People say to us all the time, “I think I need a budget”. Conventional wisdom says that if you’re trying to save, you need to limit what you spend in order to have something left over to save. Budgeting makes perfect sense – in theory. But budgets rarely ever work because they leave little to no margin for error. They are time-consuming to set-up, tedious to manage and, like dieting, usually result in feelings of deprivation followed by binging followed by guilt. Don’t worry, you’ll do better next month.
Budgeting makes perfect sense – in theory.
We believe that there’s a better way to think about how to make a budget – and billionaire investor, Warren Buffett agrees with us. Warren says that you shouldn’t save what’s left after you spend, you should spend what’s left after you save. At Stash we say save first, blow the rest. We call it the Reverse Budget™ – and once we show you how it works, you’ll never look back. But first…
WHY BUDGETING DOESN’T WORK
Conventional ‘smart money’ wisdom has us divvying up the money we earn among the various categories of life: food, dining out, groceries, travel, gas, etc. It suggests we create a limit for each category on a monthly or even weekly basis to help us better understand how much we can afford to spend. It also leads us to set aside a certain amount for savings. The savings number is usually arbitrary: “I think I can save $800 per month.” So far so good. But then…life happens.
THERE’S NO SUCH THING AS A TYPICAL MONTH
One of our clients told us that as they were sorting through their monthly expenses, they noticed that no month was ever “a typical month”. They kept trying to figure out what a typical month meant for their groceries, or what a typical month meant in terms of transportation. They realized that each month, something random popped up throwing their budget out of whack. A rainy month meant more Ubers (been there!), a holiday month meant a higher a credit card bill (been there!), a month when friends were visiting meant restaurant expenses were through the roof (been there!). They just couldn’t figure out how much they could “afford” to spend in each category – let alone manage to a realistic savings number because they always “needed it”.
HOW THE REVERSE BUDGET™ WORKS
The Reverse Budget™ was born when we realized that NO ONE actually wants to track their spending and that life is unpredictable. What we ALL want is to spend our money without feeling guilty or irresponsible.
Using that as the starting point, Stash’s anti-budgeting philosophy was born. In a nutshell, we advise that you figure out what you’re saving for, automate it, and then blow what’s left in your checking account – guilt-free.
Here are 4 steps to execute the Reverse Budget™:
1) FIGURE OUT WHAT YOU’RE SAVING FOR
Studies show that saving for the sake of saving almost never works. Why? Because without a purpose in mind for your savings, it’s very easy to justify using that money for something else – something more instantly gratifying. On our “AM I A HENRY?” call, we always ask how much prospective clients are saving. It almost always goes like this. Most people say that they’ve been saving for months but when we ask about how much they’ve been able to save up, they answer with hesitation and usually a justification about why the amount doesn’t resemble what they’d expected. We get it so let’s just call it what it is…from time to time, you move some of your savings back to your checking account and use it to pay bills!
Start by thinking about what you’re saving for. Break it down into small, tangible goals: travel, a new couch, a downpayment, holiday gifts, a designer handbag. This sounds like a no-brainer, but humor us and please do this exercise for yourself.
2) USE AN ONLINE BANK + NICKNAME YOUR SAVINGS ACCOUNT
Once you’ve decided what you’re saving for, DO NOT keep your savings at a brick and mortar bank (sorry Chase, Bank of America, etc., nothing personal). Use an online bank like CapitalOne360, Ally, etc where your savings will earn a higher interest (aka work harder for you). Why is the interest rate higher? Because online banks don’t have the overhead that brick and mortars do, they are able to pass the savings on to the customer.
Second, nickname your savings account. If travel is your thing, set up an account called TRAVEL, or better yet, be more specific, call it <destination of your choice>. When you see a cute sweater but have blown through your cash for the month, you’ll be much less tempted to tap your savings when you know you’re basically stealing from your Turks & Caicos trip!
CapitalOne360 allows you to have up to 25 savings accounts!
Here are some of the ones we recommend:
-Tips for Doormen
-Emergency Pet Care
-Baby Fund (if you’re trying to get pregnant in the next 6-12 months)
3) FIGURE OUT HOW MUCH YOU NEED TO SAVE AND AUTOMATE IT
Next, decide how much you want to save for each account:
Travel: $1500 (that’s $125 per month or $62.50 per pay period)
Pet Care: $300 (that’s $25 per month or $12.50 per pay period)
Holidays Gifts: $1000 (that’s $83 per month or $41.50 per pay period)
Set up an automatic transfer from your checking account to move the amount needed to the proper savings account on the day the funds hit your checking account (payday or a lot of our clients do it the next day – just in case). This way, it’s gone before you have a chance to spend it.
4) BLOW WHAT’S LEFT OVER
And finally, after you’ve set up and automated your savings, whatever’s left in your checking account is yours to spend, guilt-free!
Stating The Obvious: The Pushback
Upon hearing how the Reverse Budget™ works, the critics say: “what if there’s nothing left over?!” Well, then you’re probably saving for a life you can’t afford or are a victim of lifestyle creep. It’s harsh but it’s the truth. So before you decide that it won’t work for you – give it a try.
Most people feel like there there’s no extra wiggle room in their situation, but for all of the H.E.N.R.Y.s™ we’ve worked with, that’s almost never been the case (less than 2% of the time). Start small with your savings goals and build from there – because starting small is better than not starting at all.
We know you can do it! And it’s so much easier than budgeting!!
Get started with the Reverse Budget™ so you can stop tracking your money and start spending it, guilt-free!