Ed McKnight: Economist on an alternative to budgeting

Although we all try, budgeting doesn't work for everyone. Instead, Ed McKnight has what he calls the 'Economist's Pay Routine', an alternative that allows you to budget without budgeting.

He joined Jack Tame to break down the method.

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Episode Transcript

Speaker 1 (00:07):
You're listening to the Saturday Morning with Jack team podcast
from News Talks, that'd be It's.

Speaker 2 (00:12):
Good to two eleven on your Saturday morning, and we're
talking personal finance with Ed McKnight from Opie's Partners this morning,
and it has this thing called an economists pay Routine
and alternative to budgeting that will help you budget, which
seems counterintuitive that he's here this morning.

Speaker 3 (00:27):
Hey, Ed, great to talk Dear Jack.

Speaker 2 (00:30):
Yeah, great to speak with you. So run us through
your steps here, because this is really cunning. Basically that's
fair right, a way to budget without budgeting.

Speaker 3 (00:38):
Well, the trouble is, if you ask pretty much any
New Zealander how do you get better with money? Everybody
would say got to do a budget, And probably ninety
nine percent of your your listeners, except for the accountants
out there, would probably be saying, yeah, we should budget,
but most people don't except for those accountants. And so
despite the fact that we all know we probably should

(00:58):
be keeping better track of where our money's going, most
people don't. And so I think, rather than telling you
to do something that you're probably not going to do,
just start automating your money. And what I mean by
that is put it into some buckets. And probably the
best system I've seen comes from Australian guy called the
Barefoot Investor, And what he basically says is take sixty
percent of your pay. Doesn't matter how much you get paid.

(01:21):
Everybody can do the sixty percent of the pay that's
going to be on what he calls your blob account.
So just your every day standard living, your rates and
all of that stuff you've just got to pay for.
Then we take a small amount of it, call it
ten percent. That's just for your little splurges, and you
should just automatically transfer it. And you can set this
up automatic transfer across to an account called your splurge account.

(01:43):
That's for your coffees or your movie tickets, anything fun
you want to do over the weekend. We can have
a little allowance as well that he calls smile. That'll
be ten percent. That's for your holiday savings. Will say
that that's for birthday presents. But here's the really important one.
We want to also be automatically transferring twenty percent of
our pay. Whatever's left over, that's going to be our

(02:03):
fire extinguisher. So it can take twenty percent of our
we're going to put that against credit cards or personal loans,
any high interestet or also savings or property or investments
or shares, whatever it happens to be, and that's how
we're going to get ahead financially. And the main thing
I encourage people to do is automate their money so
they don't have to think about it. Because if you've

(02:24):
got to think about a can need to transfer this
amount of money into a movie budget, orm coffee account,
and I've got to transfer twenty percent into savings and investments,
you have to make that decision every single week or
fortnite or months that you get paid. And it's really
important if you automate it, you only have to make
that decision once. So I often encourage people, whether you

(02:46):
want to invest in shares, whether you want to invest
in property, set up that account and just make it
an automatic habit so you don't have to think about
it every single time. Now I do this myself my accounts,
and if I logged into an ASB account and showed
you today, Jack, they are called blow, they are called smile,
they called spillurgs, they're called fire extinguisher. And this has

(03:06):
changed my money life. I used to be horredic with money.
And as soon as I started using a system like this,
that has completely changed because I'm not one of those
people who is going to have a spreadsheet and account
for every single dollar of where it's going to go.

Speaker 2 (03:21):
Yeah, I think you're really onto something here. My sister
does exactly this. Her and my brother in law have
this where they have the different accounts and just everything's automated,
and so, like you said, they're able to kind of
keep on top of things and they engage with their money,
but it's all automated, so they're not at the start
of every month kind of meticulously going through everything. And
it just seems like it's a really kind of effective mechanism.

(03:41):
And also there's a simple way of just taking advantage
of the benefits of, you know, banking in a digital
world day, Like it's easy to set up an account
called a splurge account, it's easy to set up an
account called a fire extinguisher account. This isn't too complex.

Speaker 3 (03:56):
Yeah, And the thing is, you get some funny looks
when you go and apply to get a mortgage. But
it's really interesting the people who do this. They give
you a little smile when they look at what you're
acounts are called and they go, oh, I know what
you're doing here. And one other fascinating thing, there was
a really great study I always talk about comes from
the University of Chicago and what a guy called Richard

(04:16):
Saylor came out with this idea that mental accounting matters.
And what he basically said is, look, you could come
up with a spreadsheet, you could particulously decide where every
cent and dollar goes. But what works almost exactly as
well is just having these little mental rules of thumb.
Now you don't have to use the one that our
I outlined today. Another common one is fifty thirty twenty

(04:40):
Fifty percent of your money goes to needs, thirty percent
goes to once, twenty percent goes to long term savings
or paying down debt, whatever the numbers work out for you.
I encourage people to speak to their partner or to
themselves if first single, and just be like, Okay, what
are those percentages going to be set up? Those three
or four accounts have some different cards for them potentially,

(05:00):
and just automate that money so you can start keeping
it on top of it. Now if you want to
go whole hog and come up with spreadsheet and budget
it to your as far as you can to your
heart's content. That's perfectly fine. But this is a really practical,
easy way that people can get get started and five
or ten minutes logging into their banking app.

Speaker 2 (05:18):
Love your work here, fantastic, Thank you so much. That's
Ed McKnight from Opie's Partners with Us. This morning, we'll
put all of his advice up on the website. Of course.

Speaker 1 (05:27):
For more from Saturday Morning with Jack Tame, listen live
to News Talks ed B from nine am Saturday, or
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