How to Spend Less: Don’t Set Up a Budget
In the last couple of years, we’ve gone through periods where we were spending a lot more than we wanted. We’ve also gone through periods when we were saving a lot more than we needed. I can’t overstate how big the effect on my happiness was in both directions. It feels terrible to live life the way you want only to get to the end of the month and realize that you’ve massively over-spent. By contrast, there’s nothing better than having fun, generally ignoring the cost of your lifestyle and then finding out that you actually saved more than expected.
You might expect that the big difference between over and under-spending was that we set up a budget and diligently adhered to it. But that’s actually not it at all. The big difference was how often we reviewed our spending. When we reviewed it frequently, our spending fell and we felt happier. When we only reviewed it every now and again, our spending went through the roof and we felt bad.
In this post, I’ll explain how you can spend less by not setting up a budget.
The Effect of Measuring Things
In business, there is an oft-repeated, but misquoted saying: “What gets measured gets managed.” It’s attributed to Peter Drucker, but he apparently never said it. [source] Regardless, the private sector has a long and storied track record of optimizing metrics. Some of them are meaningless, some aren’t. The problem with optimizing for a small number of metrics isn’t that it doesn’t work. The problem is that the things we can easily measure are often the wrong things to improve.
This isn’t super obvious on the surface, of course. A younger version of me would probably say something like “just measure it better, though.” One of my best friends would chime in and say “not with that attitude.” But measuring meaningful things remains really, really hard. Here’s a quick example that proves the point.
How Not to Measure Things
I used to be super into Quantified Self experiments. About ten years ago, I decided to improve my sleep quality. I used a headband sleep tracker which reported a sleep score. The metric I set out to improve was that score. Higher scores were strictly better.
Much to my wife’s frustration, I set up cameras pointing at my side of the bed, recorded time lapses of my sleeping movements, wore my sleep tracker, and analyzed the footage in weekly batches. I know what you’re thinking: I’m a real Casanova!
I tried lots of different interventions: air temperature, bedtime, light before bed, shutting our cats out of the room, sleeping with fewer blankets, etc, etc. But the intervention that worked best was sleeping on my own in a separate bed. The effect was sizable and repeatable. I’m such a great scientist! I had achieved my goal of consistently getting higher sleep scores.
What I Got Wrong
Of course, you can already probably guess what I got wrong. I improved my sleep scores, but also managed to do lots of bad things:
- Made my wife sad. She wanted to sleep in the same bed as me! Heating up the bed with body heat is at least 50% of a husband’s spousal responsibilities after all.
- Caused the cats to damage the door to our bedroom. It turns out they really like sleeping in the bed with us. When you lock them out, they claw the door. Oops.
- Had much less fun. My wife and I were in the habit of watching TV shows before bedtime prior to my experiments, but that became difficult around the time I started trying to regulate my exposure to blue light prior to bed.
So obviously I’m an idiot. Clearly. But I hope this at least provides an anecdote about how silly it can be to measure and improve one single metric. I was very successful, but I made my life and the life of those around me worse just to increase a silly metric.
You Already Know How to Spend Less
Luckily, you can learn from my example. You can achieve your goals without pissing off your spouse and having your bedroom door ripped to shreds by angry furballs. The way that I’ve found to do that is to measure the thing you want to improve, but not set an explicit goal.
Applied to personal finance, this means getting a really accurate picture of how much you are spending and on what. And then checking in regularly. Don’t worry, you don’t need to keep doing this forever. In my experience, you only need a couple months of sustained attention to get a good sense of your spending. You may need to refresh that understanding from time to time, but learning to measure your spending is like a muscle: the more you do it, the easier and easier it gets.
If you’ve never done this before, it’s probably because you hate doing it. Which makes a lot of sense. I write a personal finance blog and I don’t enjoy checking our spending, either. It’s boring and it’s never fun to confront an impulse purchase 2 weeks later in your Quicken ledger.
So take a couple of pointers from me about how to do this in a way that preserves your sanity and your important relationships:
When I first started reviewing our spending, I set up a reward system for myself. I would buy some really good ice cream from the grocery store. I’m partial to most Ben and Jerry’s flavors. And then the rule was that I wasn’t allowed to eat that ice cream unless I had reviewed the spending. Ice cream may not be the thing that gets you over the hump to do it. But the idea here is to find something you really want and then ration it contingent on reviewing your spending.
Make Sure It’s Blameless
If you share your finances with a spouse, that means you’ll need to bring them along with the exercise. But your spouse probably isn’t jumping for joy at the prospect of categorizing spending, either. In many cases, doing this can feel confrontational and judgemental.
It’s important to defuse that emotion up front. Agree on spending categories ahead of time. When categorizing spending, never make judgemental comments. Try to praise your spouse’s purchasing behaviors whenever possible.
After practicing these affirming behaviors, reviewing your spending can morph from a dreaded chore to a quick and painless fact-gathering conversation.
