Why You Need to Stop Budgeting
You’ve been trained to think that a budget is the answer to all your fiscal problems. That it is the only way to regain control over your financial future. But guess what? Traditional budgets are making things worse. Why?
Traditional budgeting usually goes like this: $25 a week for clothes or $10 a week for toiletries, and cutting up all your credit cards. Your app sends you text messages letting you know that you’ve overspent on toiletries already and it’s only the tenth of the month. Amounts set aside for specific expenses can suddenly come up short, so you end up “borrowing” from other categories. Juggling back and forth month after month leaves you thinking about money all the time, living in constant scarcity mode.
These kinds of budgets have too many rules and involve far too much work. Because you can’t see into the future, frustration and failure are inevitable. It’s a horrible game that negatively affects both your sense of self-worth and your ability to manage money.
The true solution to managing your cash flow is to let go of the idea that you are in control of your daily spending. You’re not. You’re not in control of your daily spending. You need to accept the fact that your spending money must be fluid, flexible and able to respond to the ever-changing demands of daily life.
The Hard Limit: How to Stop Budgeting
What Is a Hard Limit? When it comes to money, there are only four categories to consider:
- Fixed Expenses is money you must pay out whether you like it or not, every single month or year
- Meaningful Savings is money set aside for increasing your net worth.
- Short-Term Savings is money set aside for spikes in your spending
- After you’ve put aside enough money each month or each payday for Fixed Expenses, Meaningful Savings and Short-Term Savings, the money left over is your daily Spending Money. It’s meant to be spent and has no job except to ensure that you’re fed, getting around and having fun. This Spending Money is your Hard Limit.
This is how setting up a Hard Limit works to signal what you can and cannot afford: It removes all the money that has a “job,” leaving you with money that you can blow down to zero every month without feeling guilty.
If you splurge on groceries you don’t have to worry that the hydro bill won’t get paid; the work is already being done. There’s no need anymore to budget every single dollar you spend, because now you know the difference between the money you can spend on daily life and the money that you need to leave untouched. The Hard Limit is awesome.
What Can You Actually Afford?
Each pay period, you need to isolate your Spending Money in a separate bank account. That way you never have to worry about whether or not you’re spending money earmarked for bills and savings.
When all your money is in one bank account and you know the mortgage payment will come out tomorrow morning, it’s tempting to put most other variable expenses today (such as groceries or gas) on a credit card, just in case. But when you isolate the money you are allowed to blow to zero in a separate bank account, there is no need to worry about whether or not the mortgage will be covered or what you can afford to spend. You can see the balance as plain as day in the Spending account. This gives you a clear yes or no answer to “Can I afford this?”
Can I afford to go out for dinner tonight? Is there enough in the Spending account? Yes? Great. Can I afford to buy this coat? Is there enough in the Spending account? No? I’ll wait until the next pay cheque. It’s that simple.
Can You Afford a Lifestyle Upgrade?
Will a $200 increase in rent mean I can never buy a home? Will a second car mess up my retirement savings? Will we be house-poor? Are we spread too thin? The anxiety is twofold. Not only are you wondering how this new expense will affect your daily spending (Am I going to feel broke?), you’re also worried that the choice may be truly irresponsible financially.
When debating a Lifestyle Upgrade, remember to think about how the decision, though it may seem small, will impact your overall finances. Figure out where the funds are going to come from in order to afford it.
- If you can’t reduce your Fixed Expenses or your savings without being financially irresponsible, then it will be a direct hit on your Spending Money.
- You need to know if the increased expense will reduce your Spending Money by more than 5 percent. If it will, you’re going to feel that in a huge way. Things will be really tight. It’s a red flag of unaffordability—proceed with caution.
Happy Spending
Think about where you spent money today or yesterday. Now think about which of those expenses made you feel proud, excited, joyful, unafraid, satisfied or happy. Those expenses had a high Emotional Return on Investment for you. These are Happy Spending.
Now think about purchases you may have made that did not make you feel so good. Maybe they made you feel resentful, afraid, annoyed, regretful, ashamed or guilty. Purchases that make you feel blue are those with a low Emotional Return on Investment. These are Unhappy Spending.
You only have so much money to spend within your Hard Limit each pay period. Don’t you want to ensure that you’re spending it on things that give you the biggest emotional bang for your buck? You should. By actively choosing to spend money on things that make you happy, you are more likely to stick to a financial plan, stop budgeting and get control over your money.
There’s More to Life Than Money
What if I’d taken that unionized job with a pension? What if I’d bought Apple stock in 1980? What if I’d bought a house downtown 20 years ago? What if I won the lottery? These types of what-ifs are harmless fantasies, the kind of daydreams we all have. This regret can keep you up at night and makes you second-guess every financial move you make into the future. Here’s a four-step fix to this:
- Remember why you made that decision in the first place. The future is a mystery. All we know for certain is what is directly in front of us. All of us made the right decision based on the information we had at the time. So deal with it. Period.
- Recognize that luck has a lot to do with it. A lot of people try to disguise their financial luck as financial savvy. Sure there are trends but no one can know for sure what’s going to happen. All we can do is research, make informed decisions, place our bets and hope that our strategy plays out over the long haul.
- Realize the Beyoncé Factor. Unless you know the intimate numerical details of other peoples’ lives, stop comparing yourself to them. The person who invested in medical marijuana early on may have made 20 percent on their stocks, but maybe they haven’t told you about their 45 percent loss on a rogue junk bond. You likely don’t know the whole picture.
- Shift your perspective: It’s not all about the money. Think how different your life would be if you had made a different decision. For Shannon, not buying the townhouse allowed her the financial flexibility to quit her job and strike out on my own. That wasn’t a bad call at the time; it was smart.
We cannot go back in time. But we can keep moving forward. And that is where your financial future lies, full of hope.
Spread the Money Love
Cultivating a supportive and nonjudgmental attitude within your inner circle is essential to both getting and keeping your financial life in order. Shannon calls this the Money Love. The Money Love doesn’t flow only one way. You need to be equally supportive of the financial decisions of others, which isn’t as simple as it sounds. At one time or another, we’ve all been guilty of spreading a little Money Hate, which involves any of the following:
- judging someone’s purchases, big or small
- becoming resentful or jealous of someone’s financial success
- using shaming language like cheap, irresponsible, ridiculous when speaking about someone’s financial choices
- not taking no for an answer when someone can’t or won’t spend money on something you think is important
The list goes on and on, keeping us all on edge and making it nearly impossible to talk openly about money. That is how the cycle of fear and guilt continues.
Financial Honesty
Financial honesty is the only way to break the cycle and stop worrying about money. Financial honesty is a powerful and frightening tool. It opens a whole new door, inviting our inner circle of friends and family to share their money plans and money fears without judgment or recrimination.
When we understand what Happy Spending looks like for others, we realize their decisions aren’t judgments of our own. We all have the right to say no to things that don’t give us a high Emotional Return on Investment. Resentments wither and die. Competitive comparisons are swept aside and no one has to be ashamed about their financial choices. No more Money Hate.
Call To Action: You Got This
Just by reading this you’ve already set the wheels in motion to take control of your financial future. All you have to do next is take the first step.
- Choose not to compare yourselves to others.
- Choose to figure out your Hard Limit and live within your means.
- Choose to say yes to Happy Spending so you can enjoy your life.
- Choose financial honesty with your friends and family.
- Choose to say no to overspending.
- Choose to redefine what success means to you in order to be truly happy.
- Choose to spread the Money Love.
You don’t have to take one big leap and do everything at once. Let’s make these choices one by one. It’s time to take all your financial lemons and make sweet, sweet lemonade. You got this.