The Easiest Budget Ever. (You’ll Be Shocked at its Simplicity!)

The Anti-Budget (or the 80/20 Budget)Let’s see a show of hands: how many of you actually make a budget?

(Silence. Crickets chirping.)

Yeah, I thought so.

One of the most overplayed pieces of financial advice is “make a budget.”

There are a small handful of nerds who jive with this idea. You dig data. You love crunching numbers. Good for you.

Budgeting is a great tactic for people who stick with it.

The problem is, most of us don’t stick with it.

And there’s good news: We don’t need to.

Budgeting is tedious and time-consuming. I’m a finance enthusiast, and even I think that budgeting is arduous, so I can only imagine how “normal” people must feel.

We all know that we “should” budget. That doesn’t change anything. There are many things we “should” do. We “should” drive the speed limit. We “should” wear sunscreen every time we leave the house. We “should” floss our teeth daily.

Let’s get real.

In this post, I’m going to suggest an alternative for the Afford Anything readers who embrace the reality that they’ll never actually make a budget. It’s my anti-budget, and it’s simple:

  • Pull Your Savings off the Top.
  • Relax about the Rest.

Boom! See how easy that is?

There’s no need to classify whether your money is going towards groceries, electricity or cat food. Just skim off the amount of money that you want to save. Enjoy everything else.

the anti budget

You could style it as an 80/20 Budget –- spend 80 percent, save 20 percent. This is the smallest savings rate I’d recommend.

If you want a thicker cash cushion, try the 70/30 Budget –- spend 70 percent, save 30. If you’re ambitious, shoot for 50/50.

Regardless of what ratio you choose, the anti-budget is a simple two-step process:

1) Pull your savings off the top

2) Relax about the rest

You don’t need to line-item your sunglasses, moisturizing cream, and that time you ran to the grocery store to pick up some broccoli. Let’s face it, you were never going to line-item those purchases, anyway. And you read financial blogs! If you’re not going to do it, who will?

No one. And that’s the point.

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Every time I write about this concept, I hear the same few questions:

Q: Where should I put my savings?

A: Here’s your step-by-step itinerary:

  1. Get your full employer match on retirement contributions (if you get this workplace benefit).
  2. Save a small emergency fund (equal to two weeks pay).
  3. Pay off high-interest debt (anything with an interest rate of 8 percent or more).
  4. Grow your emergency fund to represent 4-6 months of expenses.
  5. Contribute 15 percent into retirement funds, like your 401k, IRA or HSA.
  6. Save at least 5 percent of your income for specific long-term goals like making a downpayment on a house, throwing a wedding, or traveling through South America for three months.
  7. Pay off low-interest debt (like your mortgage or a low-interest student loan).

At this point, you’re saving 20 percent of your income, which is divided into 15 percent for retirement and 5 percent for long-term goals.

If you want to be a rockstar, boost your savings up to 25, 30, or even 50 percent of your income. First put it towards debt payoff, and when you’re done, focus on using that money to create investments like owning stocks, rental properties and buying or creating businesses.

Q: “How much should I save?”

A: If you’re carrying high-interest debt (8 percent APR or more), save 40 to 50 percent of your income immediately. Credit card debt is an emergency, and it demands drastic action.

If you’re free from high interest debts, save at least 20 percent of your income. If you’re serious about ditching the rat race within the next decade, shoot for the 50/50 budget (spend 50 percent, save the other 50 percent).

Q: “I can’t save! I don’t earn enough to save anything!”

A: You’re telling me that you earn $3,021 per month and your expenses come to exactly $3,021 per month? Somehow, I find that doubtful.

If you’re new to saving, take baby steps: Next month, save an extra one percent. If you save nothing at the moment, start by saving one percent next month. If you currently save five percent of your income, save six percent (one extra percent) next month.

To calculate one percent, knock two zeros from the end of your monthly after-tax pay:

  • If you bring home $2,000/mo, save $20
  • If you bring home $4,000/mo, save $40
  • If you bring home $25,000/mo, save $250

The following month, save one percent more. And the next month, save one percent more again.

After a year, you’ll be saving an extra 12 percent of your income.

Need a community? Check out the One Percent Challenge, a group of Afford Anything Rebels who are boosting their savings rate, one percent at a time.



