When I was aggressively paying down $50,000 of student loans, I was a budget devotee. I tracked my spending, made a meticulous list of my expenses, and constantly looked for ways I could save more. On the positive side, I was able to pay off my debt in a little over two-and-a-half years. On the downside, my obsession with saving as much as possible led to an unhealthy mindset when it came to my relationship with money.
After I became debt-free, I picked up Shannon Lee Simmon’s Worry-Free Money, in which she sets out another path to our savings goals: not having a budget. Completely blown away, I experimented with incorporating this concept into my own life.
Not Having a Budget
At first, it felt a little weird. I don’t need to write down every purchase? I don’t need to constantly check to see if I’m near my entertainment expense limit? It was liberating and terrifying at the same time. While it was much easier to spend money, it made me realize that imposing overly restrictive rules on my spending caused me to develop a scarcity mindset. I always worried about not having enough money even when the opposite was true.
Shannon’s approach is to work backwards. When you get paid, immediately allocate your money to the following 3 buckets:
- Fixed Expenses
- Meaningful Savings
- Short-Term Savings
Whatever’s leftover is your spending money, and you can do with that what you’d like; you can spend $100 on groceries, $100 on restaurants, $200 on a pair of shoes — whatever! This money is flexible but you have to be cognizant that it should cover all your variable expenses, including the less-fun items like dish soap and toothpaste.
This is how I follow Shannon’s process:.
I get paid every two weeks via direct deposit into my account marked “Bills and Savings,” which is actually a chequing account rather than a savings account. The reason I use a chequing account is two-fold: (1) This just happened to be the account I used when I set-up direct deposit at work, and (2) I can only pay bills online with money in chequing accounts (rather than savings accounts) so it’s one less step (i.e. I don’t have to transfer money from a savings account to a chequing account and then pay a bill).
During the same day, a portion of the money in my “Bills and Savings” Account, which amounts to 18% of my gross income, is automatically transferred to my brokerage account.
I then manually transfer a pre-determined amount of money to my “Short-Term Savings” Account, which is just a regular savings account in the credit union that I use for daily banking. That number tends to fluctuate each money, so I work it out at the beginning of each month.
Once all of the money earmarked for savings has made its way to the right spot, whatever money is leftover is my spending money. I then manually transfer that amount to another chequing account, aptly titled, “Spending Money,” which is connected to my debit card. For the next two weeks, I can spend that amount on whatever I want, but once it runs out, it cannot be replenished from another account.
Save First, Spend Later
There are three major benefits to this system that give me peace of mind.
- I never have to worry that I’m not looking out for my present and future self. I will always save enough because the monies are deducted on the day that I get paid.
- The system is very simple to maintain. In total, I have about four accounts (2 chequing; 2 saving) and an optional account at an online bank that deals with my writing/side-hustle income.
- I have permission to spend as much of my remaining spending money as I want on things that I love. If I spend $200 on books in one month, it doesn’t bother me. There are no rules; only to live well.
If you are earning a living wage but are stressed about saving, it means that you haven’t perfected your savings system yet. The right savings system for you involves incorporating both the right amount of friction and convenience that your personality necessitates. If you know you struggle with investing, set-up automatic transfers. If you know you get tempted to dip into your savings, move them to an entirely different financial institution that you check once every couple of months.
You’ll know when you’ve perfected your savings system because you’ll be able to sit back, relax, and watch your money flow through the process. Then, it’s on to the next step: making a living through an ethical and sustainable career.