How To Manage Money Effectively With And Without A Budget

your budget can help you or hurt you

What do you think about this question:

Which group of future millionaires will build wealth the fastest:

  1. People who rarely use a budget to manage their money
  2. People who always (or almost always) live by their budget to make financial decisions

The answer is…neither.

Yes, you got that right.

The truth is:

A budget (or spending plan as I like to call it) can either build your wealth faster or destroy it (more on this below).

Some ways to change your life for the better are always accomplished with a budget.

Others will improve faster when you have more flexibility (without a budget).

The question you’re thinking right now is:

Do I really need a budget?

In the timeless classic The Millionaire Next Door, half of all millionaires surveyed used a budget as part of their wealth building process.

I know for me one of the first things I did going from the money moron days to financial independence was tracking my spending. It wasn’t a budget (I still didn’t have that figured out). It was just tracking where the money went using Quicken.

What Happens To Your Wealth Building Potential When You Don’t Use A Budget?

If you don’t use a budget for your money (or rarely use it), you usually will struggle to build wealth.

  1. You can’t manage what you don’t measure. It’s kinda like grades at school. If we were never tested, quizzed, or had to do a book report, how would we know if we were good enough to graduate to the next grade level?
  2. You will overspend on unimportant things. We buy thousands of things each year. You know not every single one is a #1 priority. So what’s # 1,000 on the priority list? Who knows. But if you did, that’s money you could have saved and invested to build wealth.

So how do you figure out when you need to use a budget?

The answer depends on

  1. Your spending habit
  2. Where you are in life (your stage)
  3. How much discipline you have

Use a Budget To Test Your Saving and Spending Habits and Know Exactly What Is Holding You Back From Building Wealth Faster

Here is something most personal finance gurus will not tell you:

Your budget does NOT help you build wealth.

THAT’S CRAZY TALK!

Yep, you read that right.

A budget only shows you where you are this month, so you know where your money is going.

To build wealth, you need to:

  1. Develop good spending habits over time without a budget. Don’t worry, it’s as easy as asking one question: Does this thing I’m about to buy get me closer or farther away from my hopes, dreams, and goals?
  2. Use your budget as the map to your destination.

Use a Budget To Make Your Spending Fun and Become Happier With Your Life

It’s no secret a budget helps you take control of your money.

But how do you know when you’ve gotten control of your money?

Answer:

You’re in control of your money when you go to sleep and money doesn’t keep you awake.

This means there are lots of ‘Yes!’ moments you’ll experience.

  • When a debt is paid off
  • When you have some savings in the bank
  • When you have 3–6 months in an emergency fund
  • When you’re saving 20% for the future
  • When the kid’s college is paid for
  • When the house is paid for
  • When you’ve figured out that your money won’t run out before you do
    As you can see, a budget is pretty powerful for helping you get control of your money.

However…

…there is a flip side too.

If you use a budget to rule every decision, it becomes harder to:

  1. Identify bad spending habits. A simple example is having a budget category for afternoon snacks at work. I’m not saying snacks are good or bad. But people get used to spending money on certain things and it just becomes a habit. Just like people who believe ‘it’s normal to have a car payment’. Well if it’s in the budget and there is never a plan to own a car without a payment, then yes. That would be normal to someone.
  2. Take advantage of opportunities that may never come up again. I get that sometimes in relationships one person is usually a more hard-core budgeter. It’s ‘do or die’ and that doesn’t make it fun for either person. Find a healthy balance where everyone is happy. Know that nobody is going to get everything they want. There is give and take.

Take Control Of Your Money With A Budget To Build Wealth. Here is Why (And How) To Do It:

I can remember starting to use Quicken to track my spending and entering in $3.85 for a Starbucks coffee.

Who the heck cares.

When you have a budget category for hair-care products, you spend a lot of time managing little things.

This can make your budget break, and it’s frustrating. It’s also a waste of time.

So, what is the solution?

You can make a budget easier to follow, have more time, and be happier by using big budget categories.

For example we have this category: Entertainment.

  • It’s Netflix
  • Concerts
  • Eating out
  • Peppa Pig play park for the kids
  • Dinner parties
  • Magazine subscriptions

And dozens of others.

It’s a big, fat category which doesn’t require keeping track of nickels and dimes.

If something is easy to do, you’re more likely to do it.

Take Control Of Your Money WITHOUT A Budget To Build Wealth. Here is Why (And How) To Do It:

Long ago I wrote the Lazy Person’s Guide To Budgeting. It’s great for beginners and for people with simple life situations.

Can you build wealth without a budget? Sure.

  • Save and invest 20% for a long time.
  • Live off the rest.

That was easy. What I believe people miss with this approach is building good habits of knowing where the money goes. I’ll use an example I included in 99 Minute Millionaire.

Consider if someone has a habit of ordering pizza every Friday night. Over decades it’s around $64,000 worth of pizza, had the money been invested instead.

My question to you is – would you get $64,000 of joy out of pizza every Friday night?

You might! I’m not quitting cookies for the next 50 years, that’s for sure.

After you establish good spending and saving habits with a budget, you often find it’s easier to follow your plan. The good habits will be established and part of your routine. This makes wealth building even faster.

Long time listeners might be thinking – isn’t it a spending plan and not a budget? YES! Good for you for remembering. We have lots of new listeners and readers who are more familiar with the evil word ‘budget’ and we don’t want them to miss out.

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