If you do an internet search for how to make a budget, you’re going to get an answer that looks something like this:
- Determine your expenses and break them down into categories (ie. housing, food, transportation, etc.)
- Determine a budget for each expense category
- Determine your income
- Subtract expenses from income
- Put surplus toward goals or make cuts if expenses exceed income (reconciliation)
- Repeat process every month
This is all well and good and forms the basis of what’s known as a zero-dollar budget. The goal here is simple: at the end of the month, every dollar in the budget has a job and goes to work at that job.
But there are problems with this type of budget.
If you follow a zero-dollar budget, when you go over budget in one category, it’s up to you to make cuts in other ones in order to make up the difference. You rob Peter to pay Paul in a sense. This is why keeping such a budget can be mentally exhausting and why there’s no shortage of budgeting apps out there.
Also, if you’re following a monthly zero-dollar budget, you only allocate savings during the budget reconciliation process. Since this happens only once a month, you get to apply surplus to debt or investments only 12 times per year.
Why does that frequency matter? Because increasing the frequency you can move money toward goals has a couple benefits:
- If you’re paying down debt, increasing payment frequency decreases the overall interest you pay on the life of the loan by decreasing the interest you pay on interest.
- If you’re investing, you get more benefit from dollar cost averaging.
Can Budgeting be Done Differently?
While the zero-dollar budget style has become practically synonymous with the word budget, it’s not the only way. There is another style of budget out there that will produce very similar results but with minimal effort. It’s what I like to call, a Lazy Budget.
Now this isn’t a new concept. In the past, it’s been known as a “reverse” or “pay yourself first” budget but I feel like those don’t really describe the experience of using this style. In the years since adopting a lazy budget, that’s what I’ve felt, like I was being lazy with my money. But, here’s the thing: its allowed us to crush our debt and build our net worth very quickly with minimal effort.
How does it work?
First, it is a savings first budget. Just like you may put a percentage of your pay towards a 401k every pay period, you can do the same thing with your take home pay. In a lazy budget, all of your savings come before your expenses are taken out as opposed to a zero-dollar budget where your savings come at the end of the process.
Second, it takes full advantage of a consistent income. Without getting too much into the math, a cool thing happens when you get to treat the income side of the budget equation as a constant rather than a variable. There’s no guesswork in knowing how much money you have to work with every paycheck!
Lastly, putting the two above together allows for near-effortless wealth building through automation. Money can be simply sent to where it needs to go before you get a chance to mess with it. And since it goes where it needs to by default, the only expenses you need to worry about are your variable ones, your bills are taken care of.
Why Isn’t Everyone Doing This?
While a lazy budget done right can be awesome, not everyone can use one. This is probably the biggest reason why lazy budgeting isn’t as well known as zero-dollar.
In order to use lazy budget you should have the following:
- A stable, consistent income (a salary)
- Ability to save a couple months of income
The first point goes to the inner workings of the budget. If you don’t have a predictable income, you can’t really make the kind of savings assumptions you need for the budget to work well. Not to say that you can’t use a lazy budget with a variable income, but it may be more hassle than it’s worth.
The other point goes more to how the budget behaves in practice. When using this type of budget, you really need to have buffers in place to absorb changes in expenses from time to time. Certain times of the month/year are more expense heavy than others and you need to be able to account for that.
Also, this type of budget may not be the best for those whose inflexible variable expenses (the ones tied to keeping the lights on and food on the table) take up a serious portion of their budget. A lazy budget thrives when you have the ability to be flexible and a higher exposure to these types of expenses doesn’t help.