I have a confession. I don’t have a budget. In fact I never had one. It is my opinion that a dedicated focus on decreasing expenditures at every point excludes the need for a budget. Here’s how I understand budgets. Budgets are a way of allocating income to different accounts e.g. the food-account, the rent/mortgage-account, the insurance-account, the savings-accounts, etc. to make sure that there is enough money to pay the expense at the end of the day. Such a budget might look like this

After tax income: $1000

Rent+utilities: $400
Food: $100
Health: $125
Savings: $150
Car: $150
Clothes: $25
Entertainment: $50

In this budget savings is treated as an expense along with everything else. At no point is an effort made to minimize expenditure in any given account. If there are $20 left in the food account at the end of the period, the $20 is spent on eating out.

For those who have been trying to lose fat/weight, budgets are like counting calories. Although it works, it feels terrible and evokes feelings of deprivation. A much better way is to forget about the calorie counting and adopt a healthier lifestyle instead of meticulously budgeting the cookies. This is what the budget-less approach is all about.

In the budget-less approach, there are no fixed allocations. Instead constant efforts are made to minimize expenses always asking yourself: do I really need to buy this? can I substitute something else? can I borrow it? can I get it used? can I get it for free? Regular expense accounts are changed creatively. Maybe the car, gasoline, car insurance and gym membership is exchanged for a bicycle and housing is exchanged for a smaller unit within biking or walking distance of your job. Maybe entertainment and hobbies are switched from hobbies that require expensive equipment and fees to hobbies that are free or maybe even to hobbies that make money.

The idea is to improve your money handling skills i.e. fulfilling the same needs for less and thus spending less every month rather than spending the same according to a preset budget every month. This way a budget is avoided while your financial situation steadily increases.

Originally posted 2007-12-18 09:59:00.