If you don’t have a budget, you’re not alone. A U.S Bank study found that only 41% of Americans have one. While keeping a close eye on income and expenses can be the key to making better financial decisions, it’s also possible to build wealth without a budget.
No matter if budgeting just hasn’t made it to the top of your “to do” list or you’ve tried it with lackluster success, I’ll give you 5 steps to grow rich without a budget. Many people, including me, have found smart ways to manage money and achieve financial success without being preoccupied with every penny.
Free Resource: Download the free Retirement Account Comparison Chart for a summary of retirement account rules, plus the best places to open one up.
What Is a Budget?
You’re probably familiar with the idea of a budget, even if you’ve never kept one. A personal budget allocates your expected income to certain expense categories, such as housing, food, debt repayment, and savings.
You create categories and subcategories for all the ways you spend money and set limits on each one. Then you compare the budgeted amounts to what you really spend and make cuts or reallocate funds from one category to another, so you don’t go overboard.
If this sounds like an overwhelming math problem, you’re probably one of the 41% who don’t have a budget!
Budgets are often compared to diets because they seem like a temporary, mad dash to meet a short-term goal.
Budgets become a real brain-buster when you don’t have regular or reliable income. If you’re self-employed, get paid on commission, or qualify for a bonus plan, you may have given up on budgets because you don’t know exactly how much you’ll earn from month to month.
Another wrinkle is that we don’t always spend the same amount per month on each expense category, such as insurance, healthcare, food, or utilities. You can make an estimate by calculating how much you spent last year and dividing by 12. But you may not have that data, or it could be different from this year’s numbers.
For me, the roadblock to budgeting isn’t so much the math, but a feeling of deprivation. Budgets are often compared to diets because they seem like a temporary, mad dash to meet a short-term goal.
These types of sprints can work when you’ve gone completely off the rails and need to get back on track quickly. However, I generally believe that a better approach for long-lasting financial success is to set up a sustainable, realistic, and flexible money management system.
Don’t get me wrong; it’s not that you won’t need to make sacrifices to achieve your financial goals. Few of us have the resources to afford everything we want for ourselves and our families. My point is that focusing just on the math can be myopic, like not seeing the forest for the trees.
5 Steps to Grow Rich Without a Budget
1. Focus on your net worth. 2. Consider your financial end game. 3. Decide on your financial goals. 4. Create a spending plan. 5. Create an earning plan.
Instead of feeling guilty that you don't follow a budget, use these 5 steps to manage your money wisely and grow rich.
1. Focus on your net worth.
To understand how to get where you want to go, you need to know exactly where you are right now. In other words, growing rich starts by getting a grasp on your current financial situation.
I know that can be scary for many people, because you may not be happy with your finances and may not want to face them. But you’ve got to embrace reality to make positive changes.
A PFS gives you a complete view of your current situation, and should be updated on a regular basis, such as annually or even quarterly.
The best way to start is to create a tool that you can use throughout your life to help you gauge your level of financial fitness. The tool I’d like you to create is called a Personal Financial Statement, or PFS.
A PFS gives you a complete view of your current situation, and should be updated on a regular basis, such as annually or even quarterly. Each time you update your PFS, the purpose is to recalculate your net worth, which equals your assets minus your liabilities.
I use an Excel spreadsheet to list out each asset I own, such as cash accounts, retirement accounts, investing accounts, real estate, vehicles, and other personal possessions that have real value. Below these, I list my liabilities, such as mortgages, car notes, and credit card balances. The difference between what you own and what you owe is your net worth.
For instance, if you own $250,000 in assets, but have $200,000 in debts, your net worth is $50,000. Net worth is an important number because it reveals your true financial resources at a given point in time. If you owe more than you own, you’ll have negative net worth.
The goal is to increase your assets and shrink your liabilities every year. Tracking your net worth over time is an incredibly valuable exercise because it keeps you focused on what really matters, which is building wealth.
