and put it into action. Perhaps you will use a more implicit approach like Budgets are Sexy. It’s down to whatever works for you.
How do you control spending?