Why Setting a Budget is Silly – Here’s a Better Way to Save Money

If you were to ask anyone what’s the best way to save money, it is quite inevitable that the conversation will somehow lead to the word “budget”.

What does budgeting really mean anyway? In my definition, it is to place certain boundaries around different portions of your paycheck to know where the money is all going to. And if you cross those boundaries, it means that you haven’t been disciplined enough to have done what should be best for you.

Imagine yourself going on a diet. A typical diet plan would go like this: You try to restrict yourself from eating all kinds of food – junk food, ice cream and anything fried. You are sure that you’re going to be 100% disciplined and you’re gonna go carb-free or vegan until you lose those extra pounds.

How sure are you that you would stick to this diet for the next 1 month – nay, 1 week?

Why are you making life difficult for yourself? 

It is well known that humans love freedom. By setting a diet plan or a budget, it creates these restrictions to our everyday choices. The more we try to enforce it, the more we want to stray away. Anyone who has been in a relationship with a controlling partner would understand.

Luckily, the health of your wealth is a little different from diet plans. You can save money even without setting a budget. And the process can made automatic. You wouldn’t even miss it once it’s out of sight.

In fact, all working Singaporeans/PRs already have this mandatory option in place, because of our lovely government. The same goes to you if you have any ongoing retirement plan (e.g. 401(k)).

It is the concept of “Pay Yourself First”.

Okay, you’ve probably heard this before. This isn’t new.

But this is important. More important than setting a budget. Because it is more effective. And more powerful. Because unlike setting a budget and restricting yourself, you get to decide how much you save every month, and it works. Every. Single. Time.

ONLY if the process is made automatic, and you don’t get easy access to the money.

Think about it. If there wasn’t a mandatory plan for you to save 20% of your income every month, would having access to that amount of money help you any more with living your life to your fullest?

Okay, what if it wasn’t mandatory, and you wanted to learn how to save by yourself. Here’s what you do. Every month, decide how much you want to save. It could be 10% of your take home pay, or just 5% if you are just starting out. And once you get your paycheck, don’t use the money for anything first. One way to do this easily is to set the transfers to be on the same day when you get your paycheck.

For instance, if your take home pay is $20,000. 5% would be $1000. Every month, set your saving accounts to automatically transfer $85 to another account. It’s not too difficult to save $85 every month, is it? If it is, drop me a comment and I’ll do a free breakdown of your expenses for you.

You might be thinking now that $1000 is measly. It’s a horribly minute sum to even do any investment. You are very wrong. If you were to put in $1000 every year into a low-cost index fund which generates annualized returns of 7%, in 30 years, your portfolio is gonna grow to a sizable sum of $94,460.79. And in 50 years, $406,258.90. A little longer and you’ll become half a millionaire. How’s that for being measly? All you need is time, and some no-brainer tips for investing.

So remember, skip budgeting. Because it’s silly. Make automatic monthly transfers to a bank account that you normally do not access so you can’t use the money if you need it immediately. And if you can’t see it, you wouldn’t even miss it.

And once you master this, try increasing the amount of the monthly transfers. You’ll notice that you can still live life the way you want to. I promise. 🙂

P.S.: This article is meant for people who are facing problems saving in the initial stage. The first step is always the hardest, and paying yourself first can make that step much easier. Of course, budgeting would make more sense for someone who has already developed the habit of saving and already in full control of their expenses.

Thanks for reading!

Miss Niao xoxo

 

Author: Miss Niao

Hello! I blog about financial matters and things that average people can do to have a better retirement. I want to inspire people to take control of their money and have a better understanding about it. If you are interested to know more, follow me @ missniao.wordpress.com! :)

8 thoughts on “Why Setting a Budget is Silly – Here’s a Better Way to Save Money”

  1. Quick question: Would it be easier for you to save 20% of your monthly income, or to live on 80% of your monthly income?

    Most people would answer to live on 80%.

    Saving 20% is like setting a budget. We suffer from “loss aversion”.
    Living on 80% is more like what you are describing “paying yourself first”.

    As they say, the rich invest their money and spend what is left. The poor spend their money and invest what is left.

    By the way there are exactly 4 steps to become richer … that most people never follow:
    1. Earn Income
    2. Invest a considerable amount of that income (20+%)
    3. Spend the rest by maximizing your joy-to-stuff-ratio
    4. Make sure your expectations of what a good life entails grow less than your earnings.

    The last step is the real kicker.

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    1. I guess it would help if your expectations were set lower, and it doesn’t necessarily correlate with the amount of happiness that you want to achieve. Sometimes, having lesser means being able to appreciate what you already have, and not to be on a constant pursuit to the otherwise “better life” that everyone else wants, or what the world tries to portray.
      BTW, you have great content! I’m adding you to my blogroll if you don’t mind 🙂

      Like

      1. Exactly. When we show an attitude of gratitude we acknowledge the good that we already have in our life. And that is the foundation for all abundance.

        Thank you for your compliments and adding me to your blogroll. Appreciated.

        Like

  2. Whatever the approach, step 4 is most important. Don’t just upsize the lifestyle because income’s risen.
    Marketeers will tell you that you ‘deserve’ it. Really?
    Automatically setting things aside, we see that as budgeting too. Otherwise, how would you know what’s ‘leftover’? The CPF contribution is automatic, so in a way the government has already budgeted for us… that 20% (+17% from employer) should provide a basic level of retirement. Except that we can use it for education, buying a home… which dilutes the intended purpose, but that’s another story.

    Liked by 1 person

    1. Yes, I agree with you that the opportunity costs have to be considered if we plan to use our intended retirement funds for other purposes. If we do choose to use it, then we have to make even more use of our liquid cash flow to compensate for the “losses”. Some may see buying a home as a possible investment but there could be more drawbacks than they could have imagined in the beginning.
      BTW, you’ll be surprised by the amount of people that know how much they really have in their CPF – until they plan to use it for the “intended purposes. You can’t miss it if you don’t see it!

      Liked by 1 person

      1. That’s the point we are making. The same pool of supposed ‘retirement’ fund is used for other purposes. While not exactly the same, its like pouring water into a can with a hole in the bottom leaking out much of it. The can might fill up eventually, but takes long time. Hopefully long enough that it is full enough to be really useful as retirement.

        Liked by 1 person

      2. The only thing we can do now is to enlighten even more people with this knowledge, so that they can take charge of their finances. I feel lucky that both of us have already understood the system, and how to increase its effectiveness. 🙂

        Liked by 1 person

  3. I think budgeting serves different purpose. It always good to have a plan than not. But I agree with you that we shouldn’t be too rigid with it. If there is “good” cost or “expenses”, eg lending or donating more $$ to help others, it will give more satisfaction and meaning to living. 😊

    Like

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