The savings ratchet - an alternative for those who hate budgets.

[mulescent]

The personal finance community enshrines the budget as the number one tool for frugal living, and it clearly works very well for lots of people.  I, however, hate budgets.  I am not a detail-oriented individual, and having to pay attention to every small transaction drives me crazy.  More than that, budgeting makes me feel constrained and suffocated.  Budgeting focuses on decreasing spending, but I think it is more satisfying to focus on increasing savings.  Therefore, I wanted to write about a different strategy that has worked very well for me: the savings ratchet.  I think that others like me are out there, and the ratchet could be useful to them, too. 

The concept of the ratchet has two simple rules:

1) Every month, you incrementally increase deductions from your income

2) You put these deductions in an inaccessible, invisible place

The result of the ratchet is that you slowly increase your savings rate without having to explicitly budget.  If you aren't yet maxing out 401k/IRAs, increasing contributions to these accounts is optimal because it makes the ratchet ironclad.  You can't get that money back without serious consequences.  After that, Vanguard or any institution not linked to your primary bank works.  You end up having to make choices about what is important and, based on those choices, cut spending.  An additional benefit is that the change in any given month is pretty small, which makes it much easier to stick to the plan. Throughout the process you never have to try and hit some arbitrary spending goal in whatever category.

I targeted a savings rate of 50%, from 10%.  I applied the ratchet over one year, increasing my savings rate ~5% per month. It worked, and I now save about 50% of my take home pay.  To make the ratchet work, I find it useful to also save some additional cash each month in an easily accessible place.  This helps smooth out bumps, and serves as its own mini-goal (e.g. make that extra amount grow to 5k and then shuffle it off to Vanguard and repeat).

Anyway, I realize that everyone here already has their own successful strategy, but I thought I would share mine and see if it provoked any discussion.

[dorkus619]

This is kind of interesting. Without really planning, I also did this a little bit. I like your name for it though!

When I started my new job in February, I was auto enrolled at 2% in company 401k program - free to change my % as I wish. Within a couple weeks I enrolled at 6% (company match = 3% (max)). A little over a month ago I raised it to 8%. I haven't noticed a different really at all (probably because all that money was going towards useless stuff) Maybe it's time to raise it a little again. I'm not feeling much squeeze right now.

On the other hand - I do like the budget concept and planning. So I guess I'm sort of using a hybrid strategy.

[amha]

Yes! That's what I do! Budgeting takes a lot of time and work---and how am I supposed to figure out what percentage of my income I should spend on X? Too a priori. But if you just give yourself a monthly allowance, you can allocate expenses as necessary, and you're still doing the fundamental thing---only spending a fixed amount of money.

I usually think in terms of "profit"---e.g., "Now that I got that raise, I can make almost a $3,000 profit per month!" You think of yourself as your own small business.

[mulescent]

This is kind of interesting. Without really planning, I also did this a little bit. I like your name for it though!

When I started my new job in February, I was auto enrolled at 2% in company 401k program - free to change my % as I wish. Within a couple weeks I enrolled at 6% (company match = 3% (max)). A little over a month ago I raised it to 8%. I haven't noticed a different really at all (probably because all that money was going towards useless stuff) Maybe it's time to raise it a little again. I'm not feeling much squeeze right now.

On the other hand - I do like the budget concept and planning. So I guess I'm sort of using a hybrid strategy.

Awesome!  You should definitely keep increasing your savings rate, especially if you don't feel squeezed.

[golden1]

This my go to method for savings.  I automatically deduct money into my retirement accounts and savings accounts.  If I don't "see" the extra money in my checking, I am not tempted to spend it.  I like the idea of slowly ratcheting it back further though.   

[rocklebock]

I sort of did this. I tracked expenses for a few months to understand what I was actually spending. As I cut down or eliminated the ridiculous expenses, I made equivalent increases to my retirement accounts. I never actually had a "budget" in the sense that I decided I would spend $x on this or that. I just saw where I was spending too much, made the change, and put the money in savings.

[gooki]

I can vouch for this method. Very effective.

I always felt a little out of place reading the YNAB posts and stuff about mint.com. As if I'm not a real mustachian because I don't budget. Now have a name for paying yourself first "the savings ratchet". Thanks.

[arebelspy]

I also don't budget, but when I started working I just jumped to the max savings rate possible without sacrifices by spending as as much as I want, which turns out to be about 30% of my net, for a 70% savings rate.