Don’t Set a Budget
Definitely, 100% do not start with the goal of enforcing a budget. For one, you probably have no idea how much you really spend. Setting a goal without detailed knowledge of your current behavior is setting yourself up for pain and disappointment.
But even if you have a really good idea how much you spend and you have experience setting and meeting financial goals, a budget misses the point. If you want to spend less, what you probably want isn’t actually to spend less. What you probably want is to be happier with cheaper stuff or just wanting less stuff overall.
You won’t achieve either of those things by hitting a monthly budget number, you’ll just be making yourself miserable.
How to Actually Spend Less: Express Intent and Measure
After you’ve figured out a system that enables you to measure your spending regularly, you’re ready to start actually reducing your spending.
If you have a spouse, make sure you clearly communicate that you would like to reduce your spending. And then leave it at that. Keep measuring regularly, but don’t set a specific monetary target.
Something interesting happens if you actually stick to this. You’ll either 1) realize that you set the wrong goal in the first place and adjust or 2) you will organically discover ways to cut back that don’t feel terrible.
When we moved to Austin back in 2020, we had been religiously measuring our spending for years. We got so good at it that we were able to predict next year’s spending to +/- 15%.
But a perfect storm of factors knocked us off course. First, the tool that we’ve been using to do this analysis temporarily broke. The Quicken <-> Capital One integration stopped working one day in early 2021. We contacted Quicken support about it. They said they knew about it, but were waiting on Capital One to fix something on their end. They didn’t know when it would be fixed.
Without that, we would either need to find another tool (and rebuild our 10+ years of refining our categories) or operate with a big Capital-One-sized hole in our spending analysis.
Big Lifestyle Changes
At the same time, we were adjusting to a very different lifestyle. We had spent the last 7 years living in Northern California on our own. But 18 months prior, we had our first kid. By the time we got to Austin we had 2 kids under 2 years old.
We had moved to be close to family, which was great, but it came with all sorts of new obligations and activities. We hadn’t celebrated Christmas since we were teenagers, but suddenly found ourselves buying gifts for a large extended family.
Then we bought a house. And decided to renovate it. And had to replace our aging minivan. And decided to have a third kid. Then I got a new job and my wife quit her job as a software engineer to be a stay at home mom.
With so much change in our lives and Quicken out of commission, we decided to try taking a break from our regular spending analysis. Maybe we could afford to let our hair down a bit now that we were living in a lower-cost area with family nearby.
The result of all this change wasn’t hard to spot in our yearly finances. See if you can spot it:
Can you spot the year that we didn’t regularly track our spending? I’ll give you a hint, it’s the year that we were off by more than 70%.
Luckily, we spotted the trend and reinstated our regular spending reviews. Today, we’ve been able to reign in our monthly spending by more than 50%. And I can honestly say I’m much happier for it.
During that free-wheeling period where we blew out our budget, I bought lots of frivolous stuff, but none of it made me very happy. Now that we’re back on the savings bandwagon, I feel much better about spending $10 on myself than I did spending $100 on myself in 2021.
The Best Tools to Help You Spend Less
Spoiler alert, the tool you use matters very little. Lots of people swear by Empower, but when I tried them a year ago, their banking integration didn’t work for Capital One. They’ve supposedly fixed the issue since then, but it’s a pain to migrate between tools and Quicken is working again.
There’s You Need a Budget, but as the title of this post suggests, I don’t think the budget angle is a productive way to control spending.
If we hadn’t been able to get Quicken to work again, we probably would have migrated to Mint.
In case you do want to try a new tool, here are the features I think are most important:
Custom Spending Categories
Monitoring your spending doesn’t require a degree in neurosurgery, but it does require custom categories. No matter how many pre-built categories come with budgeting software, they won’t exactly match your spending. You need custom spending categories, and you need it to be easy to modify those categories.
Automatic Bank Integrations
I’m shocked that there are any tools intended for personal use that don’t automatically pull data from your bank accounts, but apparently you do need to check that. Make certain that your bank in particular is supported.
At the end of the day, you are tracking your spending, not adhering to a budget or calculating retirement portfolio outcomes with monte carlo simulations. Programs like Empower supposedly do both, but I prefer smaller, purpose-built applications that do one thing well rather than a lot of things poorly.
So we use Quicken. Honestly, it’s kinda gross. The Mac OSX native app is much slower than it has reason to be. The category editing requires a lot more clicks than I think it should. It doesn’t have any easy way to spread out big one-time purchases. But, it does have custom spending categories, automatic bank integrations, and spending reports. It also doesn’t cost an arm and a leg and you can be reasonably sure that Intuit won’t get rid of it suddenly.
If you want to spend less money, make a commitment to measuring your spending. Get comfortable reviewing your spending with your spouse (if you share finances). And then settle in to slowly adapt your behavior to meet your goals. It can take a while, but once you get to the point that you can reliably predict your financial needs, the world gets a lot less scary and stressful.
What hacks have you used to cut your spending without sacrificing your happiness?
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