Transform Your Financial Approach: Move Beyond Budgeting
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Chapter 1: A Shift in Perspective
Many people, including myself, have often found themselves living paycheck to paycheck, regardless of their income levels. Despite maintaining a budget that tracked every cent coming in and going out, I frequently ended up with little to nothing left or even in debt. However, everything changed when I adopted a new financial system.
This approach allowed me to escape debt and build up some savings. The principle is straightforward: every time you receive income, allocate it into different bank accounts based on percentages.
For instance, with a salary of 1000 euros, you might distribute it as follows:
Mandatory Expenses — 45% of total income, or 450 euros.
This account is dedicated to essential expenses such as rent, groceries, car upkeep, fuel, taxes, dental care, haircuts, medical bills, and other vital needs that recur monthly. While I personally might not consider a car essential (as I prefer public transport), that's a discussion for another time. As your earnings increase, you can decrease the percentage allocated here and shift more into savings and investments.
Fun and Pleasures — 10% of total income, or 100 euros.
This is your allowance for enjoyment—perhaps a favorite meal, movie tickets, or a new video game. It's crucial to indulge yourself here; ideally, this account should be depleted by month’s end! This provision serves to reward your hard work and keep you motivated.
Investing in the Future — 10% of total income, or 100 euros.
Financial experts generally recommend saving at least 10% to 15% of your earnings, particularly when you are young. This account can be earmarked for retirement savings, purchasing stocks, engaging in peer-to-peer lending, or investing in index funds. It's wise to diversify your investments to mitigate risks associated with any single asset.
Investing in Myself and My Projects — 10% of total income, or 100 euros.
This account funds various personal projects, including advertising, hiring freelancers, purchasing resources, and enrolling in courses. It's about enhancing your skills and capabilities to increase future earnings.
Safety Fund — 10% of total income, or 100 euros.
This is a crucial account to prepare for unforeseen circumstances, such as needing a new set of glasses or facing a medical emergency that could prevent you from working. I used to underestimate the importance of this fund, but unexpected expenses can catch anyone off guard, leading to debt if you're not prepared.
Savings Fund — 10% of total income, or 100 euros.
This account is where you save for larger purchases, whether it's a new vehicle, a washing machine, a vacation, or a deposit for a loan.
Gifts — 5% of total income, or 50 euros.
Allocating funds for gifts—whether for birthdays, holidays, or charitable donations—fosters goodwill and strengthens connections with others.
Final Thoughts
The percentages I’ve outlined are just a personal example. Feel free to adjust the allocations to fit your unique situation and priorities. The key is to ensure that your income is divided among various accounts, including savings and investments.
This system has fueled my motivation to earn more, as I can visibly track my progress toward financial goals. It has also made me less prone to impulsive spending driven by emotions. Instead of reacting to feelings with shopping, I consider the state of my accounts and resist the urge to jeopardize my progress.
While traditional budgeting may be beneficial for optimizing spending—such as tracking where your mandatory expenses go or setting a cap on weekly food expenses—the habit of allocating your income as soon as it arrives is vital. By doing this, you can meet various needs and wants, set aside savings, and cushion the impact of unexpected life events, paving the way for a promising financial future.
P.S. I am not a financial advisor; I’m simply sharing insights from my experience in hopes they might help others.
How do you manage your finances? What system do you follow?
Chapter 2: Alternative Strategies for Financial Management
In the video titled "Budgeting Sucks | Do This Instead," the creator offers a fresh perspective on financial management that challenges traditional budgeting methods.
The second video, "Don't Budget -- Do This Instead," discusses alternatives to budgeting that can lead to a more fulfilling financial life.