In theory budgets are great. You know how much you earn each month. You know how much your bills cost each month. Simply take the remaining money and allocate it to the rest of your life (food, savings, entertainment,shopping, etc.). As long as you follow your plan and don’t overspend in any one category, then you will be golden. No sweat right?
The problem with most budgets is they are too rigid. Following a strict budget is like trying to fit a square peg into a hole that’s sometimes round, sometimes square, sometimes triangular…okay you get the point. Life is unpredictable.
Are you going to starve yourself for the last 5 days of the month because you blew your food budget on a fancy dinner? Are you going to skip your friend’s birthday party because your bar budget is maxed out? Are you going to stop buying toilet paper because you spent your home budget on those Yankee Candles? (probably worth it, those things smell delicious)
In some situations, budgets can actually bait you into spending more. Like many New Yorkers, maybe you fled the concrete sauna every summer weekend. Between the hectic workweek and non-stop weekend commuting, you didn’t shop once all summer. You now have 2 months of an unspent shopping budget and there is a HUGE Labor Day sale this weekend! How convenient? You should put that money to good use and upgrade your fall wardrobe. After all, your hardcore summer discipline should be rewarded right?
We all like the idea of budgets because they introduce structure. It feels good to have a rough plan for our hard-earned money. But do we ever actually hold ourselves accountable? We devote so much time to crafting these fancy budgets, but we never follow up to see if our spending is in line.
We like to plan because it feels like we are taking action. However, when it comes time to actually analyze our spending, we find any excuse possible to delay taking action. No one wants to face the fact that they spent 25%of their paycheck this month on blind dates…
At the end of the day, we really just want to know where our money is going and how to keep a bit more of it in our pocket. Budgets help us accomplish these things, but they do so in a very roundabout way. So rather than circling the wagon, why don’t we attack these things head on?
Track Your Spending
Well go with the bad news first: If you want to understand your spending habits, then you must track your spending. There is no way around it. You must face the music.
Analyzing your expenses can be frightening, but it will have a huge impact on your life. You will finally understand where your paycheck is going. You will realize how much (if any) you are saving each month. You will discover the behaviors that are bleeding you dry. All of these sobering realizations will impact your future choices. You will think twice about blowing money because you know you will be held accountable the next time you open your expense tracker.
Tracking spending is not all doom and gloom. In fact, it can provide some much needed positive reinforcement. Did you opt for a wine and cheese night at home instead of the bar last week? Did you bring your lunch instead of buying that obscenely overpriced $15 salad? All of these good decisions will also show up in your expense tracker. It’s a weirdly satisfying feeling to see your spending decrease from month-to-month.
Change Your Perspective
Budgeting can make insignificant purchasing decisions a bit easier. You know the price of the item and you know your budget. The decision becomes clear cut. However, this process fails miserably when the item has some significance to you. If it’s something you absolutely need or REALLY want, then no budget will keep you from buying it. So lets eliminate budget constraints entirely.
Instead, you need consider how each dollar spent impacts your end goal. Do you want to retire early? Do you want to save enough money to start your own business? Do you want to travel the world? Whatever you’re after, you will likely need to save some cash to get there.
Imagine you are at the bottom of a massive cliff. At the very top of the cliff you can see your goal, the promise land. However, you cannot just teleport up to this promise land, you must build your own stairway to heaven. Every dollar you save allows you to add another stair and get one step closer to your goal. Every dollar spent simply delays your ascent.
So how does this actually work in practice?
Let’s say your considering buying the newest iPhone. Your current iPhone is 2 or 3 generations behind, but it still gets the job done.
Budget Thinker: “I do have some money budgeted for electronics and entertainment. As long as I don’t make any other big electronic purchases over the next year then I can afford this phone no problem.”
Long-Term Thinker: “My goal is to save up $20,000 to travel the world. If I buy this phone for$1,000 I will delay my departure date by 6 months. Is the marginal performance improvement I will get from the newest iPhone really worth delaying my dream of traveling the world?”
Each purchase should be considered and analyzed on a case-by-case basis. Sometimes the benefits will be worth delaying your long-term goals, but most times they won’t. Viewing purchasing decisions like this is a skill. It requires taking a step back and ignoring your “in the moment” emotions/thoughts.
When considering big purchases:
- Do not justify the purchase by saving the receipt and telling yourself that you “might return it”. Nine times out of ten you’ll end up keeping the item.
- Sleep on it, even if the item is “on sale for one day only”. This is a marketing tactic which nudges you towards emotional and spontaneous purchases. If you still really want the item the following day, then spending a few extra dollars is not the end of the world.
- Consider cheaper alternatives. Do you really need the $500 tailor made jeans? Or will a $50 pair of Levi’s get the job done? Is it really worth spending 10x more? Sometimes top of the line items truly offer a significant upgrade in quality, however in most cases the upgrade is marginal at best.
- Am I buying this to improve my life or to impress others? Be honest with yourself here. A year from now your friends won’t remember nor care if you were wearing Sketchers or Yeezys.
- Remember the Power of Compounding Interest. $100 today could grow to $700 by the time you retire!
At the end of the day your happiness should not be tied to purchases. This is a very slippery slope that will leave you with a permanent hole in your pocket. You will constantly feel the need to spend, because we all want to be happy. Instead, spending money should be a bit painful, because you know with every dollar spent you are delaying your arrival to the promise land.