Thanks to Flickr user Hugo Quintero for today’s photo.

Comments

  1. says

    Have you heard of the theory that willpower is a finite resource in our bodies? It’s like a muscle that you can workout and get stronger but you can only lift so much in a day before your muscle begins to fail. So that’s why you work it out making it stronger and stronger every day. Certain things, like exercising, take more willpower than others, like deciding whether to speed up through the light on yield or slow down, and that every decision made no matter how big or small costs us just a bit of our willpower. The reason I brought that up, is because they say that habit forming will release a substantial amount of willpower. So if you habitually turn off the lights when you leave the room, you don’t have to think about it or decide whether you’re going to do it or not, you just do it. Leaving that much more willpower to be used for tackling bigger things. This is why they say a lot of your big decisions should be made earlier in the day! We’ve all been there when we get home from a long stressful day and ate that extra cookie we shouldn’t or go grab a burger instead of cooking something healthy. Using this theory, at least for me, has given me missions to overcome bad spending or wasteful acts and turn good savings and productive acts into a habit.

    • says

      @Chris — Yes, I like that theory! I’ve heard that in relation to why “moments of weakness” often happen at night …. strict dieters will cave to a midnight snack, etc. I’ve also noticed that my most productive hours are in the morning, probably for the same reason.

  2. says

    Excellent post! We’ve lived by an “anti-budget” for all 16 years of our married life, and it’s served us well! We actually use the 10-10-80 approach (give 10%, save 10%, enjoy the rest), but we bump up the first two numbers. I think we’re around 20-20-60 at this point. Rather than obsess over every purchase, it’s much easier to just automate the important stuff off the top and then enjoy what’s left worry-free!

    Frankly, I’d never thought of it as an “anti-budget.” It’s just a budget with very few categories. :)

  3. says

    We’ve got a really variable income stream, so for us budgeting is what works the best. We spend what we always spend and save/invest everything else. Plus, I think people overdo how hard budgeting is. Mint is insanely easy if you’re already in the habit of paying with credit/debit cards and walking around with your smart phone all the time.

    • says

      @Mrs. Pop — Mint.com is a nice resource, although sometimes their classification system gets it wrong. I’ve frequently had the experience in which Mint will incorrectly classify a merchant as “clothing” when it’s actually “hardware,” etc. (That tends to happen more with locally-owned stores). I’ve dealt with it by glancing at Mint to get information about the big-picture: how much did I spend (on everything) this month?

      That said, budgeting is more important when your income is variable. A fluctuating income requires more oversight and management.

  4. says

    So I am an incredibly detailed oriented person who loves making budgets and graphs… but I guess most other folks don’t enjoy graphing and budgeting as much as I do. Like you said, just figuring out what reasonable percentage to save is would make a world of different to most folks. I agree with Mrs. Pop. If you mess up Mint, you aren’t even trying.

  5. says

    Well, I have to admit to being an 80/20 person – only more like save 80% and spend 20%. I’d rather spend my money shopping for stocks than anything else.

  6. says

    even though my budget is obsessively detailed, my starting rule is somewhat similar, but a bit different: set an amount per week that can be spent and just track the net amount over/under each week. Obviously won’t work for everybody, but for me it seems to be a good heuristic.

    And I try not to beat myself up for the (actually quite rare) occasional drift over the weekly limit …

  7. says

    I like this idea, but the only drawback is you need to make sure you have 20% to save within your budget (and there’s that word). I know that sounds anti-personal finance, but if 95% of your income is going towards bills, you don’t have the 20% available for savings. Only if you sit down and crunch numbers will you see where you can cut back on expenses (cable, eating out, possibly moving to a cheaper place), then you can go with the 80/20 rule.

    I think I need to move. 😉

    • says

      @Little House — The idea is that once you remove your savings off the top, you’ll be forced to live on the other 80 percent. If your bills are too high, you’ll be forced to trim those back. You’ll see that you don’t have enough cash coming in to cover your bills, so you’ll cancel your cable, stop eating at restaurants as much, downgrade your phone plan, and pick up extra cash through an evening/weekend job.

  8. says

    This is exactly what I’ve done all these years and it works like a charm. And I do track every dime I spend, but that’s just ’cause I’m curious about it.

