Sticking to a budget with the no-budget budget

Taking a break from our travel posts, we switch to the topic of finance for this week. Staying home after a trip means spending time to look at our finances in more detail. This also helps us plan for future trips in terms of costs, things to do, and how much to spend or cut back on since we can’t always travel for free. Dealing with logistics with the kid and how much to spend for the month can be daunting, so how do you stick to a budget when you hate to budget?

We have just the solution: use the no-budget budget. In a nutshell: it means having multiple bank accounts, directing your paycheck to different bank or investment accounts depending on what you want the account to be used for, without the need to constantly stick to an actual amount to spend per budget line item.

Think of it as a glorified envelope system, except instead of actual cash and envelopes, you use the digital equivalent of that: using bank and investment accounts. Best of all, you just have to set the no-budget budget once and let the money funnel itself to different accounts as you please!

How to use the no-budget budget

First off, what is a no-budget budget? Well, as the name suggests, instead of putting in set amounts per budget line item like groceries, shopping, travel, and the like, you spend whatever amount on whatever budget line item as you please.

However, there is a catch to this. Instead of spending all of your paychecks every single month as you please, you will have to learn how to hide money from yourself and direct the funds where you need it the most. It takes the pain out of budgeting, and it makes it easier to manage.

Step 1 to the no-budget budget: calculate how much you spend on basic necessities monthly

When we say basic, we mean basic, and it should only count in these areas:

• Housing: If you own your home, this includes PITI (principal, interest, taxes & insurance), HOA fees (if you have any), maintenance, repairs, and upkeep. If you rent, then the rent & renters insurance.
• Utilities: electricity, sewer, water, mobile phone plans, and internet bills, because the internet is now a basic necessity especially if one works from home.
• Food: No frills groceries with a small provision for eating out maybe once or twice a month. Include some drinks that you’ll do to treat yourself to.
• Transportation: Car insurance, gas, maintenance, commuting to work, anything that considers you to get from one place to another and back.
• Childcare: If you have children, include childcare and other supplies like diapers, wipes, and the like in this line item.
• Medical: paying for medical or dental premiums, co-pays, and the like go in this item. You don’t have to include a line for this if you are covered with a work plan.
• If you have pets, include them in a separate line item called pet care, or if you look after your parents or pay for nursing homes or other additional care for them, then include that in an additional section.

If you want to spend more money on other line items, then we discuss them in more detail in the scenarios below. The logic is to just live off your basic necessities, then using the rest of the money for other line items: be it to pay off debt (a mortgage, a car loan, or other consumer debt), to invest for financial independence, entertainment, travel, or to save for a big-ticket purchase.

For example, if you spend an average of $55,000 on basic necessities a year, you spend an average of $4,600/month ($4,583/month, but we rounded it up to make it easier)

Step 2: automatically put money in investments and/or different bank accounts

If you are employed, it is easy to create buckets where you can automatically put a certain amount or percentage of your paycheck to different bank accounts monthly. In the scenario above, you spend an average of around $4,600/month for your family of 4.

With both parents working, designate how much one parent will put into the family fund. In our case, let’s say we decided to split the bill – mom and dad will contribute $2,300 per month or $1,150 each pay period per person to the basic necessities fund.

We could set it up through our employers that we want to automatically contribute $1,150 to our family bank account. Before that, we automatically put in a certain % of our salary in our investment accounts – just so we can max out our 401(k) contributions for the year.

After we contribute to our retirement accounts and to our family bank account, whatever is extra is funneled into another account, which can be used to fund our Roth IRA investments for the year. Anything extra after that goes into a savings bank account which is then used for travel, more investments, and the like.

Step 3: Identify what you’ll do in your second or third investment or bank accounts

Segregate what you’ll want to use the extra accounts you’re setting up for. By assigning work assignments to your money, you are effectively more conscious of what you use it for. Here are some scenarios that you can use for your other accounts after you have put in the maximum you’ll need for your basic expenses account.

If you want to open a second bank account, we would suggest opening an online bank account with Discover or Ally. Alternatively, you can also use your local credit union. These offer better interest rates than the traditional banks like BoA, Wells-Fargo, or Citi. However small the interest is, it is still a little extra that you earn in the few days that you park your funds, waiting to pay the next bill or while you save.

Using the extra money to pay down your debt

If you have consumer debt on multiple credit cards, use a designated bank account to help pay down your debt. We suggest consolidating your debt into one with a lower interest rate, and there are multiple companies out there that help you do that.

If you have a car loan but no credit card debt, then you can use your second bank account to pay for that. Same if you want to pay down your student loans.

By paying a little extra to the principal amount on your debt, you are saving yourself tons of money on interest and can move to the next level of the checklist. All you have to do is create an auto-pay from this bank account as additional principal every month and you won’t even have to think about this account as much.

There’s extra money left behind in the bank account? Why not manually sweep the funds into your debt too? Additional principal payments = fewer terms to think about!

Saving for a down payment on a home, a new car, or maintenance

Once you are debt-free, you can then use the extra funds that you have to help save for a house downpayment or a new car. You could even use it for car or home repairs, should you own your car and home already. Or use it to pay off your mortgage early.

The possibilities are endless once you earmarked this money that’s funneling through this specialized account for a purpose.

Treat this as an emergency fund if you wish, or use it to pay for a down payment for a rental property or a second home.

As long as your consumer debt has been paid off then why not?

The no-budget budget is effectively putting your money to work

Instead of aimlessly spending everything each month and hoping an arbitrary number you put in a budget would work, then doing a no-budget budget is effectively putting your money to work for you and what you direct it to.

Imagine having money as an employee, slowly working its way to paying down your debt, or earning a little bit extra in terms of investments to achieve your goals. Just by setting it once and forgetting about it! Try the no-budget budget and see how it works for you!