Today I want to introduce you to the “secret” technique used by millionaires who don’t budget.

Now, don’t get me wrong – budgeting every dollar is an amazing strategy. Giving every dollar a specific job, before you start spending, is hugely helpful in getting a handle on your finances. The majority of millionaires budget, according to Dr. Thomas Stanley of The Millionaire Next Door, but there’s a subset that don’t. Those that don’t create what the good doctor calls an “artificial environment of economic scarcity”. That’s a fancy way of saying pay yourself first, automatically, and just spend what’s left over.

Why explore both methods? Budgeting doesn’t work for the majority of America. Only 20% of people have a “real” budget where they actually track their spending and do all those budgeting things that you “should do”.  So why does the personal finance world continue to push something that doesn’t actually work for most people? Instead of some perfect image of personal finance, I’m all about finding what actually works for you and your family.

I go back and forth between the two, depending on what I have going on in my life and my current goals. What’s the advantage and disadvantage of each? Let’s explore each, so you can pick the method that works for you.

The Argument For Budgeting

There’s nothing more powerful than knowing exactly where you’re spending your money each month. Figuring out exactly where your money is going, trimming down on categories not aligned with your goals and dreams, and telling it where to go can help you cut down on the unnecessary and bring your goals closer. Whether it’s paying off debt, saving for a home, setting aside money for college, starting a business, or buying a new car – a strict budget can help you get there.

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Most personal finance books recommend budgeting as one of the first steps to getting your finances in order. I personally would recommend first tracking your spending for a month or two first, and then creating a budget, because otherwise your budget is going to be totally unrealistic.

Of course I can spend $75 a month on groceries for my family of 5! And $20 per month for electricity sounds right. We’ll never eat out or have any fun whatsoever – oh and I completely forgot that gifts cost money! And the car tax bill that comes once a year! Oh insurance, right… 

If you already have a good record of your past spending from a checking account or credit card, you can use that information to jump-start your budgeting. I used strict budgeting when I was aggressively paying off debt following my husbands near-death from septic shock, and also when I started my mortgage payoff journey, and it was a very powerful tool. The more aggressive you want to be in your financial goals, the more budgeting is the way to go.

What Are The Downsides to Budgeting?

People that talk about budgeting as the key to reaching your financial goals often never talk about the downside. The main downside is that you need to stick with it over the long haul to be effective.

Most people  have no trouble coming up with a budget, but their first pass is often wrong. They overshoot or underestimate certain expenses, forget completely about others, or they’ll find that they’re spending more than they make. All of these things can be discouraging to a new budgeter. They’ve budgeted every dollar and then suddenly a car repair is needed. Or they forgot it’s their mother’s birthday that month. Or the electric bill is higher than estimated, this month the oil bill is lower than usual, and so on.

You need to not only create a budget, but live it, in order for budgeting to work. You need to make constant adjustments as the month goes on, save  in sinking funds for annual or semi-annual expenses (like car tax bills), Then you need to start over fresh every month. It’s no wonder that while 80% of Americans say they have a budget, only 20% actually write it down and keep up with it.  This could be part of the reason that only 40% have enough in savings to cover an emergency of $500-$1,000.

The Budgeting Alternative – Automation

Interestingly you don’t need to budget to become a millionaire, or to achieve your goals and dreams. You can do what Dr. Stanley called “creating an artificial environment of economic scarcity”, or as David Bach says, automating your way to millionairedom.

How does this work? It’s simple:

  • Get to know your goals and dreams
  • Determine what amount you need to set aside each week or month to make progress towards those goals
  • Automatically set aside that money in the appropriate kind of account(s) – an emergency fund, a debt-payoff account, a 529 college plan, your retirement account, or an after-tax investment account
  • Live off whatever you have left in your checking account – guilt free

Why does this work? As they say, “out of sight, out of mind.” When you look at your checking account, if you see a big chunk of money just sitting there, you might spend it instead of putting it toward your dreams. It’s also simple and easy to keep up over a long period of time. In fact, some hard-core budgeters evolve to this method over time because it’s so simple.