  9. says

    This would be broken down into two columuns in a budget. Save and spend, but what about debt and bills? I agree with minimizing the items income is divded into. Do you suggest zero-ing out each paycheck or to let it roll over to a set fund?

    • says

      @Mike — Bills (like electricity, your phone bill, etc.) are part of “spending.” Making the minimum payments on your debt, like your monthly car payment or your mortgage payment, is also part of “spending.” Making EXTRA payments on your debt, above-and-beyond what you owe that month, is part of savings.

      I’m not sure what you mean by “zero-ing” out each paycheck. Some of the money — hopefully at least 20 percent, if not more! — will go towards your savings.

  10. says

    Using a budget I’m able to determine how much i can live on per year. Even better i can find where I’m spending too much and reduce my spending accordingly

    • says

      @Nick — If budgeting works for you, stick with it! I wrote this post to help people who have trouble sticking with a formal/traditional budget. If traditional budgeting works for you, though, then keep doing it!

  11. says

    As a freelancer I found NOT having a budget was just a financial killer for me. It is tough to stick to, but once you make it a habit I found I could stick with it. And believe me it took many stops and starts to finally stick to one, but since I have I’m way more organized about my finances. I need to “see” where everything is going…even if I go over…it gives me a visual of everything.

    • says

      @Budget — Freelancing adds a whole new level of complexity to the game! With different amounts of money coming in each month, it’s tough to “plan” the way that people with a traditional paycheck do. I usually tell freelancers to look at the past 2 years’ worth of earnings, find the month in which they earned the smallest amount, and base their expenses/cost-of-living on that number. Any additional money you earn is a “bonus!”

  12. says

    I like keeping a budget. I have a spreadsheet that I update every 6-12 months with my savings progress and any adjustments I need for changes in expenses, income, and goals. Now that I have the format set it’s pretty easy to update without much effort.

  13. says

    You’re absolutely right. We even went so far as to over-withhold income taxes on our pay, to create an annual windfall from a tax refund. (The fact that it also gave us a good incentive to file early was just a bonus.) Experts all say that’s crazy, but they’re wrong: the interest we forego is pennies, and it’s an easy-peasy way to save (and it’s untouchable until tax time).

    We did (and still do( what you say: first take off everything that “has” to be taken care of (savings, emergency fund, mortgage, etc.) And what’s left over is “spend with peace,” but “when it’s done, it’s done. No bump with a credit card.”

  14. says

    This is good! In fact, I do something very similar most of the time. Twice a year or so I’ll do a detailed inventory of what is being spent on what just to make sure that some part of the spends is not out of proportion (like chocolate :)).

  15. says

    Thanks for the post. I do this same strategy and it makes it hard at times because there’s never a good time to save. However it’s best to cut corners and sacrifice now, and if you can deposit your money in a 401k or IRA then you get tax deductions too.

  16. says

    You are soooo right! I am putting 18 percent of my income into my 401K and it makes such a huge difference that it is incredible. Most people won’t do this because they do not understand that saving is the first expense before Starbucks coffee and McDonald’s lunches. Get rid of your Benz if you need to. Instead of retiring in your 70’s you can start having fun in your forties. You may even be able to retire young. I am retiring when I ‘m 46 so I can spend time with my daughters and my wife and family. Just take of your blinders and you will see how easy it will be.
    Travel to Southern Mexico or go to Ecuador and you will understand how rich you already are.

    • says

      @Alex — That’s awesome for so many reasons! Retire young (or at least have enough money so that you have the OPTION, the freedom, to choose.) It’s not that hard, it just requires persistent savings and investing. I’m glad you’re on the path!

  17. says

    The anti-budget is truly the easiest budget I have ever seen, and I have seen (and created) many. I agree you do not need a lot of spending categories. However, if someone is trying to figure out if they can afford to buy a house, they might want to try the Budget by Percent method to get started. There are many spreadsheets out there. You plug in your Net Income (take home) and it distributes it to the main categories. For example, about 30% to housing (rent or mortgage) is a rule of thumb to make sure you do not over extend yourself. I offer some tips and a spreadsheet on my 6/29/15 Blog Post at, personalfinancesense.com.

    Thanks for sharing all your tips.
    Pam K.

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