It seems odd to be to start with 10% savings (and then do what with all the extra money??), then go to 15, then 20.

My question is: why did you stop at 50%?  Seems arbitrary.  How about you set your goal 80%?  Or 95%?

If you don't know what you need to spend (even if you don't "budget" it), how do you know what to set your ratchet level to?

(EDIT: I can see how this ratchet method would be good for those that don't/can't save on their own, who spend every dollar they get.)

[thepokercab]

I feel like I do a combination of ratchet savings + budgeting. 

I'm sort of a data nerd, so I spend a lot of time pouring over my budget, and tracking each expense, savings account and investment.  It is, sadly, kind of fun for me.  But, what i'll do is come up with a budget/savings goal for the month and then do two things.  The first is that I have an automatic investment into Vanguard which i've basically learned to now treat like any other bill.  I know when its going to happen- just like I know when my internet, or power or rent is due.  So its almost non-negotiable at this point.  I also keep a savings account and have a goal each month (based on what our budget looks like) for the money that goes into there, but what i'll do is put that money into savings at the beginning of the month, as opposed to wait until the end of the month to see what's left.   Each month i'll try to make this a little bigger forcing me to always re-examine by budget. 

I find doing this really keeps me wanting to stay in my budget as my checking account looks really dire by the end of the month.  Right now, we've got a week to go and i've only got like a hundred bucks left- so I basically feel like I can't spend any money. As opposed to having $500 dollars in checking and just telling myself "eh, i'll just save a little less this month"

[Silvie]

I am self-employed and never really know how much I am going to make next month. I just make sure I transfer enough money for my monthly expenses to a separate account, and whatever is left, I either transfer to a savings account or I use it to pay off a loan from my dad. He's not in a hurry to get it back and it's 0% interest, (savings account is 1.95% interest) but I don't like owing my dad a lot of money :( I wish I could have a more structured approach but it all depends on how much work I have each month.

[Dulcimina]

The personal finance community enshrines the budget as the number one tool for frugal living, and it clearly works very well for lots of people.  I, however, hate budgets.  I am not a detail-oriented individual, and having to pay attention to every small transaction drives me crazy.  More than that, budgeting makes me feel constrained and suffocated.  Budgeting focuses on decreasing spending, but I think it is more satisfying to focus on increasing savings.  Therefore, I wanted to write about a different strategy that has worked very well for me: the savings ratchet.  I think that others like me are out there, and the ratchet could be useful to them, too. 

...
I targeted a savings rate of 50%, from 10%.  I applied the ratchet over one year, increasing my savings rate ~5% per month. It worked, and I now save about 50% of my take home pay.  To make the ratchet work, I find it useful to also save some additional cash each month in an easily accessible place.  This helps smooth out bumps, and serves as its own mini-goal (e.g. make that extra amount grow to 5k and then shuffle it off to Vanguard and repeat).

Anyway, I realize that everyone here already has their own successful strategy, but I thought I would share mine and see if it provoked any discussion.

I do something similar.  I started saving late in life (after years of grad school) so, like arebelspy, I jumped into saving the max once I began earning a decent salary.  I did make a budget with my fixed expenses and a best-guess of variable expenses, but basically just used it as a guideline rather than an absolute.  Then I started going after those fixed expenses - refinanced my mortgage, cheaper phone plan, paid off my car.  I have a good idea of variable expenses, when I reconcile my credit card and can nip it in the bud if they start creeping up.

I have two transfer out of my account monthly - one to the linked savings account for the same bank where I take set aside funds for irregular expenses.  Like clothes or repairs.   The other is my online savings account where I have my emergency funds and cash that I haven't invested yet.  A couple of months ago, I started seeing a high balance in my checking after regular spending and those two transfers, so I upped my transfer to both savings.  If I've miscalculated, the bank takes any overdrafts from linked savings without a fee. If I've still got extra cash in a few months, I'll ratchet up the amount again.

[dodojojo]

I don't have a set budget either.  I eyeballed my spending and guessitimated I spent about $3,000 monthly.  Last month, I downloaded a simple expenditure app and have been tracking everything since.  So far this month, I'm at about $2,550 and with a week to go in September, I'll likely come under $3,000.  And this total includes a weekend of Craigslist furniture shopping (which included a car rental).  It looks like my basic expenditures on a monthly basis is actually lower than my estimate, which is great.  I do feel a bit sheepish about the total though--compared to the mustaches sported on this board.  Under examination, I'm sure fat can be trimmed.