There’s no magic net worth number that you should have. But here’s a rough guideline to target:
[Your age – 25] x [Gross income / 5]
For example, if you’re 35 years old, subtracting 25 gives you 10. If you earn $60,000, dividing by 5 equals $12,000. Then multiplying 10 by $12,000 gives you $120,000, a good net worth to target for your age.
If you’re 35 years old and that amount of wealth seems out of reach for you, don’t despair. Improving your financial health doesn’t happen overnight. Just follow the remaining steps in this post to build wealth over time.
In chapter two of my book, Money Girl’s Smart Moves to Grow Rich, I review this net worth formula and explain step-by-step how to create a Personal Financial Statement. You can download chapters one and two for free, which includes a sample PFS to help you get started now.
2. Consider your financial end game.
After you know your net worth, it’s time to create a financial plan. This doesn’t have to take a long time or be complex. You don’t need to be a financial whiz or have a high-paying job to achieve significant financial goals.
Think about the big picture of your life and consider your financial end game. What financial and nonfinancial dreams do you have? Why do you want more financial success in the first place?
Take a moment to reconnect with what’s important to you. I find that’s it’s helpful to imagine my life five years from now. Consider where you’re living and how you spend your time. What would make you proud to say that you had accomplished between now and then?
Time passes quickly, so don’t underestimate how much small decisions and everyday actions impact your finances decades from now.
Then stretch your imagination out further and do the same for your life in 10 or 20 years. Go further and imagine you’re on your deathbed with just a few hours left to live. What accomplishments would make you feel good about yourself even in your final hours?
These types of heavy questions can give you important information about yourself and inspire you to begin planning for what truly matters to you. Maybe you want to travel the world in retirement, pay for your kids’ college, take a nice vacation every year, move into a bigger place, give to charitable organizations, or just be prepared for the day you can no longer work. It’s your call.
Time passes quickly, so don’t underestimate how much small decisions and everyday actions impact your finances decades from now. We all want a financial future with more freedom, not less. By thinking about the end game first, you focus on your dreams, which can make necessary sacrifices easier to handle.
Related: A Blueprint to Prioritize Your Personal Finances
3. Decide on your financial goals.
Once you know where your finances stand today, by creating a Personal Financial Statement, and you have some idea about what you want to achieve in the future, it’s time to create specific financial goals to clarify your intent.
There are three different types of goals to consider when you’re doing financial planning: short-term, medium-term, and long-term.
Short-term financial goals are those you want to achieve within a year. You might want to max out a retirement account, buy a new car, save for holiday gift giving, or donate a percentage of income to charity.
If there’s one short-term goal you should have, be determined to establish an emergency fund. Having a cash reserve is key for staying out of financial trouble. None of us knows what the future holds when it comes to our income, our health, or our economy. So, hope for the best, but always plan for the worst by keeping a healthy cash cushion in the bank.
If there’s one short-term goal you should have, be determined to establish an emergency fund.
Medium-term financial goals are those you want to accomplish in the range of one to five years in the future. These might include beefing up your emergency fund, paying off debt, saving for a down payment on a home, or saving for your children’s education.
Long-term financial goals are those you intend to achieve more than five years into the future. Of course, the granddaddy of all long-term goals is saving for retirement. And perhaps, if you can afford it, saving for the education of a young child.
I recommend that everyone make a goal to invest a minimum of 10% to 15% of their gross income for retirement. Here are some resources to learn more about special tax-advantaged accounts that can help you achieve long-term goals like retirement, paying for education, and healthcare costs:
- Retirement Q&A: How to Choose Accounts, Manage Rise, and Cut Fees (Podcast 502)
- Should You Use a 529 Plan to Pay for College? (Podcast 504)
- How to Save Money on Healthcare With an HSA (Podcast 391)
4. Create a spending plan.
Now that you have a clear picture of where your personal finances stand today by creating or updating your Personal Financial Statement, and where you’d like them to be by setting short-, medium-, and long-term goals, the next step is to close the gap between them.
