Guilt Free Money

I tend to obsess. Not in the melodramatic sense of the word; I don’t obsess about my thighs or about my complexion or about whether Tommy Jenkins will ask me to the winter box social. What I mean to say is that when I decide to find a topic interesting, I

a) see it everywhere
b) feel compelled to purchase (and read) books about it
c) seek out communities of thoughtful and intelligent experts in the field, and read everything they have said to each other in the last year or so on the subject
d) read the new books I have discovered
e) think a great deal about it
f) Tell Amy all about it. ALL about it. Even when she’s sleeping, or eating, or hitting me. She usually just rolls her eyes.

This is a system which, at least as I apply it, is really quite adapted to developing my expertise to a relatively competent level in a relatively short time over a relatively broad expanse of possible interests. I have applied it with success in automotive mechanics, birds of eastern North America, understanding electricity for real, and poker, as examples. I have also applied it quite vigorously on the subject of finance. Budgeting, insurance, credit and debt management, mortgages, retirement planning, real estate investment, taxation, equity trading, mutual funds, options strategies, &c. &c. I do not offer for-profit counselling services nor would I without some kind of accreditation to back me up, but I am also relatively comfortable with what I know and what I don’t, enough that I can make judgements on the wisdom of various ideas or strategies and be confident in the decisions I make.

Enough that I can yell at my monitor when I read what passes for “financial strategies,” “money management” and <shudder> “budget tips” online. My monitor bears witness to the spittle encrustations of my vociferous discontent. By the holy and inspired laws of the Opinion Piece [ “Op. Ed.” being a less useful term when I am the only writer for this, uh, publication] I am now required to say something inflammatory and glib, so as rivet your attentions, to wit:

Budgets are useless or worse, and if you’re using one, you aren’t managing your money properly.


Not you, of course. Your budgets are well thought out and practical and right in every way, naturally. But almost everyone else is all messed up. So. Let’s talk about why they are all messed up.

The principle of budgeting works like this, roughly: “We need to set up a budget so that we know where our money is going. We need to do this because our spending is out of control, we’re not saving as much as we should, we lack discipline and the budget will force us to have it. It will force us to have discipline by confronting us with over-spending, since our numbers will exceed the numbers on this piece of paper. This will make us feel bad and we will want to live within the budget. Thus will order be restored and we will feel happy. We will also be millionaires. (Optional.)”

At this point it is essential that we stop and give budgeters a great deal of respect. They don’t usually realise this, but they are not, emphatically not lacking in discipline; a budget is an extremely proactive, disciplined action to take. Just the exercise of writing everything down so that you can see the financial ins and outs is such a good thing that it would have value even if you threw the paper out at the end and forgot the whole budget business. So, budget people are good people.

But budgets are still bad.

  • They tend to be rigid
  • They tend to be unrealistic
  • They tend to make you feel bad
  • They often don’t do what they’re supposed to

Remember, budgeters have a lot of discipline, and the budgets are agents of discipline so how comes it to pass that most people who budget talk about how they “really need to get back on their budget” and “really need to redo their budget” and “haven’t been sticking to their budget very well lately?” It’s because of those four budget tendencies up there. Budgets are made in a living room looking at a pile of receipts — they put spending into boxes, and they are notorious for forgetting the day to day extras which then have to be faked in one way or another. A popular tactic is to leave a “miscellaneous” category in the budget with some arbitrary (but usually too small) amount in it, to catch-basin all that. But then, the more of your budget that falls under miscellaneous, the more it resembles your old, budget free life without the discipline you were supposed to be getting. And when you see that happening, you feel bad, you slap your wrist, you say “no more slipping, we need to get back on our budget.” Shame spiral — it’s worse than a diet.

