I know you hear it at the start of every year: you need a budget! The nagging gets tiring, even if you know or think you need one.
Budgets have a bad connotation. They’re restrictive, inflexible, complicated, time-consuming, and difficult to keep. They don’t allow for any fun.
And how are you supposed to know what will come up in the future? Your income and expenses may fluctuate.
The good thing is that a budget doesn’t have to be any of those things above. It can be flexible and easy to follow, which is so important because how many of us have started a budget only to ditch it after a few months? *Raises hand*
There are some people out there who love to budget and it works for them. For the rest of us, there’s another way. The type of budget I’m writing about today is the easiest to follow! I’ve even heard it called “the anti-budget” budget.
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Step 1: Determine your fixed expenses
There has to be some math involved in the creation of every budget. The first thing to do is tally up all your fixed expenses.
Fixed expenses are ones that remain the same every month. Some of these include rent or a mortgage payment, electricity, water, cell phone bill, health insurance, car payments, and childcare.
While there may be some variation such as in your electricity bill from month to month or season to season, in general, you know that you’re going to have to pay it each month. The point of doing this calculation is to set aside a portion of your income to cover these expenses.
Step 2: Set aside money for savings and investment
The second step is to set aside money for savings and investment. The point of this step is to set aside enough money to eventually meet your financial goals.
You might already contribute to your 401(k). That’s great! If you also have a goal of funding your Roth IRA this year, you can contribute up to $5,500 for the year, which means setting aside roughly $458 a month.
I include paying any debts in this category. Every month that you pay off some debt is less you owe in the future. Eventually, when you pay off your debt completely, that extra money will likely become savings or investments.
Step 3: Create a buffer
One of the biggest difficulties with setting up a budget is dealing with one-time and unexpected expenses. Some of these include visiting the dentist 1-2 times a year, dealing with car repair, and buying Christmas gifts. It’s cumbersome and time-consuming to create a category for every item or event that might arise during the year.
The best way to prepare for this is to have a healthy buffer, again setting aside a chunk of money each month in order to meet those expenses. You’ll have to make some estimation and judgment as to how much you need to have in this category.
In general, it’s good to have 3-6 months of living expenses on hand and then some for your one-time or unexpected expenses.
For a single person with no dependents, low rent, no car, and few financial responsibilities, that buffer may be a relatively small amount. If you’re a one-income family of 4 with children who attend private school and you have two cars and a mortgage, you’re going to need a large buffer.
If you’re not there yet, keep working every month to build this category.
Step 4: Allot the rest to discretionary spending
The rest of your income each month is considered discretionary spending. It may be $50 or it may be $5000, but it’s yours to spend as you like.
No need to create a budget category for every little thing like movies and eating out. If the money in this category is there, then it’s okay to spend it.
This budget is straightforward, right? It covers your financial responsibilities.
You’re paying your bills and saving first, so you don’t have to feel bad about spending on the things you want. It doesn’t require a lot of math or maintenance either. Here are a few more tips to consider while using it.
Automate whatever you can. With fixed expenses, making automatic payments ensures that they’re paid on time. You don’t even have to think about them except for checking your credit card statement for accuracy once a month. If you automate steps 1 and 2, then you have what’s left for steps 3 and 4.
Many people spend first and then save whatever they have left at the end of the month. Using the method above, you’re doing things the other way around. Save first and then spend, which is better for meeting your financial goals.
You need to have an income that fits your lifestyle to use this budget. Say you make $50,000 after taxes and steps 1-3 above require $30,000 a year. Then you’re doing great because you have $20,000 to spend freely.
If you make $30,000 a year and steps 1-3 above total $50,000 a year, then you need to do something differently, whether looking at where to cut back or how to increase your income.
This budget works best when your income matches your lifestyle.
Example
Here’s a rough example to get an idea of how this budget works. The numbers are made up, so don’t worry that this person is spending too much or too little on something.
Income: $60,000 yearly after taxes, equaling $5,000 a month
Step 1: Expenses – $1930 (or $23,160 yearly)
Rent: $1000
Electricity: $30
Cell phone: $50
Gym membership: $50
Car payment: $450
Health insurance: $300
Internet: $50
Step 2: Savings/investments – $758 (or $9,096 yearly)
Roth IRA: $458
Student loan debt: $200
Investment: $100
Step 3: Buffer – $1000 (or $12,000 yearly)
Monthly contribution to 3-6 months living expenses: $500
Monthly contribution to one-time and unexpected expenses: $500
Step 4: Discretionary Spending – $1,312 (or $15,744 yearly)
Groceries/restaurants
Clothes
Gifts
Vacations
Etc.
If you’ve tried budget after budget without success, try this “anti-budget” method.
Budgeting doesn’t always have to be as torturous as it sounds. You don’t have track every cent you spend and shuffle around money from this category to that in order to go out to dinner Saturday night.
Once you’ve set up this budget and you know your numbers, you’re set. You can maintain good control over your finances and still meet your financial goals while having some fun.
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Have you heard of or tried this “anti-budget” method? What do you think of it?