Instead of budgeting, I recommend creating a spending plan. This is a simple plan for how you intend to manage your money. The idea is to account for your financial goals in addition to all your living expenses. The total of all your expenses must balance with your take-home income, so you never spend more than you earn.
I’ll give you some guidelines to follow for what percentage of your income to allocate to broad types of expenses. But there’s no right or wrong way to set up your spending plan. Everyone has different goals and priorities.
My spending plan starts at the top with how much I want to set aside for my long-term goal, which is a comfortable retirement. I invest no less than 10% of my gross income by making contributions to different retirement accounts. I also make sure to maintain a minimum of six months’ worth of living expenses in my bank savings account. Then I live off the rest.
So, my strategy is to pay for my financial goals first, and then never spend more than what’s left. It’s not difficult now, but there were many years when I cut back ruthlessly on big expenses, like housing and cars, and eliminated just about every unnecessary cost, such as dining out, entertainment, and new clothes.
If you feel like you can’t afford to fund your goals, especially investing for retirement, it’s time to tighten up your spending.
If you feel like you can’t afford to fund your goals, especially investing for retirement, it’s time to tighten up your spending. Eliminate items you really wouldn’t miss, like a gym membership you’re not using and online impulse buys.
Make changes that are less expensive and better for you, such as cooking at home and bringing your lunch to work. Shop your utilities and insurance to see if there are less expensive options for your situation.
One popular planning approach is called the 50/30/20 rule. It’s a basic guideline for setting limits on your living expenses, variable expenses, and savings.
With the 50/30/20 rule, you spend no more than 50% of your take-home income on fixed expenses and true necessities, such as housing, insurance, utilities, food, transportation, and debt payments.
You limit variable expenses, such as dining out, clothes, cable TV, travel, and gifts to 30%. And the remaining 20% is for financial goals like building an emergency fund and making retirement contributions.
These are rules of thumb that you can tailor to your situation and priorities. For instance, if you can spend 40% on fixed expenses, you could increase your variable costs to 40% or boost your savings to 30%.
Related: Checklist to Measure Your Personal Finance Success
5. Create an earning plan.
As much as creating a spending plan can improve your financial life, creating an earning plan can be even more powerful. There’s a limit to how much spending you can cut, but the amount of additional income you can earn is unlimited.
Consider all the ways you could earn more over the short- or long-term. Maybe you could get more overtime, do freelance work on the side, or get a second job. Once I began earning more, I kept my expenses low and had enough freeboard to save and invest more and more each year.
Always start small and increase your savings a percentage point or two every year so you build it over time, especially when you get a pay raise, windfall, or bonus. The trick to building wealth is not to spend more when you make more.
Having more income and cash flow is fantastic! But if you spend it carelessly, it won’t help you achieve your financial goals or build more security.
Having more income and cash flow is fantastic! But if you spend it carelessly, it won’t help you achieve your financial goals or build more security.
Best Money Management Tools
One way to protect yourself from making bad financial moves is to put your goals on auto-pilot. Easy access to money makes it easier to spend on unnecessary items and to make impulse purchases.
Use tools such as an online bank account or app to set up automatic transfers to your IRA. If you have a 401k at work, contributions must come from automatic payroll deductions. Also request that your employer send a portion of your paycheck by direct deposit to your savings account.
For ongoing money management, I’m a big fan of Quicken software, which is the gold standard. It’s an all-in-one solution that aggregates transactions from all your financial institutions, allows you to create customized categories, reports, budgets, pay bills, sync up multiple devices, and more.
You might also try out free money apps that aggregate and categorize financial transactions in a dashboard, such as Mint and Personal Capital. If you prefer using spreadsheets to manage money, check out all the great templates at Simple Planning.
Growing rich is about much more than budgeting. Abraham Lincoln said, “The best way to predict your future is to create it.” So, it’s time to decide what you want your future to be and how to use money as a tool to create it. Then develop a spending plan to get there by setting aside the right amounts in the right places so to make it happen as soon as possible.
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