You might think that as a finance nerd and Certified Financial Planner™, I would have the perfect system for budgeting. I mean, I actually like this stuff. I read financial planning magazines for fun. I devour books, newspapers, and podcasts on financial topics in my spare time. So surely I have a finely-tuned budgeting system that practically ensures millionaire status if implemented, right? Well, you would be wrong about that. The perfect budgeting system was never even brought up as a topic in any of my classes. Why?
My best guess is because it doesn’t exist.
So through the years I’ve tried a hodge-podge of different techniques, from tracking every penny on complicated spreadsheets to the automated online systems such as Mint.com and PersonalCapital.com. And the long-short of it is that they all work if you work them hard enough.
At the end of the day, it doesn’t really matter which budgeting system you use, because getting ahead financially isn’t really that complicated. You can boil it down to a pretty simple formula:
Income – Taxes – Expenses = Savings
And savings is what really matters. When you save you increase your net worth so that eventually, when you retire, your net worth can be turned into income. Ultimately, when the income that you can produce from your savings and investments is enough to pay your expenses, you have reached the holy grail of “Financial Independence.”
Sounds simple, right? That’s because it is. What’s hard is actually doing it.
The problem with budgeting is that very few people do a detailed budget and follow it consistently. It’s too detailed and time-consuming for most people. So what if we just cut out all the parts of budgeting that don’t help you focus on the one thing that actually matters, which is savings? Well if you do that, you basically have the “anti-budget.”
This has been around for a little while. David Bach wrote about it in “The Automatic Millionaire.” U.S. News and World Report recently called it “the budget that’s for anyone who doesn’t like sticking to a budget.” It’s the method I’ve used for many years, and I’ve found it to be pretty effective.
So how does it work?
Basically, the Anti-Budget simply says that instead of spending so much time tracking and categorizing each and every expense, you should just focus on what’s really important: savings. Figure out how much you need to save to meet your goals, set that up to happen automatically, and then figure out how to live on the rest. So let’s take a deeper dive into how it works.
Figure Out What You Need to Save
First you need to sit down with your partner (if applicable) and hash out your goals. They may be different for each of you, and that’s ok. (If so, I’d recommend that you sit down separately and make your own lists, and then prioritize them. Then compare notes and work out between yourselves a combined list that you both can get on board with. Be aware negotiating and compromise will be necessary!) But you’ll need to eventually boil it down to no more than a few key goals. (I’d keep it to 3 goals or less to start, because its hard to focus long-term on more goals than that.)
Next you need to price out these goals and figure out how much you need to save each month to reach them. For short-term goals, this is relatively straightforward. Just take the total cost and divide it by the number of months between now and that goal. For long-term goals, such as retirement, this is a tad bit more difficult, because compounding interest and inflation come into play. So you’ll need to use a simple retirement calculator. I’d recommend something straightforward like Vanguard’s Retirement Income Calculator. It’s pretty easy to use, and makes fairly reasonable assumptions.* My one caveat is that if you are within 10 years of actually retiring, this calculator is probably too simplistic. But for those who are just trying to get a ballpark number, it is a good way to get started.
Set Your Savings to Happen Automatically
The key to success with the Anti-Budget is that it’s easy and requires little time commitment, so automating your monthly savings is key. You want to set them up to come directly out of your paycheck, if possible, before the demands of life and last-minute expenses get in the way. Now if you are saving for retirement, I recommend taking advantage of workplace plans such as a 401k and 403b first. Thats because you often get a matching contribution from your employer. But even if you don’t have access to a workplace plan, there are individual retirement accounts (IRAs) and Roth IRAs available as well. The cool thing about these plans is that there are huge tax benefits to using them — check out my post on whether you should fund an IRA or Roth for more info.
Then Spend The Rest and Don’t Worry About It
Once your savings goals are met at the beginning of the month, you can just spend the rest as you see fit, and not worry too much about it. When I was on the Anti-Budget, I used credit cards for all my discretionary spending, and just made sure that I paid them off in full at the end of the month. As long as you do that, you don’t pay any interest, and you may even earn points and rewards along the way as well. Because I live a pretty laid-back lifestyle, this worked fine on most months. Occasionally I’d run over and have to dip into my savings to pay off the credit card bill, but then the next month I would just reign it in a little and make up for it.
However, notice that part of the key to this strategy working is that you already have some excess cash savings lying around. Why? Because if not, and you can’t pay off the card in full when you go a little over, you then start to carry a balance. And that’s when interest charges start kicking in. Suffice it to say, credit card interest rates are not something you want to mess with!
So there it is: the Anti-Budget. Simple, effortless, and straight-forward. For those who already live comfortably within their means and don’t want to dedicate a lot of time to budgeting each month, this might be a good option. For more information on a similar approach (he doesn’t call it the “Anti-Budget,” but the basic idea is the same), check out David Bach’s classic book “The Automatic Millionaire.”
A word of caution though, if you’re struggling to make ends meet each month and to get out of debt, this strategy probably isn’t for you. In my opinion, you probably need a more robust budgeting discipline like Dave Ramsey’s envelope system or YNAB.
*No retirement projection or calculator is perfect because, by definition, you are trying to predict the future. The key to a helpful calculation is the understand the limitations and to make reasonable assumptions. Be sure to read the fine print behind the numbers, so you know what assumptions the calculation is based on.