Hate budgeting? You are not alone!

We are not big fans of it too. We ran an experiment, asking a couple dozens of millennials about their approach to budgeting. Our experiment focused on millennials who belong to (or are approaching) the “HENRY” segment (High Earners Not Rich Yet) and work in Financial services. Our “sample” spanned banks and investment companies with the roles in product, strategy and finance. Our hypothesis was that people in these career paths could be more inclined to stick to details of the budgeting process. Here is what we found:

First, not surprisingly, everybody in our sample had at least tried to keep a budget. 40% have been tracking their spending closely for 2-3 years after graduation. That’s enough time to understand the spending patterns, adjust spending levels to match the savings goals and develop habits going forward. Another 40% keep doing their monthly budgets well into their careers in mid-30s.

Second, though many of these professionals have tried various tools and apps, the vast majority did not find an “out of the box” solution that could work for them in the long-term. The most common (and “sticky”) “app” they use with the various degrees of “nerdiness” is the good old excel. Upon initial set up, no matter how complex the model is, it does not take any of them more than a couple of hours a month to review the last month’s spending and adjust projections going forward.

Finally, 40% of people who were doing budgeting after graduation, did not just quit after a few years. They replaced this process with “reverse budgeting”. In simple words, they first put the money from a paycheck towards recurring savings and live on what’s left.

What can we learn from that?

Tip 1: Budgeting does not have to be complicated; it also does not have to be part of your routine for life. Yet, it helps to understand your expenses.

  • You can start with a simple excel outlining your anticipated spend by category (food, housing, etc.).
  • Layer in the big-ticket items that happen from time to time (vacation, IRS payment if you anticipate you’ll have to make one, payments for kids activities).
  • Compare to the actual monthly spending – you can go through your credit cards and checking account statements and highlight which expenses fall in each category
  • Adjust an anticipated amount if needed
  • Do it for several months to capture the non-recurring items

After that, you should have rather a good sense of your spending patterns (and might have some good ideas about flexing them as well).

Tip 2:  Understand how much you can allocate towards your savings goals. By now, it should be a rather simple exercise of subtracting your expenses from your income. Automate contributions to your savings and investment accounts by setting up periodic transfers so that you do not have to worry about them every month.

Tip 3:  Reassess your spending vs savings picture at least a couple of times a year. Did you receive a bonus? – Send more than usual to your investment accounts. Vastly underestimated how much that holiday trip would cost? – See if you can temporarily spend less in other categories or contribute less to your investment account this month. Got a raise? – increase auto-investments towards your goals (and buy yourself a champagne!).