It seems to me nothing is harder than following a monthly budget. Costs vary month to month and sticking to a rigid plan for spending and saving can be impossible. Apologies to you Quicken and Mint budgeting pros! I admire you, but can’t muster the discipline to do what you do!
And, I’m not alone. Long-time personal finance guru and Edelman Financial Services Vice Chairman David Bach, author of “The Millionaire Next Door,” says budgets don’t work. “People rarely really build them, and it’s even harder to stick to them.”
Fortunately, there is a way to get the benefits of the budget without spending your weekends slaving over an Excel spreadsheet. The real advantage of a budget is that it gives you parameters on what to spend on individual categories. Think of it as a pie. According to Bach, you’re best off spending just 35 percent of your monthly income on housing costs. That means mortgage or rent, repairs, taxes, utilities and insurance. Truth is, housing costs have been increasing handily. To find out whether it is cheaper to rent or buy, go to Trulia.com.
Another tough category is debt. Bach recommends that just 15 percent of income should be snagged by student loan payments, credit cards and personal loan payments. Transportation, car payments, insurance and gas, should comprise just 15 percent of your budget while other living expenses like eating out and vacationing should be 25 percent.
The big nut to crack is savings. Bach says saving 10 percent of your income is a good rule of thumb, but you may want to spend more if you are behind on retirement goals.
The bottom line is this: By understanding the proportion of your income that should go to each category of spending, you put yourself in a better position to budget without a real budget. Hitting your goals can be as simple as paying yourself first. By automating your savings dollars and locking in low housing costs, you’ll go a long way towards making your budget (or unbudget) work!