Saving Money without a Budget

Having a budget is one of the best ways to save money because it is a plan for every dollar you have coming in and going out. But not many people enjoy budgeting. It can be time consuming, tedious, and boring. It can be stressful. And once a budget is set up it can be hard to follow through, which causes more stress and anxiety.

That's why most people don't budget. Instead, the most they do is check their bank balance before making a purchase.

What usually ends up happening is once a paycheck is deposited, the person starts making purchases and right before the next paycheck the bank account hovers near zero. The next paycheck comes in and the process repeats. Little to no money is ever saved, despite the best of intentions and self-promises to try to save more.

If that's a description of your situation, here's a simple way to pay yourself first.

  1. Open an online savings account* (must be a different bank from your regular spending account, so you don't check your savings balance as often) and have your paycheck direct deposited there instead of your checking account (regular spending account).
  2. Schedule an automatic transfer to your regular spending account that coincides with your paycheck deposit clearing date.
  3. Make the transfer amount 90% of your paycheck.
  4. Don't look at your savings account balance and proceed as you always did in your spending habits out of your spending account.
  5. Voila, you are saving 10% of your net pay with little extra effort.

It may feel like you have less money the first couple of paychecks. Pretend that there's a new tax that made your paycheck 10% smaller. In a month or two you'll get used to it. If you're like most people, you don't need or use half of the stuff you buy. So you won't really be giving up anything.

One might wonder, why not have the money deposited into the regular spending account and then transfer the savings to the savings account? Similarly, if the employer's direct deposit supports it, why not direct deposit into both the savings and regular checking account?

The answer is that we want the amount going into the spending account to always be the same. That way, any raises and bonuses that you get are automatically saved and you avoid lifestyle creep.

Lifestyle creep is an increase in one's spending that comes with an increase in salary. People live paycheck to paycheck when they make $50k a year. Even if they  get a bunch of raises and make $100k a year, they still live paycheck to paycheck. It's like their salary doesn't really matter. We always find ways to spend the entire paycheck, no matter how large it is.

If you're used to spending a certain amount per month, there's no reason to increase your spending if you get a raise. It won't make you any happier. Save the difference instead, pay yourself the entire raise. You deserve it.

* It's a personal preference, but I would recommend online savings banks from the more traditional financial institutions (Discover, American Express, Goldman Sachs, Ally, Capital One 360, etc) versus the new fintech ones (Wealthfront Cash, SoFi, Digit, Simple, etc) even though the new fintech banks offer higher interest rates and oftentimes more features. I've used Discover for a while and have had no problems. I use Wealthfront Cash as well, but this is for a part of my emergency fund (call it my emergency fund's emergency fund).

I would hesitate to implement the direct deposit scheme outlined above with a fintech bank because most of them aren't really banks. Institutions like SoFi and Wealthfront have agreements with real banks and act sort of as intermediaries. As a result there's a lot more moving parts and more chances of things going wrong. And if things do go wrong, there's less customer support people to help you. There have been numerous cases of people having their SoFi accounts frozen because of some algorithm being triggered with no help from the fintech institution's customer support.

That doesn't mean you'll have a bad experience with fintech or a good experience with a more traditional financial institution. I just think you're less likely to have a smooth process with a new company that has less support, more moving parts, and what is essentially a minimum viable product (that will improve over time). That said, fintech is a great place to earn higher interest on money you don't need immediately.

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