You don’t need a budget to manage spending

60% of people don’t use budgets to manage spending, according to the 2017 Consumer Financial Literacy Survey from The National Foundation for Credit Counseling. While that number may be surprising, what is more shocking is that this number has not changed much since the 2007 survey. For all the advances in technology, including spreadsheets and online budgeting software, people’s habits related to managing money and tracking spending have not really changed that much over the last decade. 

There are a ton of articles examining and explaining why people don’t budget, but the main reason is because it’s not easy to do. Like dieting, many have tried, but failed to maintain it over time. For many people, just making sure they don’t overdraw their checking account each month is easier than budgeting, even when that means paying hefty fees if they fail. And many do fail, as indicated by the whopping $15 billion American’s paid in overdraft fees in 2016.

Of course budgeting is useful and important, but most people don’t want to do it. The good news is that you don’t need to establish and maintain a budget to manage your personal finances, but you still need to track your spending. By not tracking your spending, you’re more likely to buy impulsively and spend more than you have available in your bank account, resulting in high-interest debt, overdraft fees, and lower savings rates. Here are the three steps you should follow each month to ensure you are spending wisely.

(1) Pay everything you can on a debit or credit card, or use online bill pay. Start with a debit card, and graduate to a credit card once you’ve proven to yourself that you can control spending. Using a debit card or the online bill payment service offered by your bank takes money right from your checking account, like paying with cash, but allows you to see where you spent the money. Unlike a debit card, making online bill payments enables you to schedule payment for a future date so make sure there are sufficient funds in your account on the withdrawal date. If you’re worried about future cash availability, just schedule the bill payment withdrawal for earliest possible date. Pay all recurring bills this way. Try to limit check usage, since payee name is not included on the statement when a check payment is made, requiring you to find it. If you don’t feel comfortable using a debit card, and prefer cash, then you will need to write down where you spent the cash. I recommend collecting receipts, both paper and electronic and storing them in a central location, like a box.

(2) Print out your monthly bank statements. Using online access to your bank checking and credit card account provider, print out your transactions each calendar month. If you made payments using cash or check, you will need to manually account for those transactions each month.

(3) Do a quick assessment of your spending while reviewing your bank statements. Now go through your receipts and reconcile each one with monthly statements. Going through this exercise each month has multiple benefits: Not only will you catch any suspicious activity, but more importantly this mental and physical exercise will force you to think about how you’re spending your money. When you’re finished checking each line item, take some time to ask yourself the following questions:

  • What are my largest recurring expenditures and can I reduce them? If you’re a family, it’s usually your mortgage and groceries. For individuals, it could be mortgage/rent, travel & entertainment, telecommunications, or transportation-related expenses. Whatever it is, allocate each transaction to these categories, calculate totals by category, monitor the categories, and find ways to maintain or lower expenses in the biggest categories. Simply put, anything you don’t spend is added savings.
  • Did I make any impulse buys last month? People without budgets are more susceptible to impulse buying. Consider anything outside of regular monthly expenditures or planned vacation as an “impulse buy”. Add those up and watch closely. This is typically where most people overspend leading to financial problems.
  • What method am I using to pay for my spend? Once your spending is understood and controlled, ask yourself “can I shift any debit or bill payment spending to a credit card?” Using a credit card has multiple benefits including building a credit profile and getting rewards, but don’t use a credit card if you’re not paying your bill in full each month. If used properly, a credit card can generate hundreds, and even thousands of dollars in cash-back rewards.

Before doing these three steps each month, I highly recommend that you calculate your monthly Personal Net Income (PNI) statement based on the prior month’s spending. This will give you a good idea of how much discretionary (fun) money you can spend each month. Check out the playbook & tools from my book if you need guidance on creating your PNI statement.

To review: Three simple steps. Three questions. No budget. No excuses.

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