You’ve already pulled out what you need to work toward your goals. Now you just pay all your bills and fund your discretionary spending out of what’s left in your checking account. No need to track, budget every category, or move things around as an unexpected expense comes through.

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Automation!

This works best when you automate your sinking funds too. Christmas comes every year? Transfer $10, $20, or $30 per week into a Christmas Club account, and when December comes you’ll be smiling. Have pets? Put $10 or $15 a week into a pet fund to pay for their inevitable vet visits.  Car taxes, annual insurance bills, semi-annual tax bills, and the like? Set up a sinking fund for each one and automate your way to budget freedom. I use Capital One 360 – I’ve been a customer since it was ING Direct back in January of 2004 (over 13 years now!) and I’m very happy with it. You can open multiple accounts with different names for different funds. You can also do similar things with Smarty Pig, which pays an even better rate (up to 1.12%!). As of this writing, there are a few accounts paying 1.3% – Magnify Money is the site I use to find good rates (none of these are affiliate links, they’re all real).

The Dark Side – Ignorance

When automating, you need to be careful not to just ignore your spending entirely. I know, the reason you’re trying this instead of a budget is so you don’t need to track! But if you’re not careful you can find yourself with a bunch of leaks in your financial ship.

So when automating be sure to keep an eye on the expenses you’re incurring. Watch your grocery spending, eating out, subscriptions, discretionary spending, and more. Make sure to shop around for better deals on your recurring expenses (aka fixed expenses) – better rates on your debt, lower insurance premiums, cell phone bill, home phone, etc.

If you’re finding you’ve automated and don’t have enough “money at the end of the month”, you’re going to need to do strict tracking for a while to get back on track.

The Take-Away – Experiment With Your Life and Money

Believe it or not, there is no “one right way” to live your financial life. Rather than strict rules, I like to treat your personal finances as an experiment. And don’t be afraid to try one technique, then another, and to move back and forth between the two as your life and needs change.

If you’ve tried budgeting before and it didn’t work, or you wouldn’t keep up with it, don’t despair. Try automation instead and see if that works better for you. Or if you’ve been automating but you keep needing to tap your emergency fund, do a strict budget for a while. Use each method as a tool to help you achieve your dreams.

More Resources

Did you notice how the word “secret” was in quotes up in the title? That’s because it’s really more of an open secret. It’s been written about, talked about, and discussed pretty thoroughly in the personal finance media. It never gets as much attention as budgeting, though, so I’m adding my voice to those spreading the word about this technique.

Here are a few great resources you can use to learn more:

I Want To Hear From You!

Let me know what you do – are you a hard core budgeter? Do you automate and spend guilt free? Or do you go between the two, like I do, as your life and needs evolve? Let me know in the comments!

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23 thoughts on “The “Secret” Technique of Millionaires Who Don’t Budget

  1. While we are huge fans of the anti-budget (pay yourself first then live off the rest), we have gone back and forth between the ignorance and knowledge state within our non-budget life. We are currently trying to figure out the best way for us to keep our non-budget method, but be more vigilant/mindful of the creeping expenses.

    ~Mrs. Adventure Rich

    1. That’s probably where the tracking tools can help (e.g Mint et. all). Personally I prefer manual budgeting and tracking when I need to be strict about it, but those tools are great for consolidating your spending so you can see if there are any problem areas

    2. I follow this line of thinking as well. I set an amount aside I feel comfortable spending each month (after all expenses including saving and investing) and I’m ok with living off that.

  2. I have had an ‘extra’ almost every month. Dentist bill, a doctor bill, car insurance (every 6 months), home insurance, car maintenance . I can budget a round amount for the insurance based on past years, but dentist and doctor bills seem so variable even with the same insurance. That is why I put a large amount of each paycheck into savings. It earns more interest there while waiting for the known expenses, and the unknown costs of the other stuff that comes up. If I have a better year with the dentist or car maintenance , the extra money I didn’t need is already in savings, and easier to move to Vanguard. I finally set up additional savings accounts in Vanguard. One is to save for house expenses like property taxes. I just set one up for a trip my mom and I are planning for next year.