Like the OP, I'm working from the angle of a savings goal.  Mine is to max out 401K and IRA plus 4-6K in taxed accounts annually.  I was very close to buying a home this summer, but pulled out when I figured the monthly home payments precluded me from maxing out my retirement accounts.  My agent (of course) plus a few friends thinks I've got it ass-backwards...maybe...I guess time will tell.  If rent goes up 50% in the next 5 years than I'm screwed.

[mulescent]

I also don't budget, but when I started working I just jumped to the max savings rate possible without sacrifices by spending as as much as I want, which turns out to be about 30% of my net, for a 70% savings rate.

It seems odd to be to start with 10% savings (and then do what with all the extra money??), then go to 15, then 20.

My question is: why did you stop at 50%?  Seems arbitrary.  How about you set your goal 80%?  Or 95%?

If you don't know what you need to spend (even if you don't "budget" it), how do you know what to set your ratchet level to?

(EDIT: I can see how this ratchet method would be good for those that don't/can't save on their own, who spend every dollar they get.)

Hmm... I think your attitude isn't really representative of most folks out there.  Our culture tells us that if you're saving 10%, you're way ahead of the curve.  Most folks strive for that, and I think few realize the power of extreme savings from day one.  My path, which I think is more typical, was 1) get a job and spend my (small) salary without thinking too much about it; 2) get a few years older and realize retirement is a thing, start saving 10%; 3) get raises, become a little wiser and realize that spending and happiness aren't linked.  At that point, you have a 10% (or whatever) savings rate and it takes time to realign your spending with your new goals.  Hence the ratchet, which enables you to develop a high savings rate without explicitly budgeting.

In terms of 50%, that was the initial goal, not the final one.  I'm still ratcheting, hoping to get to ~60% in another year or so.  Going too much beyond that isn't possible in my profession/city/living configuration, and I'm not interested in moving to change it.

The point of this method, like budgeting, is to develop habits that lead you to save rather than spend every dollar. Thus, I'm not sure of the relevance of your last comment.  Perhaps you mean that people like yourself who were in a position to begin by saving 70% need neither budgets nor this method, a statement with which I heartily agree.

[pachnik]

Every once in a while I prepare a budget for my non-variable expenses like rent or mortgage, bills.  The last time I did one was four months ago to post onto my journal page.  But I don't try to follow it - I just use it as information. 

In the past (pre-MMM), I did always 'pay myself first' and put the money into long-term investments.  I started with the conventional 10% and added to that but let's say I didn't try too hard to add to it.  :(   I have always put away separate money for large expenses that are paid for annually - like car insurance.   I certainly did not "realize the power of extreme savings from day one" as the previous poster wrote.   I really did not believe it would add up to anything - this sounds pretty crazy to me right now.   sigh!

I also have only tracked my expenses for a short period of time - say a few months at a time to keep me honest about some money-wasting habits I have had. 

I am looking for permanent work right now and when I get it, I will keep my expenses low like I have been doing for the past 5 mos. since I got here, and see where my savings rate is and then optimize further.    This sounds like what is happening up-thread.

[arebelspy]

Our culture tells us that if you're saving 10%, you're way ahead of the curve...

Right, but this is the MMM forums.

Thus my statement, and final conclusion that this could be good for someone who doesn't/can't save on their own and spends every dollar they get.  That is not us here.

Thus, I'm not sure of the relevance of your last comment.  Perhaps you mean that people like yourself who were in a position to begin by saving 70% need neither budgets nor this method, a statement with which I heartily agree.

Do you understand my last comment now?

In other words, this would be a great tip on a personal finance site for the average person.  (Say, Get Rich Slowly.)

[mulescent]

Right, but this is the MMM forums.

Thus my statement, and final conclusion that this could be good for someone who doesn't/can't save on their own and spends every dollar they get.  That is not us here.

I think you are confusing my admittedly wussypants 10% starting point with the method I wanted to discuss.  Methods for increasing your savings rate are largely independent of said rate.  You said you started at 70%.  If you're happy there, then you need no plan for doing better.  If you wanted to get to 80 or 90%, though, you could do it by obsessive budgeting or by another method, including the one I proposed.  You could say that you didn't think about it at all, but that is also a method (and one that probably would fail for most people). 

