Before we talk about investing or aspiring to be part of the top 1%, regular saving of your income is absolutely critical. But how do you save? Only if you spend less than you earn. I know, right? But how do you spend less? By budgeting, of course.
The word budgeting has an image problem. It evokes the same emotion as in smokers who want to kick their habit but are afraid to go through the painful process. Many websites that talk about budgeting also ask you to follow a discipline of preparing a budget at the beginning of a month or a year, then keeping track of all your expenses and even having daily targets for spending. That’s a lot work! All this adds to the stress, much like a smoker who is told to follow a rigorous 12-week process to give it up. Or a couch potato who is told to follow a 90-day rigorous exercise routine to run a marathon. Ain’t gonna happen!
So, how do we get the benefits of budgeting without actually…budgeting? Simple, we hack it. We can manage money well without actually budgeting. Unlike years ago, today all our financial lives are practically 100% online. So, there are 2 simple and FREE ways you can do it.
There are two effective online tools, both of which I have used personally. They are Personal Capital and Mint, and both are great in categorizing all your expenses. They do this for you FREE! I personally prefer Personal Capital because it not only helps you budget but also monitors all your investments and tells you if you are paying too much fees or if you are not on track for retirement or other goals you may have. All you need to do is to link your bank, credit card and investment accounts. You get to see them all in one place. Expenses are categorized and presented in easy charts and tables so you know where your money is going and what areas to focus on to reduce your spending. If you are spending say, 50% of your income on rent, that’s where the biggest ‘bang for the buck’ will be in reducing your costs. Moving to a cheaper place will help you save a whole lot more than trying to sacrifice your refreshing daily latte. These online tools help you become sensibly frugal, and that’s what matters in your financial success. Using a good online tool helps you get the benefit of budgeting without actually budgeting.
If you are unwilling to aggregate all your financial accounts into Personal Capital or Mint for whatever reasons, there is an alternate option. This method appeals to those who like to do it on their own for maintaining full control and analysis of their own financial information. This method uses your own bank that you put money into and withdraw from. All banks provide a free online statement of all credits and debits for any period in your account (monthly, quarterly or annually or any period you choose). All you need to do is to import that bank statement into your favorite spreadsheet tool (Microsoft Excel or Google Sheets, for example). Once you do this, you can play with it as you like to do a ‘proxy’ budgeting. For example, you can add only the debits using the SUM formula of your spreadsheet. These debits should cover all your cash outflow/expenses. Adding these up tells you what you have spent over a period. If you follow this method, I suggest using a bank statement over at least 3 months or even 6-12 months, so that you can capture your one-off expenses that may not occur monthly. This method works best for those who have only one bank account where they spend all their money from. For example, if you download a 12 month statement, you can divide all the added debits by 12 to calculate your average monthly spend. If this figure is more than 90% of your pay check, then you need to dig deeper and see where you can cut.
Following either method above offers a simple alternative to detailed budgeting while yet giving you most of the benefits to improve your savings. This way, you can claim to budget without actually doing the painful process of budgeting. Now, if only there was a similar hack for smokers and couch potatoes!