In my profession, I manage budgets in excess of $500M. Every day I come to work, I look at how we are tracking, look at what opportunities I have to reduce the budget, check on my vendors, and develop strategies on how to reduce costs to come in under the budget. In my personal life, however, at one point in time, it was anything goes. I tried many systems to either manage to the penny or simplify by the bucket method. Every time those budgets failed. Why? More importantly, why can I manage a giant budget to the penny and achieve year over year savings whereas my personal budget only achieved year over year of credit card debt and increased spending?
The first thing that I noticed immediately is the lack of well-defined goals that are attainable. In my profession it is simple, coming in under budget saves the company money and directly impacts my salary and bonus. This provides motivation to be diligent and set short and long term goals to make sure I achieve the end state every year. In my personal life, the goals were not as defined. If I saved $100 on my food budget one month then it only meant that I had $100 more to spend on something else or send an extra $100 to a credit card payment. Not very exciting nor does it help me see the big picture.
The Second thing, no accountability. In our personal budgets, there is typically no method to incentivize us to do better. Sure, we can increase savings, pay down debt, but really there is no day to day accounting that says we are doing good. Soon after any budget is created we lose interest because the effort does not seem to come with a benefit.
Lastly, budgets take dedication. That is not to say we can’t dedicate but it is much easier to dedicate an effort to something like an exotic vacation or a new car. Just like a new diet, we lose interest and revert back to our normal habits.
If most budgets fail, then what can we do?
The idea of becoming Thrifty Rich is to transition to a budget naturally. We all want to spend money, the difference, however, is how we spend that money.
A typical budget says:
- look at all the money you have spent
- categorize your spending
- set defined buckets of money to spend
- manage to those amounts.
How is the Thrifty Rich method different?
- Instead of looking at how the money is spent, you start simply by finding things you can save on to create new habits. Skip a cup of coffee, eat leftovers, walk to work, etc. You focus on the current things you spend on and find simple achievable ways to reduce them.
- Categorizing your money takes time and changes month to month depending on what you are doing and what things you have an interest in. Being Thrifty Rich does not lock you into any defined categories, but more simply says you can spend where you want but spend knowing the importance of every dollar.
- Setting defined buckets of money is a formula to fail. When we are locked into one structure we lose interest and fail. Being Thrifty Rich treats goals as things that matter to you. You have what you need to spend on (rent, food, etc.) vs. the things that compete for the things that matter (a cup of coffee, soda, new shoes, etc.). Step 1: find ways to save on the things you have to spend on. Step two: you choose to spend for instant gratification at the cost of the things that really matter.
- Manage your budget. Thrifty Rich teaches you to know the cost of your short term choices vs. your long term goals. Each choice you make has an impact. You choose.
How it all comes together
Thrify Rich is really a budget in hiding. The real difference is the path. A typical budget is not natural, is not flexible, and is slow to show results. Embracing the Thrifty Rich method starts by building savings on small daily habits you can teach yourself naturally. Small change, big impacts. Once those are achieved, you can increase your efforts to bigger goals. As you save and move money out of your spending account you do two things, build savings and naturally begin to manage less money. However, there is one difference, the money you have to spend goes further. No other budget system achieves this. The second benefit is that you build savings to use for the things that matter! This is your money and now your efforts are visible.
Lastly, if you set SMART goals, you know what you are saving for.
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