Why This Financial Planner Says “No!” To A Budget

Budgeting is not the key to financial success. You heard that right. This financial planner is telling you not to make a budget. Why? Because budgets are like diets. If you are always on a diet, what happens when you go off the diet? Living a restricted, budget life can lead to financial blow back when you revolt against the tight budget categories and go on a shopping spree. There is another way. I’m a financial planner after all, and I wouldn’t leave you without a plan for financial success.

Most folks think that their first meeting with a financial planner will entail creating a budget; setting strict spending categories to dictate where their dollars go. That may be true for other financial planners, but I don’t like budgets and don’t advise my clients to start making one. Why? Because budgeting to too restrictive.

As a CERTIFIED FINANCIAL PLANNER I never recommend a budget to clients and friends.

Sure, keeping a tight grip on your money and budgeting carefully can save you some money and help you sock away extra into savings or to pay off debts. Just like a restrictive diet can work as well. But keeping an unreasonable chokehold on your finances is not sustainable and eventually people fall off the budgetary wagon and go back to their old spendy ways.

So what does a financial planner recommend instead? I have my clients implement a Save, Spend, Track (SST) strategy.

Start with Saving

In financial planning, you have to start with running the numbers to get a baseline of where you are at. To continue the diet analogy, it is just like getting on the scale to determine your starting weight. This does not have to be a complicated process and you can find simple online calculators to help you figure out how much you will need to save for retirement or college at sites like www.financialcalculators.com. If you would rather sit down with a financial planner to help you run the numbers to figure out what you will need to meet your savings goals and how to get there from where you are, you can find a Certified Financial Planner at www.cfp.net or you can even hire me at www.redwoodfinancialplanning.com. Your goal in running the numbers is to figure out how much money you need to save as a lump sum, then how much you need to save monthly to reach your financial goals.

Enjoy Your Spending

The point of SST is to allow you to enjoy spending your money and not have to micromanage it. The overall question you must ask yourself here is if your spending in line with your savings goals. You should enjoy your money, but not at the expense of your long term financial goals.

To get a good idea of how you are spending, take a look at where your funds go each month. Putting your actual expenses down on paper may reveal several areas of money misuse. Go through your account statements and record your spending each month. It helps to categorize it so you know what you spent on housing, car and gasoline, debts, food, savings, and entertainment. This is not setting up a restrictive budget, merely looking at your spending in terms of overall groups or categories.

Next, look at your monthly savings goals you have identified above. What percentage of your total income is that savings goal? 10%, 15%, or maybe 50%? As you are spending now, are you able to save enough each month to reach your savings goals? If you have to save more than 50% of your income to reach your savings goals, something has to change. You either have to make more money or change your goals.

Unless you are quite wealthy, it is unlikely that you will have a sustainable savings rate of 50% of your income. A more reasonable percentage for the average family is saving 10-15% of their annual income. Set aside that reasonable percentage that moves you toward your long term savings goals and get on with the business of enjoying your money!

Once you see where your money is going, you can choose to spend it more wisely. Everything is a choice. That expensive car is a fine choice, as long as you know where the money is coming from to pay for it. The goal here is to think through your saving and spending priorities and prioritize saving. You can split your savings goals to come out of each paycheck, to be saved each month, or even each quarter, but the important thing is that you save first. And then spend the remaining amount on whatever you need or want.

If you set aside 10% off the top to reach your savings goals, you are prioritizing you, your family, and your financial security. Then fit your remaining expenses into the remaining 90% of your income. If you have trouble fitting your expenses into that amount and find yourself relying on credit cards, you will get yourself into debt and into the same trouble you were in before you set aside your savings off the top. Setting aside money into savings only to rack up a comparable amount on credit does not make a successful financial plan. Trimming your spending by evaluating your priorities is key.

Tracking Your Spending and Savings Goals

Maintaining tracking of your spending is easy thanks to the help of amazing apps like Personal Capital and Mint that can sync with your bank account and show you how you are allocating your spending in an easy to read graph. You can also automate your saving and investing with monthly or bi-weekly transfers to your favorite savings or investing accounts, allowing you to pay yourself first and set aside your savings before you even start spending.

These apps can also track your savings goals, so you can see how your savings and investments are growing simply by taking a glance at the app. Keeping an eye on tracking your spending and savings allows you to see your whole financial picture, both short term and long term. There’s no need to get into the weeds about tracking each penny you spend, that is not what SST is about. Instead it’s about enjoying your money today while also focusing on your long term goals.

How To Start SST Right Now

Step 1: Start by saving something next month. It doesn’t need to be a big amount. Try to set aside $100, $200, or $500 from next month’s income and put it into savings. The number is not as important as forming the habit of saving first. Building that saving muscle takes time and it may be hard to take that money out of your spending rotation and put it into savings. But it is worth it! After a while it will become second nature to pay yourself first and stock your savings. When you are ready, check out an online retirement calculator or meet with your financial advisor to set concrete goals for yourself to invest enough money for your retirement or college savings goals. Then you can modify your monthly savings to meet that goal.

Step 2: Live your normal life. Pretty easy, huh? Of course it is. That is the beauty of SST. If you don’t have to obsess about your restrictive budget and instead just start with a smaller amount of money every month to spend (after you have set aside your savings) you will just naturally shift your spending habits. Being intentional about your purchases and knowing where the money will come from to pay for your wants and needs is the evolution of SST. The key here is to keep your spending within your means. Do not whip out the credit cards or dip into your savings to pay for extras that you cannot afford now that you socked away money into savings. Remember, you are doing this to reach your long term financial goals. Having money in retirement is far more important than going out to dinner next week.

Step 3: Go back and see how you spent your money by tracking it. Come the end of the month, take a look at your app, look through your bank statements, or review your receipts to see how you spent your money. Was your spending in line with your financial priorities? Most likely you were able to get all your bills paid and still have money for entertainment, so you didn’t even miss the money you socked away. That is the beauty of SST. If you take the savings off the top you won’t miss it the rest of the month. If you found that you spend far more money on something than you would care to admit (ahem, restaurants, Starbucks, personal care), then keep that in mind for next month to curb that spending a bit more so that you have more money left for things that really matter to you, like family outings, saving for a special vacation, or renovating your bathroom. When you track your spending, you can see where your dollars go and can make better, more intentional choices with your money that help you reach your financial goals.

There’s no need for restrictive, bottom-up, track your dollars and cents budgeting to get ahead financially. Instead, I recommend the Save, Spend, Track (SST) method. Using SST will prioritize your spending first to help you reach your long term financial goals by lopping off a savings chunk right off the top, allow you to spend as you want within your remaining allocated spend money, and move you toward your financial goals without the restrictive demands of a line-by-line budget.

This post was originally published May 10, 2019 and was updated September 20, 2019