Finding it hard to stick to a budget? Pay yourself first, to save better: experts

Dubai: Self-made US millionaire and published author David Bach opines that budgeting is a waste of time. But that doesn’t mean not being smart about money — it just means to go about saving differently.

When attempting to track and limit where you put your disposable income, things can get tedious and complicated fast.

Why do budgets fail?

There are so many reasons why budgets fail. A very common reason studies show as to why your budget doesn’t work is because you’re not analysing your past spending.

A 2020 survey of at least 1,500 people found that more than 60 per cent didn’t know how much money they spent the previous month.

Financial planners reiterate that you cannot make a proper budget if you don’t go back and analyse several months of spending first. You have to know where you spend money, and how much you usually spend to have an idea of where to start.

Experts also recommend you analyse at least three months’ worth of past spending when drafting up a budget for the first time. Get an understanding of the trends in your spending.

Moreover, budgets are also often pushed as a one-size-fits all solution to the complicated financial situations that many of us face, proving to then be a disaster for those trying to budget costs rigidly.

Isn't budgeting every expense tedious?

If you’ve been budgeting your expenses closely, from time to time you may ask yourself questions like: Is it okay to overspend on leisure if you saved on let’s say groceries, or whether taking a cab home from work comes out of the ‘transportation’ category in your budget or the ‘leisure’ category?

What budgeting boils down to is depriving yourself for the sake of your future well-being. This is certainly a responsible idea, but as a strategy, it goes against human nature.

- David Bach

Or even simply asking yourself whether you should subtract money from your budget’s total when you either take it out of the Automated Teller Machine (ATM), or when you actually spent it; these are doubts that can derail you from budgeting consistently.

Financial advisors too agree that the nuances of sticking to what felt like a largely arbitrary budget became frustrating over time.

“What budgeting boils down to is depriving yourself for the sake of your future well-being,” Bach wrote in his book ‘The Automatic Millionaire’. “This is certainly a responsible idea, but as a strategy, it goes against human nature.” So what’s the fix, or how else can you go about budgeting or saving money?

Paying yourself first: experts

David Bach’s book suggests an alternative strategy, called “paying yourself first”. Instead of vigorously tracking your expenses daily, Bach recommended giving up budgeting altogether and start monitoring finances the opposite way: Calculate and subtract your fixed costs first and then spend what is left.

To ensure you’re not leaving yourself too little to actually cover all you expenses, you can also roughly follow the ‘50-30-20 rule’, which dictates that 50 per cent of your income goes towards necessities, 30 per cent towards discretionary spending and 20 per cent towards saving.

While making sure you’re not putting more than 50 per cent of my income toward necessities like rent, utilities and other bills, you could also switch the remaining two categories, so that you put 30 per cent of your income into savings and aim to spend no more 20 per cent on discretionary expenses.

You can treat usual budgeting categories like saving, investing and contributing to retirement accounts as a fixed cost, and add these to your list of fixed costs for the month to determine about how much you’ll have left over.

Why is this alternative proven to work?

The reason this method is a favourite among many is because once you’ve figured out that number (your fixed expenses), you’re free to spend it however you wish. The fluidity allows you to edit your priorities as you go, instead of fretting that you’ve overspent in a certain category.

You can splurge on a meal out and make up for it by taking advantage of free activities over the weekend. If you keep your grocery bill low, you can go see a movie or take a cab home. As long as you stay within the limit you set, it doesn’t matter if you’re buying groceries, birthday gifts or new clothes.

The strategy of ‘paying yourself first’ ensure you are no longer stressed or guilty about not staying inside the lines of a rigid budget or arbitrary budgeting categories. By paying yourself first, you’re forced to stay within your limits, but what you do inside that boundary is totally up to you.

Bottom line?

Even if budgeting doesn’t work for you, having an idea of how much you’re spending can be useful to make sure you’re meeting your financial goals, like paying off credit card debt or saving for retirement. Also, being flexible and leaving room in your budget for when you have periods of higher spending, helps.

If you’re wondering what you can do instead of budgeting, you can start by prioritising your emergency fund and putting aside any amount of money you can in order to have enough to cover six weeks’ worth of expenses.

If you want to save more money and build wealth, you don’t necessarily have to create a detailed budget that allocates money for each category that fits your spending patterns. Instead, simply commit to paying yourself first, meaning whenever you earn money set aside a portion for your future self.

As long as you establish how much you need to save each month for retirement, your emergency fund and any other big, future purchases, and you actually set that amount aside, you don’t have to budget at all.