My impression is that FIRE is a work in progress for a lot of people here, and that a key concept of Mustacianism is continuous improvement.  That's why I thought people might be interested in discussing methods for increasing savings rate.  I am certain there are more and less effective methods for increasing savings rates, and based on the comments so far, it's clear that MMM readers aren't unipolar adherents to budgeting.  Anyway, I guess the upshot is that I understand, but disagree with, what you are trying to say. 

[happy]

I'm a hydrid operator.

When I first started doing MMM, I set some savings goals but found in the first 3-6 months I was able to increase these incrementally several times ie the ratchet method. After 6 months I kind of got more or less to baseline. Periodically I have tracked expenses...the main value being having a list that I can look at cutting, or shifting spending around...ie cut $10 here  or there in order to get reduced spending. Tracking probably helped increase savings a bit more after the ratchet. I usually now track for a period if I think I am getting "a bit loose' with my spending.

[dorkus619]

Yes lots of us here in the forum are still n00bs! (me currently putting 10% in my 401k)
It's a work in progress for many of us here, so the theory/strategy could be helpful for many.

[arebelspy]

Yes lots of us here in the forum are still n00bs! (me currently putting 10% in my 401k)
It's a work in progress for many of us here, so the theory/strategy could be helpful for many.

Uh huh, and wouldn't you then categorize yourself as someone who doesn't save much on their own, and spends (almost) every dollar you get?  I.e. exactly who I said the tip would be good for?

;)

[Ellen]

I was not a "natural" saver for many years, unlike RebelSpy and MMM and many others on this blog. I wasn't a debtor, but I wasn't a saver. (I think there are quite a few of us populating this blog).

For one thing, my family of 4 was on 1 1/4 modest incomes and had hardly any $ to save after paying our basic living expenses. But starting about 5 years ago, I developed a method similar to your ratcheting style (like the term!) after I went back to school and then got a job paying somewhat more than I'd been making. I created online accounts to funnel the money into--some were short-terms savings (property taxes, braces for X child, home maintenance, while others were more long-term: retirement and long-term savings). If I don't see it, I can't spend it. In general, I tend to "over save" and sometimes have to bring $ back from savings into checking ... but we are way ahead of where we were.

Like you, I used my method as a way to avoid the hassle of budgeting while still saving a substantial percentage of income (maybe 50-60%, including principal payments, retirement accounts, and long- and short-term savings) Just in the past few months, though, I've begun budgeting using YNAB. I suppose I just wanted to get a better picture of where our money is going. I kind of knew that some of our outlays seemed to be increasing, but I wanted to see actual numbers and patterns, so that I could make changes if necessary.

[Cinder]

I forget which blog talks about this method, but I really like the it.  It is the 'flexible budget', which basically is the same thing as having a separate 'spendable' bank account that you have access to.

They have categories for actual, monthly costs/bills.  eg. rent/mortgage, internet, phone, etc.. in addition to things like groceries.
Then they have all of the other categories...  Auto repair/gas, clothing,   Expenses that don't always come up every month (or would vary, you don't always have to repair your car every month, or buy clothes every month).  As long as they keep their spending across a broad set of categories below that number, they're good, without having to actually say 10% for auto things, 5% on clothes, etc...


That, or there are a lot of people here, like MMM, who just think about every purchase they make and don't actually budget, but that requires you to have a really solid grasp on what you SHOULD buy, not just what you 'CAN' afford.

[arebelspy]

That, or there are a lot of people here, like MMM, who just think about every purchase they make and don't actually budget, but that requires you to have a really solid grasp on what you SHOULD buy, not just what you 'CAN' afford.

Or third option: buy everything you want, but don't want very much.

[dorkus619]

Yes lots of us here in the forum are still n00bs! (me currently putting 10% in my 401k)
It's a work in progress for many of us here, so the theory/strategy could be helpful for many.

Uh huh, and wouldn't you then categorize yourself as someone who doesn't save much on their own, and spends (almost) every dollar you get?  I.e. exactly who I said the tip would be good for?

;)

Yes :)
but then right after that you said "that is not us here" I was trying to say some of us here on MMM are noobs like me (I hope I'm not the only one!)

[2527]

I think this idea is a good one.  Obviously, it works for the person who posted it.  It may be a useful idea and work for other people.

[Simple Abundant Living]

I like this idea for people like me whose spouse isn't 100% on board for Mustachianism. In my case, DH is trying to be more responsible, but if the checking account has $12,000 in it, he will spend differently (and plan differently) than if it has $4000 in it. I've told him I am putting extra towards the mortgage and savings, but what I'm really doing is creating false poverty for us. Whatever works, I say.