What???!!! Did I read that right?! Is this some fake news site?!
No, friends, we were not hacked and you read that correctly. The headline comes from a quote a colleague gave me a while back from a personal finance columnist at the Wall Street Journal – Jonathan Clements: “Don’t budget. It’s a tedious exercise favored by nerdy individuals. Instead, make sure you save enough every month. Do that, and there is no need to budget.”
At first I took offense at the “nerdy” remark. I never saw the whole column so I can’t speak to Mr. Clements’ points, but the concept of “saving enough” really resonated with me.
Now, don’t get me wrong – I’m not dissing budgets. We DO need to have a spending plan. After all, who among us has unlimited money? We’ve only got so much and if we don’t control where it goes, other forces will do it for us leaving holding the bag.
THE SPENDING PLAN
Coming up with our spending plan (aka budget) is the easy part:
Step 1 – Determine take-home income
Step 2 – Subtract fixed expenses (rent, utilities, loan payments, etc.)
Step 3 – Subtract necessary and desired savings (car repair, health insurance deductible, retirement, holidays, etc.)
Step 4 – Subtract flexible expenses (food, clothing, gas, entertainment, etc.)
Step 5 – Equals what’s left. Decide how to allocate the surplus, if you are so lucky. (A negative number here needs immediate attention!)
Executing our spending plan becomes the tricky part. This where the nerds have an upper hand – they love spreadsheets, data, tracking, balancing. Budgeting is fun for them. I know I take great pleasure in balancing my checkbook with my credit union every week. I love it when it doesn’t balance because then I have to find the error! (I prefer to think of myself as a detective instead of a nerd, although it’s probably not good material for a riveting detective novel.)
STAYING ON COURSE
For those of us who aren’t as “nerdily” inclined, how do we make a budget work in our real, everyday lives? Even nerds can struggle with this. If you have a busy family and everybody is dipping into the same pot of money, it doesn’t take much to lose control and debt ensues. The control is usually lost in the flexible and periodic spending.
The old fashioned, tried-n-true envelope system is an effective and powerful tool to control spending, but having cash around carries its own risk (fire, theft, forgetfulness…) The envelope system works best for those expenses that are frequent, like groceries or dining out, as the money is moving fast. While saving cash can work for periodic expenses (sports fees for the kids, clothing, Christmas, car insurance) it’s just not as secure and convenient (you have to pay by check or online.) Here’s where the Jonathan Clements’ quote comes in.
SAVINGS AS ENVELOPES
Many financial institutions offer sub-savings accounts that you can name and set up auto-transfers into. This can be a great way to keep a handle on those periodic flexible expenses. Let’s take clothing as an example:
- Your monthly budget includes $50/month for clothing (which is $600/year), but you don’t necessarily buy clothes each month.
- Set up an auto-transfers into the sub-savings labeled “CLOTHES” for $50 each month.
- When you need (or want) to buy something, the balance in that account dictates what you can spend.
No spreadsheet to update, nothing to remember. Getting it set up is a little work, but once in place you’re set:
- After you’ve established your spending plan, add up the “save monthly’s” for the periodic expenses.
- Ask your payroll department to direct deposit that total amount each month to your general savings account.
- Go to your financial institution (may be able to do it online in your pajamas) to set up the various accounts, the transfer dates and amounts.
That’s it. No apps to figure out how to use or spreadsheets to maintain. Simple but elegant. With your hard earned money all in place, whether in an envelope or a special account, what’s left is yours to squander as you wish!
I’m sure Mr. Clements’ article included saving for goals, retirement, and emergencies. They should all be a part of your master spending plan, as much as is possible. You may find by compartmentalizing the flexible spending you have more to put in those longer term savings!
A budget review with a financial counselor is a great way to kick-start this strategy. Call LSS Financial Counseling today at 888.577.2227 for your free session!
Author Mary Ellen Kaluza is a Certified Financial Counselor and she specializes in budget, credit, and debt counseling and financial education.