Millions of Americans these days budget their money, making it one of the most popular money management strategies that is abided by.
You know how budgeting works: You take your income, subtract your monthly expenses from it (i.e., car payment, mortgage, utility bills, etc.) and then decide where any leftover money is going (i.e., savings, entertainment, rainy day account, etc.).
Budgeting is simple, and, as long as you stick to it, generally pretty effective. You can even download budgeting apps like Mint to help you stay on track with your monthly budget. But a budget might not be the best way to manage your money and plan your financial future.
According to one personal finance expert, consciously spending – and not budgeting – is the real secret to financial prosperity. At least that’s the case that Ramit Sethi, a renowned personal finance coach, is trying to make.
Let’s take a look at what he writes about consciously spending in his latest book, I Will Teach You to be Rich. This strategy could be the right money management one for you.
“Conscious Spending?” What’s That?
Sethi writes in his book that budgets, overall, aren’t positive money management strategies. He says this is largely because they make you feel bad about your consumer habits, especially if you go over budget. He also says that they’re not forward-thinking enough in the grand financial picture. He compares budgeting to a poorly planned diet – it’s ineffective, you break it, and then you feel bad about breaking it.
So what’s the difference between budgeting and consciously spending? For starters, Sethi likes conscious spending because it encourages consumers to look toward the future. Here’s how Sethi recommends enacting a conscious spending strategy:
- Split income into four cost categories: fixed (i.e., monthly bills), investments (i.e., retirement), savings (i.e., rainy day funds, vacations) and free spending (i.e., entertainment, guilt-free purchases).
- Up to 60 percent of your income should go toward fixed costs, while investments should account for 10 percent, savings 5-10 percent and the last 20-25 percent toward entertainment and fun purchases. (Sethi just uses these as estimates for people to use as a guide as they develop their own plans.)
So, why is this method better? According to Sethi, it allows you to take care of the necessary bills first in your fixed spending, then divvy up the rest toward your future, whether it’s your long-term future (i.e., retirement) or your short-term future (i.e., vacations, a night at the movies).
In a nutshell, Sethi’s conscious spending strategy doesn’t mean you have to cut back on certain things to reach your financial goals, like many people do if they were to establish a budget. Instead, the goals are laid out in front of you, and you can reach your goals by allocating appropriately into the four cost categories.
Building Better Spending Habits
Yes, like a budget, you have to stay disciplined and make sure the appropriate amount of money is being allocated into each fixed cost category. But conscious spending can have its benefits. Instead of wondering where you’ll make up the money in your budget you spent on a $90 pair of gym shoes, you know that it’s already there for you when you consciously spend. Instead of cutting back your 401K savings because your electric bill was higher a certain month, you can rest assured that it’s already there working for you. Sethi might just have a point to this. You don’t feel bad when you consciously spend because if you do it right, you won’t have anything to feel bad about.
We’re not necessarily endorsing conscious spending over budgeting — we’re just laying out an alternative that you might find effective. Whether it’s right for you is up to you to decide. If you’re regularly going over your monthly budget, then it could very well be worth your time to explore another method. But if budgeting is working just fine for you, then why revamp anything?