I used to think that budgeting was a way to set spending goals for different categories of spending such as eating out, vacation saving, and groceries. I would pat myself on the back for spending $10 less than my allotment last month on eating at restaurants while I would give myself a hard slap across the face for overspending by $20 on bowling… Unfortunately I was missing the point of budgeting altogether.

Budgeting is a tool that you use to help you maximize the happiness you obtain from spending your money

Have you ever heard someone say “I have tried budgeting but I just could not stick to it” or “budgeting makes me stress about my spending habits so I just gave up”? If that is how you feel about tracking your spending, making a budget and sticking to it then I suggest you try applying this alternative approach:

  • Track your spending with as much detail as you can. Use software such as Quicken or Mint.com
  • Once you know about how you tend to spend your money, look at the items you are spending money on and ask yourself: If I changed what I am spending money on could I make myself happier?
  • If you could make yourself happier by changing what you spend money on, then a budget is for you. A budget is a roadmap that guides you to spend your money on the things that are going to make you the happiest. When putting together your budget, take money away from the things that make you less happy and put more money into the things that will make you happier.
  • Don’t feel bad for not reaching your budgeting goals. A budget is not meant to help you give yourself a slap on the wrist when you don’t stick to it, instead it is meant to help you live as well as you possibly can. If you didn’t reach your goal it simply means you did not get the most out of your money that month. Not getting your maximum amount of happiness is punishment enough!

Instead of making a budget many people find it easier to set money aside every month for their future costs such as retirement or buying a house and then simply spend the rest of their money earned every month as they see fit in the moment. While this strategy still accomplishes the goal of saving money for later consumption, it does not address the fact that the money you don’t save every month (the money that you spend) may not have been spent in a way that made you as happy as you could possibly be.

Tracking your spending and budgeting will help you assess the tradeoff between the things you choose to spend your money on

Sometimes things seem really great and I just want to have them immediately. It is so easy to convince myself in the moment that whatever it is I want is worth the cost of buying it. A budget is protection against these frivolous expenditures because it has already forced you to think about tradeoffs. I am NOT saying that frivolous expenditures are bad. All I am trying to get across is that if you have a budget, you can assess the tradeoff between that frivolous expense and the other things on your budget that bring you a lot of happiness.

After tracking my own expenses for the last two years, it became obvious that I like to go out to eat. I typically spend around $250-$350 per month eating out, usually for dinner because I bring my lunch to work 95% of the time. There are times when I feel the urge to go to a really nice restaurant and order the whole gambit including drinks… While this usually ends up being a great time, at the end of the night when I have spent over $80 I realize that I have already spent about 1/3 of my eating out budget for the month and I only got one meal. What my budget helps me do is realize that I would probably get nearly as much happiness out of a $15 dollar meal… the difference is that I could have five $15 meals for the price of one $80 meal. I can still choose to have the $80 meal, but at least I am consciously aware of the fact that I am giving up potentially more happiness down the road by choosing the more expensive option.

Tradeoffs also apply to all of the different categories we could spend money in. It may be that you really like doing adventurous things like skydiving but you find that you never have the $200 at the end of the month to go. Budgeting allows you to look at your other spending and choose where you could take $200 away from things that make you less happy than your monthly adventure. Tradeoffs are different for every person, but the concept is the same: Figure out how you can make yourself the happiest with the money that you have.