The No Budget, Budget
As we all know, living an extraordinary Life is dependent upon many factors and choices. Although not the only one, one factor that has a huge impact on our life is our ability to successfully manage our finances.
Those of us who are able to make enough money to cover our financial commitments each month and also have enough to build an emergency fund to provide some cushion, tend to have a higher level of stability in our lives than those that don’t.
As we all know, living an extraordinary Life is dependent upon many factors and choices. Although not the only one, one factor that has a huge impact on our life is our ability to successfully manage our finances.
Those of us who are able to make enough money to cover our financial commitments each month and also have enough to build an emergency fund to provide some cushion, tend to have a higher level of stability in our lives than those that don’t.
Those of us who are able to pay our monthly bills and have a significant amount available afterwards, either due to making a lot more money than we have bills or because of frugal living, tend to live a much more comfortable life enjoying much more than just the basics.
Although the level of “material” life we can live is controlled to a high degree by the amount of income we make, it really is true that “it’s not what you make, it’s what you keep” that determines the quality of life that you will have financially.
The dreaded Budget
In order to put ourselves in as strong a financial position as possible, we first need to know where our money is going. The traditional approach to that is to track each and every expense so that on a monthly basis we know exactly how much we are spending and on what. This of course is the dreaded budget!
Although establishing a budget and adhering to it in order to save and invest money is truly one of the keys to living an elite life, most of us tend to struggle with the chore of budgeting.
We find it stifling and a ‘negative’ action, requiring way more discipline and time spent up front than what we believe we get as a result.
Personally, I avoid budgets like the plague…yet my wife and I are able to control our spending on only what we want to AND we hit our major savings and investment goals. As a result, we enjoy a significant savings and investment rate just shy of 50% of our income (after taxes and deductions but NOT including our employer 401(k) match) while making significantly less money than our friend group.
In fact, we are on track to retire considerably earlier than the standard retirement age, unlike our friends, many of whom are doctors, accountants and otherwise high earning professionals who are prepared to go the distance.
Pay Yourself First Budgeting Method
So how can you control spending, save and invest a considerable amount of your income and NOT have a budget? I know that this will sound surprising because it did to me when I stumbled onto the concept of a pay yourself first budgeting method but it’s what I call our “No Budget, Budget”.
Now here’s the kicker…it’s also the EASIEST thing in the world to do and it has turned out to have had the biggest impact on my financial life bar none. I am truly convinced that had my wife and I not stumbled onto this that we’d be living paycheck to paycheck like most people.
The “No Budget, Budget” first and foremost relies on the principle that it’s important to understand what financial commitments you ‘need’ to cover and those that you ‘want’ to cover. So the first thing you need to do is track what you spend for a consecutive three month period.
With this data in hand, you then open up a spreadsheet and on the far left column you will input large spending categories such as housing, car/transportation, food, education, phone, internet, cable, entertainment, etc. Everything that you found yourself spending money on those past three months needs to be inputted.
Needs and Wants
Create two more columns and name them “Needs” and “Wants”. Now here’s one of the biggest tests as to whether you’re going to be able to live an elite life or not. Can you literally look yourself in the mirror and responsibly tell yourself which of these expenditures is a true need and which of them is a true want?
If you can stop lying to yourself financially at this point, you have the ability to turn your financial future around and I would argue your entire life. I know, because I did this VERY THING almost 20 years ago and it literally changed the trajectory of my entire life.
Now there shouldn’t be much of a debate as to what is a Want and what is a Need so let me take some pressure off of you.
Any expenses that will cause you to be legally prosecuted, cause you to starve or lose your job are Needs. Any AND all other expenses are truly Wants. Seriously.
Although we all love television, cable and subscriptions to premium programming (sorry YouTube TV and Hulu) they are Wants. As is our Internet expense unless we need it for our job.
I consider the cell phone an essential, due to having to communicate with work, but we’re going to talk about the “level” of what is needed. Although perhaps a Need, no one truly needs a $1,000 phone and a $200 a month cell plan. That’s turning a Need quickly into a Want.
Now that you have your three columns; (1) All monthly expenses over the past three months identified and averaged, (2) expenses identified as Needs and (3) expenses identified as Wants created and populated, we now can do the heavy lifting.
The first thing that we need to do is look at each and every expense individually, regardless of whether it’s in the Need or Want column, and make a note on the far right in the row that it’s in as to “why” it is even an expense and “why” it’s the amount that it is. This will become a fourth column, the “Why” column.
Why?
More specifically, in the Why column we want to ask ourselves “why do we need to spend the amount on this expenditure that we do?”. We want to challenge why we need to spend $600 a month on a car when we could spend $300, or as previously mentioned, $1,000 on a cell phone when one for half as much would do the job.
This exercise is as much about validating the expense as a Need as it is reviewing whether we can accomplish the same goal with this expense if we spent less money.
Now as it relates to reviewing the expenses in the Want column, we need to be brutally honest and ask ourselves whether each and every expense deserves to take our money going forward. When I did this exercise some 20 years ago, I was astonished as to how much money we spent on doodads and other meaningless stuff.
In addition, I couldn’t believe the amount we spent on Wants that I was willing to admit that we didn’t even need to have. I found it to be frustrating from the standpoint that we could have been investing this amount all along versus uselessly throwing it away every month and feeling strapped because we “didn’t have enough money”. The truth was our spending habits had held us hostage for far too long.
After you’ve finished the Why exercise, you should have a pretty good picture of a few things. First, are your Needs really Needs in the first place? Can you accomplish the Need in a more affordable way?
Secondly, of your Wants are any even worth spending your money on them going forward? Of those that are, are there any alternatives where you could spend a lot less on them? (basic Internet versus a high-speed premium package, for example).
Once this is completed, you will need to reevaluate where you stand with your spreadsheet. I’m assuming that you now have dialed in your expenses so that if it truly is a Need you know what you need to spend on it.
You’ve also now identified where you could adjust an expenditure and possibly even determined where you could get a more affordable alternative. Perhaps you could even identify where you might have been duplicating an expense in an area such as insurance coverage.
In addition, you’ve also tightened up your Want expenditures and identified several that you no longer will be spending money on. With all of this information in hand, you now have a “No Budget, Budget”. You have a pretty good, albeit not exact, idea of what you will need to have monthly in order to pay for your life operating expenses.
Now how do you use your “No Budget, Budget”? Actually, at this point you need to make a pretty serious paradigm shift. You now need to consider the amount that you have “left over” after your total Needs and surviving Wants, which I call your Future Fund, as the most important part of your finances.
In fact, this amount will now be the amount of money that you will do whatever you need to do in order to reserve up front BEFORE you allow any other funds to be expended. These funds will be the first ones allocated, to your future, and everything else remaining is for Needs and then Wants, respectively.
Pay Yourself First
Effectively what you’ve done is allowed yourself to pay yourself first and left yourself with ‘just enough’ money “leftover” to pay your bills.
Approaching your finances in this manner accomplishes a few things; First, you make sure you invest a significant amount of your money. Second, you reduce the amount of money you spend on Needs AND Wants.
Lastly, you don’t have to keep a budget because you’ve already apportioned the required amounts upfront to meet your commitments.
Therefore, there’s no need to track the expense of your funds as you have effectively already done so upfront before you spend any of them.
Summary
Although there are many ways to approach personal finance, I have found the “No Budget, Budget” approach the most effective. Unlike the traditional budgeting process which requires ongoing effort and daily will power to follow the plan, the “No Budget, Budget” requires the effort and the commitment to the plan to be spent upfront.