    Thanks for a great article, because this takes the ‘guilt’ or stress of covering these sort of expenses, but knowing they happen you can save without knowing the exact amount ($17), car insurance will increase because of some new state charge.

    1. I’m with you, that was one of the things that drove me crazy about a “traditional” budget. There were just too many unexpected expenses! So I did something similar to you where I just left in a big buffer every month, not budgeted for anything, specifically to cover those kinds of expenses. It worked really well, and if we didn’t need it, then that money could go to savings.

  3. Although we budget, and use YNAB, which I really like, I think tracking your spending can be just as powerful a tool. When you see how you are, in actuality, spending your money, you can make changes and/or automate in better ways. We definitely automate all our savings or I would spend it all! (Mr. ThreeYear is much more disciplined than I am). I think like you said, you have to find the tool that works for your family.

    1. Yes I still like to do a detailed spending audit every so often to make sure there aren’t things creeping up on cost, or expenses I can reduce/eliminate. The way I see it, a plan for spending/saving/tracking that works for you and your family is much more useful than the “ideal” way that you won’t keep up with. It’s all about what works! 😀

  4. I could not “automate and forget it” for spending and saving for gifts, etc.. I am okay with “set it and forget it” for retirement accounts but that is about as far as I can go.

    Nice article. Everyone has to figure out their best methods for saving. For me, it is watching what I spend and reassessing at the end of the month.

  5. This is a great subject to discuss. When we were in our debt elimination days, we tracked all of our spending closely. Now that we are debt-free (except our mortgage), we fall into the budget automation concept you discussed. All of our investments are automated and we monitor our credit card spending, ideally each week, to ensure we aren’t overspending. It makes our budgeting more efficient and less time-consuming.

    Thanks for sharing, CMO!

    1. It can be a great way to keep up to date on your finances without the stress of planning/tracking every dollar. If it works for you, it’s a great approach to try.

  6. I do a mix of the two strategies. I set aside my savings goals first and then budget with the money that is left over. That way I don’t mind going over in one category or another in a given month, because I can pull it from a non-savings category. If I go over in restaurants, I’ll pull the extra money from my entertainment budget, but keep investing the same amount of money that I do every month.

  7. Hey Mom! I don’t have the patience for budgeting. I love the “forced scarcity” approach, and have used it for 30+ years. I simply get aggressive in automating my savings, then know that if I still have $$ in checking I’m free to spend. Much easier, and it’s worked extremely well for me!

    Having said that, I did track every penny we spent for a year to develop a solid baseline for our retirement planning. It was a good exercise, and I gained some good insight in the exercise.

    1. Glad to hear it’s worked well for you! I go back and forth depending upon what my goals are. Sometimes I just automate, and sometimes I’m strict. It’s worth trying both!

  8. I sort of do automation (in the way of a lump savings account), though I’m a huge proponent of the accountability knowing you’re keeping track of your expenses has. I don’t budget per say, but I am consciences of every $ I spend 🙂 It’s great that there’s so many methods too, thanks for laying them out!

  9. My approach is a bit hybrid. I automate all the savings up front, and keep a buffer in the checking, just in case. I track everything via Personal Capital and an excel sheet. Because we use credit cards for virtually everything and pay the entire balance at the end of the billing cycle it is really pretty easy. At least for me anyway.

  10. We don’t budget in the sense of setting aside money by category. We tried it once and failed. I think something came up, blew a hole in our plan, and we thought, “Why are we stressing about this?”

    So now we mostly get by with automation and my spreadsheets. I automate the 401k, and I’d love to automate everything else (IRA, 529, etc, etc), but I’m not quite there. I mostly monitor cash flow and when there’s a big surplus I allocate money toward those other accounts. Honestly I think I enjoy my spreadsheets too much to go completely automated!

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