So, you’ve been thinking of drawing up a brand new budget to reign in your spending.
But there’s a problem. You start a new budget with the best of intentions only to forget to follow through or you simply get annoyed with it. Maybe you’ll try again next month, right? The cycle goes on and on, and you’re left disappointed and broke.
This is common for many people, but why? Budgets fail because they’re unsustainable. Why are they unsustainable? Because they focus entirely on needs and ignore wants. This is where Conscious Spending comes in to save the day!
Traditional budgeting is all about making cutbacks and, usually, the first thing to go is fun stuff. You don’t need a Netflix subscription, so that gets cut. You don’t need to go to Taco Tuesday at Molina’s Cantina, so that goes too. But what does that leave you with? A budget that no one wants to stick to. And … another failed attempt. We know, we’ve been there.
The truth is, budgets are a waste of time. Didn’t think we were going to say that, did you?
“[Budgets] make us feel bad about ourselves, they don’t provide any forward-looking information — they’re just pointless,” as explained in our book, I Will Teach You to Be Rich.
Ditch the budget and get started with conscious spending instead
The problem with budgets is they make you look back on your spending to make changes. What really happens is you look back and feel horrible. And you do that the next month and then the next month after that. What you should do instead is look forward not backward.
This is a strategy we call “Conscious Spending.” Notice how it’s conscious spending, not saving. The thought behind this is all about positive spending habits, not banning yourself from spending altogether. So, put down the budgeting spreadsheet or app you launch every couple of months and forget about it.
Here are the steps behind the Conscious Spending strategy.
Step one: categorize your current spending
Let’s start with an overview of your money and spending. You should be able to categorize your spending into four different types:
- Fixed costs (rent and bills)
- Important investments (401k, Roth IRA, emergency fund)
- Savings goals (home down payment, vacation fund)
- Guilt-free spending (dining out, movies, happy hour drinks)
Let’s break those down even further.
Fixed costs – what you need to live
Starting with the fixed costs, list everything you need to spend during the month, including rent/mortgage payments, car payments, loan repayments, insurance, and utility bills. Get it all written down and write the cost next to each one.
Once you’re done, add an extra 15% on each one. But why, you ask? It’s to cover the things you haven’t accounted for. This way, if something does crop up out of the blue, it won’t derail your month.
After doing this, subtract this total cost from your monthly take-home pay. Ideally, this figure should be around 50-60% of your net income. What you have leftover is for savings and fun stuff.
Important investments – what future-you needs to live
Your priority here is to cover your 401k and Roth IRA. Aim to save at least 5-10% of your income after taxes for these accounts. If you’re unsure how much you should be putting away for retirement, this retirement calculator is your new best friend.
Savings goals – what you want for the future
The next thing to look at is financial goals for the future. You can split this section up into short-term, mid-term, and long-term savings.
Short-term savings are things like gift purchases or a brand new pair of AirPods you’ve been desperate to justify buying. Mid-term savings include things like a down payment on a car and long-term savings are for big-ticket items such as a down payment on a house or a college fund.
If we’re following the 50/30/20 (50% essentials/30% wants/20% savings) rule, savings goals and retirement savings fall in the 20% bracket. This means that 20% of your take-home pay should end up in savings.
Guilt-free conscious spending – what you want, period
The guilt-free spending part is the hard part. It’s all those little costs that add up before you know it. The Uber rides, popcorn at the movies, an extra cocktail at happy hour. These kinds of things are a little harder to prepare for unless you live a rigorously planned-out social life. Ideally, you want to set aside 20-30% of your take-home pay for this type of spending and variable expenses.
“But, I thought we weren’t allowed to spend on fun things when budgeting?”
This is exactly where budgets become unsustainable.
Remember, traditional budgeting is a waste of time. Most of us are going to spend this money regardless of whether we’ve told ourselves not to. You might as well decide how much you’re going to spend on fun stuff rather than ban yourself from spending altogether.
By allocating your money in this way, you make sure all the important costs are taken care of first without leaving out the fun stuff.
Step two: set up your automated system
Now you have a good idea of everywhere your money should be going, it’s time to automate your budget.
First off, decide what percentage of your take-home income you want to put into each category. As we mentioned earlier, a good rule of thumb is 50% for needs (e.g. rent, groceries), 20% for savings (e.g. 401k, savings goals), and 30% for wants (the stuff you feel guilty about spending money on). Remember, budgeting is an organic process. It’s not the end of the world if you have to tweak the percentages a little bit. Don’t feel guilty about it, it’s all part of the process. The most important thing is that it works for you.
The next step is to split your money up into each category when your paycheck comes in. A simple way to do this is to set up regular transfers from your checking account to your savings accounts. That way, you don’t even have to think about it.
For example, you could automatically transfer money for your fixed costs to go into a joint account with your spouse. You could also move your guilt-free money to a prepaid card you use just for fun spending. Making these transfers automatic will have you thanking past-you for not forcing you to make these difficult decisions each month.
Step three: keep track
This part will probably sound familiar if you have ever downloaded a budgeting app before. But rather than starting off with a vague idea about making cutbacks and saving money, the Conscious Spending strategy will provide a more focused approach.
So, go ahead and re-download that budgeting app or budget worksheet. Apps we recommend include Tiller Money, You Need a Budget, or Mint. These all work in slightly different ways. For example, if you’re the type of person who prefers spreadsheets, (me! guilty!), Tiller Money is a great choice. Be sure to check out some reviews before picking one that works for you.
Using an app or a trusty spreadsheet to track your spending is a simple way to ensure you’re staying within the parameters you set earlier.
Remember: it’s conscious spending not saving
Budgeting shouldn’t be about depriving yourself. It should be about spending where it really matters; spending on what you love and cutting back on the stuff that doesn’t matter.
That’s why the Conscious Spending strategy is about spending first and foremost. Most budgeting tips focus on what you can’t do, what you can’t spend your money on, or how you’re ruining everything buying coffee you love (P.S. You’re not. Coffee is fine, more than fine actually.)
We’ll be the first to admit that budgeting isn’t exactly fun. But if your budgeting method fills you with guilt, dread, and a sinking feeling every time you buy something, that’s a clear sign it’s not working for you.
There’s definitely a place for frugality and sensible spending. We wouldn’t recommend splurging on designer clothes while your retirement accounts lie empty. But there’s got to be a middle ground between that and making your budget absolutely miserable. Frugality alone isn’t enough to get you where you want to be. Neither is reckless spending.
What will work is being conscious of your spending and deciding what’s actually important. That’s why the 50/30/20 split is so beautifully simple. It takes care of the important stuff first but doesn’t neglect the importance of spending on yourself.
To sum it all up, conscious spending is not about looking at your checking account after you’ve spent the money and feeling bad. It’s about knowing how much you’re going to spend before you go on a spending spree. Look forwards, not backward.
Happy (conscious) spending!