The problem is that budgets are the wrong solution to the problem. Go back to what inspired them: you want to save more, you want to have your money under control, instead of being controlled by your money. Great, but the budget doesn’t give you that. In fact, it gives your money MORE control over you — before you just felt befuddled, now when your “dining out” allowance goes over-quota, you chastise yourself for having fun. In fact, whenever any line item goes over-quota, you hit a very negative place where not only do you feel bad, but you have to decide where to cut. The decision is almost invariably one of two things: either your miscellaneous budget, or your savings. They are the two that don’t get collection agencies after you, so they are the easy choices. But they are both really bad things to be cutting, and it’s not necessary.

Try this out. Sit down, like you’re going to do a budget, but bring only the Collection Agency & survival bills — no estimates of dining out costs or booze or theatre tickets, just the things that, every month (or every 3 months, or every year, whatever) if you don’t pay them, great vengeance and furious anger and maybe starvation will rain down upon ye. Add them up. If this amount is >= the amount of money deposited into your account each month by work or other income sources, you have a great big problem and you need to cut some expenses right now. I can write a whole article about how to do that, consolidate debt, reduce payments, &c. but this is not that article. Even if this amount is less than your income but not a lot less, you probably have a problem that needs more than any budget. Let’s assume you’re okay, this number is significantly less than you earn. Good, we’re done step 1, we’ve confirmed you have enough money to stay afloat.

Step 2 – Decide how much you want to put away for savings, and treat it like any other bill: you are about to have no choice but to pay it, so pick it carefully. The experts say 10% of your salary is a really good general rule, and I like their thinking on the subject, but this is also not the article on investing. Add that amount, and then see the checks in step 1. Still OK? Good.

Step 3 – Wherever possible, set those things to be on autopilot – pre-authorized withdrawals, automatic transfers, whatever. This is especially important for the savings portion, which is really hard to transfer month after month manually without looking at it as extra funds. Make it happen before you touch it. If you can’t or won’t automate everything, that’s okay, but in your mind, that money is gone, no touchies. Still OK? Good.

Step 4 – You’re done. Pay attention here, it’s really really important and it’s the huge difference between broken budgeting and ruling your money: You’re DONE. Take the rest of that money, it should be a fair bit if you’re living within your means, maybe hundreds of dollars, and spend it on pennywhistles and gumdrops. The point is, once you have taken care of the absolute necessities, the amount you have remaining is guilt free – you’re saving the amount you want to save, you’re managing all your obligations, you deserve to have some fun money, and there’s no reason to box it up. If you spend more on theatre tickets, you’ll have less for monster truck, and that adjustment happens automatically. Rather than having to decide which budget category is going to have to cover your excesses in CD purchases, you just have less money this month for other stuff, but your savings don’t suffer and neither do your bills. Basically your budget has an enormous “miscellaneous” section and that’s how it should be. No more wondering if you can really afford to go out to dinner tonight: is there money in your account? Then you’re good to go, you’ve already taken care of your obligations, you’ve already been responsible! No more guilt, no more lack of discipline, this system becomes very automatic very quickly because thanks to Step 3, you don’t even see the extra money – any money still in your account after the automatic stuff has been removed is your money and you can enjoy it. You should enjoy it, you earned it.

[This is the first article I’ve written on the subject of personal finance, and I’ve used enough declarative sentences that I expect people will inevitably bristle and think that I’m overstepping my unqualifications. On the other hand, if people see any value in this type of post, let me know; I have screeds in my head about home buying, debt management, RRSPs & Investment, and probably others. I may end up writing them anyhow, but it would be super nice to know that people are reading them.]

12 comments

  1. Glad to know that I’ve been doing it right all along. 🙂 That was a happy accident.

    Yes, please expound at length about money-related things. You compress information so effectively, and if you have fun writing about things that I don’t have fun looking up myself, we both benefit. 😉

  2. That’s the way I’ve always planned on “budgeting” should I ever have enough of a gap between my income and my expenditure to do so. 🙂 Of course, at the moment, my expenditure is negligible, and my problem is finding ways to increase that, since I can’t legally increase my savings to 95% of my money earned.

    Boy, that’d be nice, though 🙂

  3. Personally, I’m waiting for the next article on financing strategies. Particularily to do with the best way to finance new cars. Anything in my future, Dr. Money?

