May 032008

When someone talks about managing money better, for most people that means budgeting. Budgeting also tends to turn people off, and then they don’t even try to manage their money better and just let their finances be managed reactively and by emergencies instead of proactively and consciously.

But, here’s the good news: Budgeting is just one way to manage money. The key to managing your money effectively and consciously is to have a system, and the system doesn’t have to be budgeting. With a system, you can consciously judge each area of expenses and income rather than letting circumstances or your emotions guide you.

There are some things to look for in a system, though, for one thing, it has to provide structure without being too restrictive. Some people feel that managing money will take away their freedom. You also want to pick a system that is decently flexible and won’t implode if you change things a bit. Systems are usually designed with some criteria in mind. Budgeting is designed to create the maximum amount of control, however I feel it takes too much effort to maintain.

Obviously, different systems have different pitfalls. Budgeting, for me, has three pitfalls: 1. I don’t have good associations with it. 2. It can take too much time to maintain if not done properly. 3. It can be a little inflexible if not done properly.

The idea is thus: you need a system that is as unique as you are. You might also have to try to a number of different systems before you find one that works for you.

Here’s a short list of some systems I know of, with the one at the top being the easiest, and most automatic to maintain but still provides a good deal of results (which, in this case, is to save and invest money for financial security and freedom):

0. This is something I feel you should do, period. Get a financial management program like Quicken, or check out Wesabe (free and online and can import bank data). Start using debit cards or credit cards (I only use a good rewards card like PC Financial’s MasterCard and when I have the cash to cover it, I don’t use it if I don’t have cash) when you’re spending your money. You can then go to your bank’s site and download the bank data into Quicken or Wesabe which you can setup to automatically categorize your spending for you. Then, at a glance and in less than 10 seconds, you can tell where your money is going. Monitoring your money is the name of the game and I highly suggest you do this in conjunction with one of the following systems.

1. Save ten percent of every paycheque automatically and have it transferred into an index fund. Many investment accounts and funds can be setup as bills in your account. This technique has actually created millionaires according to The Millionaire Next Door so it works.

2. Broadly slice up your income and your expenses. This is a sort of very basic budget. So, 45% of income may go towards rent/mortgage and so forth.

3. The JARS system.

4. A simple and effective, zero-based budget.

Whatever your financial goals are (you do have some, right?), whether they’re to take a truly care-free vacation, get out of debt, save up a down payment for a house, stop working, better systems for managing your money will get you there faster and much, much easier on both your time and your emotions.

  2 Responses to “Why You Don’t Have to Budget to Manage Your Money”

  1. I agree with this – I personally don’t have a budget, as such, but I have a system and I keep very clear track of what my money is up to. I think you need to set up some basic guiding principles (as you suggest, saving 10% of your gross income, not spending more than 50% of your gross income, investing regularly in stocks or a mutual fund, etc. etc.) and then try to ensure you act i alignment with them. In fact, this is a good strategy for everything in life!

  2. Thanks for this post. I appreciate some lateral thinking on the issue of money management. I don’t know how many times I’ve started a budget only to forget about it next paycheck.

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