Why You Should Toss Your Budget In The New YearGeneral Behavioral Finance
Let’s face it: everyone hates budgeting. It’s a financial chore found in many forms, from an app on your phone to an excel sheet on your computer to a piece of paper stuffed in the back of your office drawer. Regardless of the platform, most people don’t use it or stick with it long-term.
Despite universal disdain, budgeting is still seen as foundational in personal finance. Our team at Paradigm thinks there is a better way to budget… not budget at all.
What is an “un-budget” and how does it align with your spending and savings goals? Let’s take a look.
Establish your needs, wants, and wishes
Not all spending is built alike, and it differs for each person. Morning trips to Starbucks might be a must have for some. But, if you don’t drink coffee, Starbucks will not make the cut. Instead of penning your spending into tiny boxes, assign broader categories like needs, wants, and wishes.
- Needs are the things that you must pay each month, like housing, food, utilities, debt, etc.
- Wants are not vital to your everyday life, but they help round out your experience. They are often more short-term in nature. For instance, getting takeout from a restaurant you love, buying the latest sweater from a downtown boutique, or stocking up on books by your favorite authors.
- Wishes represent your goals for the future. For you, this could be a dream vacation (once it’s safe to travel) or a home remodel.
Traditional budgeting feels restrictive, demanding, and narrow. By erasing some of the line items, you will find that you end up spending more money where it counts and less where it doesn’t. Think about it, what if you aren’t spending money on a subscription service you don’t even use? You can reallocate that money for a date night with your spouse or store it away for a rainy day.
Be sure to save at least 20% of your income
Un-budgeting does not mean you can check-out of your financial habits. You must establish a base for your saving goals. We recommend that clients save at least 20% of their income. You can decide if you want to increase that amount for retirement or other future goals. What’s left is yours to spend.
This strategy provides more freedom and flexibility from month to month. Spending does not stand still and can shift. Your spending habits have likely changed with the pandemic, for example. You might be saving more on food from not eating out and gas from long-commutes. You might also find that your energy bill increased or you’re spending more on flour and baked goods.
Those fluctuations in spending are completely fine if your savings plan is in place. Remember, un-budgeting does not mean you can stop saving. It means that your spending does not have to be reduced to line items.
Adopt a ‘no shame no blame’ attitude to tracking expenses
Tracking your expenses is still valuable, even if you aren’t using a traditional budget. This way, you can see where your money is going so you can use it in the best way possible. Tracking expenses can reveal how you spend money and how that spending affects your life.
Remember, everyone is different and holds various ideas on what makes an ideal life. Get joy out of your daily Starbucks? Maintain that habit. It’s not about whether you should or shouldn’t do something. It’s about ensuring that your spending aligns with your values.
You know what is best for you, which means you should be able to spend your money where you see fit. An un-budget is less about disregarding spending habits. It’s about aligning those habits with your values and the things that bring you joy.
At Paradigm, we want your money to reflect your ideal life. You don’t need to lose sleep over a missed line item on your budget. Instead, redefine what it means to spend money. Do you want to see how an un-budget can transform your spending habits? Set up a call with our team today. We can’t wait to hear from you.
Paradigm Advisors is a fee-only financial planning firm based in Dallas, Texas and Fayetteville, Arkansas. Paradigm Advisors provides comprehensive financial planning and investment management services to help clients organize, grow and protect their wealth throughout life’s journey. Paradigm specializes in advising well-established career executives through financial planning and investment management. As a fee-only fiduciary and independent financial advisor, Paradigm never receives commission of any kind. Paradigm is legally bound by certification to provide unbiased and trustworthy financial advice.