To Budget or not to Budget?

23 Feb / James Eastham

The budget! The number one piece of advice almost all personal finance guru’s advocate. Start on the road to improved finances by working out exactly where it is you are standing right now. But is the budget a thing of the past? Is there a better way to become more financially free without the need for apps or spreadsheets?

The vast majority of people I know who DON’T budget do it for one huge reason. The time required and monotonous of actually doing it. Whether you have an app linked directly to your bank account or manually complete a spreadsheet. These things take time and are frankly pretty boring.

Hands up if you love to budget

 

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I’m going to start this article with the disclaimer that I love to budget. I have two separate spreadsheets, one for my personal and one for our joint bank account. Roughly once a week I quickly run through my bank statement and add any new incomings or outgoings to the sheets.

I’ve set them up in such a way that the process takes around 10 minutes and all of the calculations are done instantly.

From the minute I add the data to the spreadsheet I know exactly where I stand financially for the month. This includes any recurring payments that are yet to come out.

The reduction in mental stress that comes from this is astonishing. I’ve always been pretty comfortable with money, but going through this process takes things to a whole new level. Knowing exactly how much disposable cash you have available every month is a powerful thing.

The other thing I love about budgeting, seeing the results of the savings I make. Whether that be an increase in savings rate, a paying down of debt or just savings on our household bills. Progress always breeds more progress. Seeing things slowly improving every single month, even by the 1% I’m always banging on about, only makes me want to work harder.

Yes, my time is valuable and yes it is a little time consuming to manually type in the data. However, a lot of the effort was front loaded. Now that the spreadsheets are linked up and working, spending 15 minutes a week for the peace of mind I get from it. That’s a pretty epic trade-off if you ask me.

It’s the 21st Century James, use an app

Some of the apps out there are absolutely fantastic! However, most of the apps I have tried don’t have the right level of control that I like from my spreadsheets. Having direct bank integration seems like a great thing at first. But once you realise you need to manually categorise all your transactions, then that becomes a bit more of a chore.

A lot of the apps also have pages and pages of different categories. If I want to mark something as being a bill; first I select bills then household then kitchen then 3rd cupboard from the left just to be able to mark the expense against a specific item.

From a reporting point of view, this is great. For simplicity… Not so much.

If you’re just getting started with a budget, getting into the habit of recording your spending in an app can be a great starting point. For the vast majority of people, an app will be a great addition. For nerds like me, however, I just didn’t get the right level of control.

What if I don’t want to budget?

There have been some murmurings around the community about an alternative way to ‘budget’. One that doesn’t require spreadsheets or manually selecting categories for transactions. It’s simple. It’s effective. Most of all? You really do not have to think about it an awful lot.

What is it?

The pay yourself first budget.

I first came across this idea through one of my favourite personal finance bloggers; Afford Anything. Paula advocates taking on an anti-budget, paying yourself first then working with the rest.

So let’s explore this idea a little further.

Traditionally, people get their salary, spend what they need and save what is left at the end of the month. They use fancy apps or spreadsheets to track what they are spending as the month goes on. At the end of the month, they have £X left over and that is then moved to a savings account.

Pay yourself first

The pay yourself first budget flips this completely on its head.

Let’s say you’ve done the maths and you want to retire in 20 years. That means you need to invest 40% of your income for the next 20 years.

Instead of hoping you have 40% left at the end of the month, why not just invest the 40% as soon as your salary hits your bank account and then work with what is left.

No need for time-consuming written budgets. No need to spend your hours categorising transactions in an app.

Plain, simple and most importantly impossible to get wrong.

Once the money is invested, withdrawing it is a huge no-no. So there’s no chance for you to just take a little back to fund a meal in a restaurant. Or to pay for a night out on the town.

Instead of hoping you have 40% left at the end of the month, why not just invest the 40% as soon as your salary hits your bank account and then work with what is left.

You don’t need to worry about making 40% because 40% has already been reached for the month.

But what if the remainder isn’t enough for me to live on?

Well, that’s fine, you know where you stand. Working with a pay yourself first budget gives you complete clarity about where you are compared to your goals.

If you can only afford to invest 35% of your income, then you know that making an extra 5% through side hustling is an option.

The peace of mind knowing exactly where you are compared to your goals is priceless.

The hybrid budget

Personally, I sit somewhere right between these two schools of thought. All of my direct debits leave my current account a couple of days after payday. This includes investments, savings, debt repayments and household bills.

I set 10% of my income aside in a separate account to use for ‘fun’ spending.

I most definitely pay myself first.

That said, I do still use spreadsheets to monitor my spending for the month. This:

  1. Allows me to monitor ‘lifestyle inflation’ to ensure my frivolous spending isn’t increasing and
  2. Gives me peace of mind that I am not going to overspend with what I do have left after investing

I’m also a huge nerd, so keeping track of my expenses in linked spreadsheets with fancy graphs really does it for me.

What’s the secret?

There is no secret sauce for meeting your financial goals. For every piece of advice out there in the finance community, there will be a counter-argument somewhere else.

The secret lies within. Finding out exactly what works for you on a personal level is absolutely key for reaching your goals.

Some people would be happy to instantly transfer 40% of their salary to an investment account and just figure the rest out from there.

Some people need to go through all of their expenses with a fine-toothed comb to ensure they aren’t overspending.

Nobody is 100% right, and nobody is 100% wrong. The only person who can truly work out what is best for you is… Yep, you guessed it. You!!!!

Actionable tip 1 – Be aware and be accountable of your finances. However you do that is up to you, just make sure you do it.

But, make yourself aware!

That said, don’t sit on your hands and hope everything will be ok.

I look around people my age and almost none of them have any kind of long term financial planning or goals. In the UK, all employers are required to offer a workplace pension scheme. All employees are auto-enrolled and have to request to be un-enrolled.

That is a great start, but to really take back control of your financial future needs more than that. 5% of your salary into a workplace pension every month is fantastic, but there is so much more you could be doing.

Have thoughts on the budget vs anti-budget? I’d love to hear about it in the comments.

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