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Budgets are 'pointless,' one financial coach says—here's what to do with your money instead

Megan Leonhardt

Want to save more money? The go-to solution, according to many financial experts , is to create a budget and cut down on your expenses. But personal finance coach Ramit Sethi says budgets don't work for most people.

"'Create a budget!' is the sort of worthless advice that personal finance pundits feel good about prescribing, yet when real people read about making a budget, their eyes glaze over," Sethi writes in the updated version of his book, "I Will Teach You to be Rich."

Why budgets don't typically work

Most people wouldn't know where to start if they were told to stop spending and start saving, Sethi says. It can be difficult to track every single daily purchase you make, and even if you're successful, a budget may not stop you from spending.

That's because a budget tracks what you've already spent, he says. "You look back at the end of the month, you feel horrible, you feel guilty, you realize you overspent," Sethi adds.

"[Budgets] make us feel bad about ourselves, they don't provide any forward-looking information — they're just pointless," Sethi says.

Sethi isn't alone in his frustration. Chris Reining, who quit his IT job at age 37 with more than $1 million in savings, told CNBC Make It the same thing last year. "Budgets don't work," Reining writes on his blog . "I don't believe in them mostly because people can't stick to them."

He compared budgeting to a bad diet. "How many people do you know that are always going on new diets, trying this and that, and never succeeding?"

Here's what to do instead

Instead of using a budget, which asks you to look back on your spending and make changes, Sethi recommends a strategy that forces you to look to the future. He calls it "conscious spending."

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The first step is to split up your income into four categories: fixed costs, investments, savings goals and guilt-free spending money. Fixed costs, which are expenses like rent, groceries and student loans, will likely require up to 50% to 60% of your income, according to Sethi's guidelines. Investments, including your 401(k), Roth IRA and taxable investing accounts, should make up about 10%, while savings for goals such as vacations or a down payment on a home make up 5% to 10%. The last 20% to 35% of your money can go toward guilt-free spending.

By allocating your money this way, you make sure you have enough to pay off all your responsibilities first. Then any money left over can go towards savings goals and everyday spending. The guilt-free spending category allows you to buy what you want while knowing that your other important expenses are taken care of.

"It's time to stop wondering where all your money goes each month," Sethi writes.

Sethi isn't suggesting that you blow your money on frivolous things. Rather, this strategy frees you from having to agonize over buying a latte every morning. "You get to spend extravagantly on the things you love and cut costs mercilessly on the things you don't," he says.

For example, instead of tracking all your spending meticulously, pick something you really want to spend on, such as a vacation. Assume it would cost $1,200 and you want to take this trip a year from now.

Using Sethi's strategy, you don't need to worry about figuring out which expenses to specifically cut back right away to save $100 a month over the course of a year. Instead, you simply need to pull out $100 a month from your guilt-free spending. Plus, you can save it automatically by setting up regular transfers from your checking account into a savings account so you don't even have to think about it.

"The real beauty of this is it's not just about saving for a one-time trip," Sethi says. "By flipping your spending from looking backwards to looking forwards you can do the same thing with your savings, with your investments, with all parts of your life."

Stop feeling bad that you can't keep a budget, Sethi says. "Almost nobody maintains their budget. Instead I want you to flip it, look forward and say: 'Where do I want my money to go?'"

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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns .



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