  4. Very good advice and pretty much what I’ve been doing.

    One thing that I might suggest that was very helpful to me. If you belong to a credit union or use a bank that doesn’t charge for additional checking accounts, I opened a separate account for my mortgage and had enough money to pay that plus taxes split off into it with every paycheck. That account was ONLY used for those purposes, so even if I messed up a bit and went over in my regular account, the mortage money was guaranteed to be there. Given the rather expensive consequences, I found it worked rather well.

  5. […] Okay. So. You’ve got your brain clear on the whole budgeting scam, and you’re ready to start tackling the bigger questions. You know you should save. You have heard about Freedom 55 and that sounds nice enough. You don’t know anything about stocks and bonds and mutual funds and derivatives and secondary markets and e-trade and selling short and day trading and you are sort of worried that you’re going to have to learn about some of that. Or worse, much worse, you know a little about some of those things, and you’re buying stocks based on P/E ratios and dividend yields, without actually knowing how to read a balance sheet. If you’re Canadian you’ve heard of RRSPs and are certain that they are something responsible people have, or maybe you have one but still don’t quite get what makes it different or what to do with its contents (they have contents?) Back that truck up. We’ll get there. The whole point of the anti-budgeting rant was that you shouldn’t have to work that hard just to manage your money. The same goes for investing, and doubly so, because working too hard is going to cost you money. […]

  6. I like it! Sound, sensible advice. Keep it coming.

  7. Getting here a little late, but better late than never. Many thanks to Steph for setting up an LJ feed for your blog. ^_^

    I’ve generally found your advice to be helpful on a number of topics, and the gods know we need all the good advice we can get right now on money topics. So expound away!

  8. I was very interested in reading your comments on guilt free money since I’m currently on some projects related to this.

    Do you have (or did I miss it) any suggestions for putting some of your money to use “for something bigger than yourself” – charity, etc.?

    I’ll be interested to learn.

    Scott Hove
    http://www.scotthove.com

  9. Fantastic at last a plain old common sense approach to debt debt managementt .Spending without guilt what joy and suddenly work can no longer be seen as a cruel and harsh punishment for living.

    Thank goodness for your advice now people will have to seek a replacement nou nou.

    keep writing

  10. Thanks for the post. Very helpful. I just spent the whole day crunching my numbers in Quicken, which has taken me some time to understand. I was shocked and dismayed to learn that my husband and I spend about $1,000 more every month than we earn. But we each put money away in our 401K — and that is not accounted for in this cash-flow analysis. We never go down to zero in our checking — there is always some residue there, so I was confused to find out with Quicken that on a month-to-month basis, we are actually in the red.
    Some additional info:
    We are also saving $400 a month with an automatic transfer to savings. The three months I looked at, we had some unusual expenses, like city taxes and other things that won’t happen every month. Also we are expecting a huge tax refund this year. My dad tells me not to worry — we have only been married 6 months, and he would expect us to be deeper in the hole when in fact he says we are ahead because we are saving for retirement and building an emergency fund (albeit slowly). But I have caught a fever for personal finance and I want us to be excellent. We don’t have very high salaries, and I want to make up for it by being smart with our finances.

    Any advice would be greatly appreciated! I want to get us on the right track.
    many thanks.
    AK

  11. also I should add that we have no credit card debt. We pay it in full every month.

  12. Any which way we look at this “animal”, it boils down to gathering our real money numbers and placing then in front of us in a meaningful way so that we can see the real flow of our cash in numbers that can easily add up to our actual financial bottom line. Call it a budget or call it “my Kangorilla” it’s still our method by which we take ourselves out of the dark when it comes to governing the flow of your cash.

    There is a growing community of money control freaks around this relatively new little website called Out Of The Dark (OOTD) which is completely anonymous and free to use, located on the web at:
    http://www.myexp.org/OOTD_gate.php

    I started using it about three month ago, and it is too good to be free. And as a self admitted money control freak, for the first time I find myself in good company.