Budgeting has never worked for me. I just don’t like doing it. Yet month after month I am able to pay all my bills, put something aside, and have a little fun too. How?
Too much mental cost
The reason I can’t keep a budget is because tracking and categorizing every purchase requires a high mental cost. I feel like I am living a math problem instead of my life. The idea of prescriptively saying “This month, I can only eat $200” or, “I can only have $150 worth of fun this month” is stifling, and trying to figure out if a box of chocolates I bought for my wife should be categorized as “food”, “gift”, or “fun” is a complete non-starter. If I had to manage my money like this, I would simply never buy anything.
Furthermore, most of my discretionary expenses – the bulk of what a budget helps track – amount to a very small proportion of my income. As an example, if I make $5,000/month, a $3 cup of coffee over lunch represents 0.06% of my income. A cup of coffee makes me happy and provides a pleasurable midday escape from work. However, a cup of 0.06% of my monthly income is not pleasurable at all; in those terms, it is just an undifferentiated mark in the ‘expenses column’. For me, tracking each individual purchase like this reduces each purchase to its monetary value, erasing the benefit of the purchase entirely.
The utility of that $3 is better as a cup of coffee, than as a 0.06% increase in my monthly savings. This is a choice I made, and it may be different for you (maybe you hate coffee!). Even if I buy a cup of coffee every workday of the month, the monthly total is $3 x 21 = $63, or 1.3% of my monthly income. Logging, tracking, and limiting each of these purchases is too much work to manage that 1.3% of my income, especially if it comes at the expense of managing the other 98.7%.
Tracking and forecasting income vs expenses
Just like I have a limited amount of money to spend each month, I have a limited amount of mental energy to spend managing my finances. What I need is a quick, easy way to keep track of my income and expenses – a method that doesn’t require detailed record-keeping, but that keeps me from spending more than I make and on track towards my financial goals. I can accomplish this by:
- Tracking known income and expenses
- Forecasting to spot shortfalls in advance
Below is an example of how I track my money (all amounts are made up):
This represents 2 months’ worth of income and expenses. The left box represents the current month. Let’s say that today is January 15th – we are halfway through the month. I started January with $222 in my account, and have already paid tithe, utility, and data, and earned one paycheck. I keep track of completed transactions by changing the color of the box, from orange to blue. Before January is over, I will need to pay rent and my credit card bill ($1,853), and will earn an additional paycheck as well as an extra $200 for a side gig. When the month is over and all income and expenses are accounted for, I should have $299 in my account, of which I plan to save $200.
In the right box, which forecasts next month’s income and expenses, I spot a problem. I’ve entered all the recurring expenses, and estimated my credit card bill at $1,800 (in line with the current month’s bill). I know I have a semiyearly insurance payment of $400 due in February, so that’s entered too. If I don’t make any adjustments, I will have -$171 in my account at the end of February. Fortunately, since today is only January 15, I have plenty of time to change course – I can put less money in savings, try to earn an extra $171 at my side gig, or spend less money on discretionary purchases for the rest of January, which will decrease my projected $1800 credit card bill due at the end of February.
Benefits to Mental Load
I want to re-emphasize that this method is not a budget. It doesn’t tell me what to do or how to spend my money. Instead, it simply and concisely gives me the information I need to make my own decisions. It extracts a low mental cost by being dead simple to implement. There is no categorization of purchases; no real-time tracking (I can update this as infrequently as twice a month); and is easy and quick to read and understand. If I want to go deeper into my spending, I can open up my credit card statement, which already itemizes every purchase with location, date, and amount .
And the method provides high mental benefit by providing me with a picture of both my current and near future financial situation. I know, to the dollar, how much I’ll be short 6 weeks from now. The sense of unease, or financial dread, that comes from not knowing is significantly mitigated. I have a number I need to hit, and can take steps to make sure I do. If I decide to cut my lunchbreak coffee for a month, I know from my credit card history I would only save $63, and I will need to take additional steps to cover this projected shortfall. The point is, I have the information.
This article merely introduces the concept of tracking and forecasting vs budgeting. Key elements of this technique, addressed in separate articles, include:
1. Having sufficient savings to cover emergencies or unplanned expenses.
2. Maximizing the benefits of a credit card without falling into credit card debt.