A Different Way to Budget

I have a friend who swears the idea of a budget just doesn't work for her.  "There's always some need I don't account for, or I forget to keep track of spending and overspend in some area."

It is hard to keep track of every penny.  And sometimes prices go up more than you expect, and then your budget has to be redone.  Just because I've been using a budget for years doesn't mean I never have to make adjustments or that the concept works perfectly for everyone. 

So I asked my friend to describe what she does do, since she doesn't seem to have problems with overdrawing her checking account or being late with bill payments.  Whatever she's doing is working well for her, so maybe it's a solution for many people who have had trouble with, or just don't like, traditional budgeting.

The 2 step non-budget plan

My friend's idea is straightforward and certainly worth trying to see if it works for you.

1.  Pay now.

Whenever you get a paycheck, immediately pay for or buy the things you absolutely need.

• Pay your rent, utilities, car payment, parking fees, and insurance (or set aside a portion of those costs if you get paid more than once a month and any one paycheck isn't large enough to cover them).

• Transfer a fixed amount into a long-term savings/investment account.  Treat this like a bill.

• Buy your groceries and toiletries to cover the period until you get paid again, and take out some cash for gasoline.

If you're setting aside a portion of your essential payments for a later date, don't just keep that money in your checking account.  Transfer it to a savings account that has a small minimum balance requirement.  (Many credit unions offer the option for multiple no-fee savings accounts with a $5-$25 minimum balance.)  The point isn't the small bit of interest you might earn – the idea is to keep the funds separate and safe.  You can withdraw them without penalty when the bills come due.

2.  Decide on your "cushion."

Hopefully, you have some money left over after you've paid for your absolute basic needs.  Decide on the amount of money you want to have remaining in your checking account by the time your next paycheck arrives.  My friend likes to have a $500 cushion, but you could choose a larger or smaller amount, depending on your means.

Now you just have to make sure that whatever you buy doesn't cut into that chosen cushion.  As long as you maintain your boundary, you have discretionary funds to spend on clothes, entertainment, meals out, etc.  Otherwise, you don't get to buy whatever-it-is until your next paycheck.

"After all," she explains, "if all my actual basic needs were paid for when I got the paycheck, anything that cuts into the cushion would be a luxury that can wait."

Needs vs. wants

As you've probably noticed, my friend is using the classic budgeting tool of needs vs. wants.  She's carefully funding her basic necessities first, then enjoying the freedom to spend however she wants within a pre-chosen boundary.  This isn't mere self-indulgence.  It's a calculated plan to use her money wisely, while avoiding the need to budget for every purchase.

I think this plan works well because my friend knows that her bills are paid, her long-term savings is growing, and she maintains a cushion for emergencies.  Beyond that, she has no accounting to do.  "It's worked for me so far, way better than keeping a spreadsheet or using an app."

It could work for you too.

Related article:  15 Little Luxuries that Make Even a Minimalist Feel Rich