I'm a Millennial Millionaire. This Is Why Budgets Don't Work

I hate budgets. Like, seriously. I think budgets are the biggest reason most people do a crappy job managing their money--they hate budgeting, too. Most personal finance books and financial literacy courses are built around budgeting, but maintaining a budget is too much of a burden and puts too granular a focus on small purchases that, in the grand scheme of things, don't have that great an impact on how much money you have.

Another reason I don't like budgets is because they reinforce the idea of scarcity. They are designed to make you track every penny you spend to the point that you end up feeling guilty if you overspend or spend money on something you don't absolutely need.

Budgeting is a lot like dieting: the more guilt you feel, the less likely you are to stick with it. You think, We'll, I've blown it or This isn't working, and give up. Or eventually you start to feel deprived, like you have to cut back on every little indulgence in order to stick to your bloated budget, and you become frustrated or bitter. Instead of becoming a tool for empowerment by encouraging you to be smart about your money, the budget becomes a source of anxiety and stress. Ugh. Budgets are the worst.

While budgets definitely work for some people and small purchases definitely add up, you're not going to save the most money by cutting back on your small expenses. You save the most money by controlling your biggest expenses--namely housing, transportation, and food--and you can do that without the aid of a formal budget. In fact, just by optimizing your housing, transportation, and food expenses, you can realistically increase your savings rate by 25 percent or more, significantly reducing the number of years it takes to reach financial independence.

Take Travis, my parents' old friend who bragged about saving 5 percent a year for retirement. Travis will drive forty minutes each way in traffic to save $20 on a case of wine and prides himself on being able to track down deals like this. And yet both he and his wife recently bought new cars for at least $40,000 each. According to various car-buying websites, if they had chosen a two-year-old version of the same cars with less than 30,000 miles on them, they could have saved at least $10,000 on each car. If they bought five-year-old models with less than 60,000 miles on them, they could have saved more than $20,000 on each car, or $40,000 total. That's like getting one car for free! You have to buy a lot of slightly less expensive cases of wine to save $20,000 to $40,000.

If Travis and his wife had invested that $40,000, it would be worth $161,549 in twenty years. If he'd forgone that $150,000 addition on his house and invested that money instead, he'd have $605,810 after twenty years. That's a lot of money.

Again, I don't want to pick on Travis. The new addition to his home looks great, and I have no way of knowing how much joy he and his wife get from it. I just want to make the point that we often spend so much time and energy worrying about how to save a few bucks here and there when we could save so much more with relatively little effort by considering a few key purchases. If you figure out how to save the most money possible on your biggest expenses, you won't have to worry so much about the smaller expenses because you'll have saved so much already. And if you invest this money and let it grow over time, you'll end up with even more than what you had to begin with. This is the only budget you ever need, and it will help you dramatically cut expenses while increasing your savings rate so you can reach financial independence earlier.

The average American family spent $57,311 in 2016. This includes $7,203 on food, $9,049 on transportation, and $18,886 on housing. Those three categories alone add up to $35,138, or about 61.3 percent of the total expenditure. That's a huge ratio, but when you subtract Social Security contributions ($6,509 on average in 2016), which Americans are legally required to make, from total average expenditure, the figure comes closer to 70 percent of their total spendable income.

Looking at these numbers, you can see how reducing your top three expenses of housing, transportation, and food will allow you to save a lot more money. It's unrealistic to think you can save much on personal insurance and pensions (which include Social Security) and healthcare, since those are relatively fixed costs. The rest are the smaller expenses like entertainment, apparel, and other expenditures that you can manage easily if you are mindful about your spending, but because they constitute only a small portion of your total expenditures, they're unlikely to make a huge difference on your overall savings. Your small entertainment expenses are also probably the things that make you happiest.

And when you consider the future value of any money you save on your biggest expenses, the growth opportunity for savings becomes even greater. Reducing your monthly rent by $400 might not seem like much, but $400 over a year is $4,800. If you live in that apartment for three years, you will have saved $14,400. If you invest that $400 monthly savings over the course of those three years, it would be worth $16,558 at the end of that period. After twenty years of compounding at 7 percent, it will be worth $66,873 even if you don't add a penny to it.

If the average American household could cut the $35,138 they spend per year on housing, transportation and food in half, they could have an additional $17,500 per year. If they invested that $17,500 every year for the next twenty years ( approximately $1,458 per month), they would have $835,143 after twenty years. That's massive savings.

Where can you save in each of these categories? If you move to a smaller apartment, walk to work, and cook at home, you could potentially increase your savings rate to 50 percent or even higher, cutting decades off the amount of time it will take you to reach financial independence.

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