How To Budget Your Money and the “Personal Tax”

Recently, Sweating the Big Stuff featured a great article on using a 100% “personal tax” to “force” yourself to save. The idea really is pretty cool:

Whenever you buy something that isn’t a necessity, you impose a 100% tax on yourself that goes toward your savings account. For example, if there is a Blu-Ray you want to buy on Amazon for $20, you have to have $40 to spend on it. $20 goes to the Blu-Ray and $20 goes to the savings account. As the redditor puts it, “your larger savings plan can dictate where the money goes that accumulates in this account. (i.e. IRA, 401k, emergency fund, etc)”

When I first read about this idea, I was a huge fan of the concept. It provides a great way for people to feel less “trapped” by money responsibility. It allows people to spend freely but still make progress toward savings goals.

The more I thought about it, though, the more I realized that this system is essentially a clever approach to how to budget your money.

Let’s say that, on a typical month, you have $200 left over after all of your other expenses. On one hand, you could have two lines on your budget (one for saving $100 and another for spending $100 freely). On the other hand, you could just pledge to save $1 for every $1 you freely spend.

Both wind up with the same result. You end up with $100 in savings and $100 spent freely.

That’s not to say that both methods are completely equal. They offer different psychological carrots, ones that will work differently for different people.

I find that having a budgeted amount that I can spend freely each month knowing that I am already saving for my goals is the right approach for me, but I can see that many other people would find the “personal tax” approach very appealing.

There’s still one more vital piece of the puzzle. Both approaches require self-discipline to work. If you’re not able to simply say “no” and stick to an agreement you’ve made with yourself, neither the “personal tax” nor budgeting will work for you.

Of course, there are many things you can do to “help” yourself with discipline. You can shop without credit cards, using only cash. You can intentionally limit the amount of money in your checking account so that you’re actually not able to overspend.

Still, in the end, it comes down to self-discipline. You’ll either look at things like this as restrictive and try to find ways to “cheat” or you’ll look at these things for what they truly are: self-rewarding.

If I’ve learned one hard truth about life, it’s this: if you can’t make agreements with yourself and stick to them and if you can’t control your own behavior, you’re going to struggle mightily with everything you do.

The “personal tax” is a great tool, but in the end, just like budgeting, it comes back to personal discipline. Can you make good choices over and over again? If you can’t, getting ahead financially is going to be a challenge, with or without a “personal tax” or a budget.

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