Budgeting

Keeping track of every little purchase and rolling them up into categories at the end of each month is too much work for me, even with Quicken. I prefer the easy and low maintenance artificial scarcity method of budgeting.

If you haven’t heard of artificial scarcity, it’s the idea of taking money out of your hands before you have a chance to spend it. The theory is that the typical human being will spend all the money that they get their hands on. Perhaps the most common application of this concept would be 401(k) accounts.

My wife and I have maximized all of our tax-advantaged options, 401(k), Roth’s, and IRA’s. The government rules have changed over the years so the total amount invested has increased along with our salaries. This naturally lowers our take home pay by a considerable amount, but if you gradually turn up the savings rate you can save more than you ever imagined.

The same concept can be applied to your after-tax savings, if you have any money left after maximizing your tax-advantage accounts. Setup automatic investments and increase them until you start to feel a bit of a crunch. That’s when you’ve reached a limit and whatever is left is your spending money. Unless you have a lot of income, savings has to hurt a little or you aren’t going to accumulate enough.

If you run up consumer debt instead of living within your new budget then you are probably creating more problems than you are solving. If you simply can’t find a way to cut expenses then it’s time to turn down the savings rate.

Once you have reached equilibrium with your new budget, you are free to use all of your spending money without jeopardizing your future, because you introduced artificial scarcity to your finances.

If you can’t find money for tax-advantaged accounts, let alone basic savings, then this system will not work for you and you’ll need to take the harder road of strict budgeting and finding expenses to eliminate. There are numerous budget systems that you should look into.