There has been a trend of late to distance oneself from the usage of the traditional budget. It usually starts like this: “You may find this hard to believe, but I don’t budget…” And then they go on to say why it is that they omit one of the most fundamental steps for financial success. Though my opinion may not be popular with some of my friends in the personal finance community, I just couldn’t keep quiet any longer.
Budgeting is the right way
The irony of all of the antibudget articles out there on the personal finance blogosphere is that they usually go on to describe their alternative to budgeting, which ends up being, well, budgeting.
Most of the budget denouncers do so because they don’t truly understand what budgeting is. They usually claim that budgeting blurs your focus or causes negative side effects, which could not be further from the truth.
The truth is that there are too many people whose finances are an absolute disaster, and the simple concept of budgeting would go an incredibly long way in helping them take the right steps toward financial success.
What actually is a budget?
First, we HAVE to clarify what we are talking about when we say “budget.” I can’t tell you how many wasted finance meetings I’ve been to at work in which people were using the same words but actually all talking about different things. It’s the same when we are talking about savings or budgeting.
Generally, a budget is an estimate of income and expenditure for a set period of time.
Budgeting is simply putting together that estimate by taking into account your historical earning and spending patterns adjusted for any irregular known future events.
If your budget isn’t working, it’s because you’re not working
Some argue that most people can’t stick to budgets anyway, so why bother? That my friends, is not a problem with budgeting, it’s a behavior problem. That’s like saying P90x doesn’t work after only doing half of the workouts and not following the diet guide.
I’ll be honest. Some months, I’m doing a lot more monitoring than budgeting. But let’s be clear, budgeting is always better than monitoring. Budgeting is always better than tracking expenses.
Monitoring is passive. Budgeting is active. We ought to be actively working toward our goals by seeing where we fall short and finding creative ways to improve.
Now let’s address some of the budgeting myths and incorrect assumptions people make that cause them to resist.
Budget myth #1 – Budgets are too rigid
Some people are critical of budgets because they believe they are too fixed. There is no requirement that a budget be fixed. You are the boss of your budget. If you want to make a midmonth adjustment, you are allowed to do so. You do not have to track every expense to the penny if cents are below your family materiality threshold.
What’s a materiality threshold? It is simply a dollar amount at which your money matters or has a noticeable impact on you or your decision making. For example, failing to record $20 spent at a restaurant by someone who makes $300K per year is probably not material. But if that person is only making $30K per year, they better be recording every cent.
There is no one-size-fits-all budgeting method. It should be personally tailored to your circumstances.
Budget myth #2 – Budgets create feelings of failure
Some people say budgets hurt our feelings, that they can be stressful and emotionally damaging. They would rather you forego one of the most fundamental personal finance actions you take take in order to spare you the disappointment you may feel when you go over your grocery budget by $100.
Budgets do not fail people. People fail their budgets. But every failure can be turned into a success because each time you fail, you learn more about how you interact with money.
Budgeting myth #3 – Budgets are too limited because they only focus on cutting costs
Umm, nope. They should focus just as much on income as they do expenses. It’s easy to think they focus more on costs because we generally have many more expense categories than income categories.
Focusing soley on cutting costs is foolish. If that’s all budgets did, I’d be writing the same sort of “why I don’t budget” articles. There is a limit to how much costs can be cut. There is no limit on how you can earn, with effort and ingenuity. Focusing on both aspects in a budget is a powerful way to achieve savings goals.
Budget myth #4 – Budgets focus on how much we can spend
“Budgeting focuses on how much we can spend, but the focus should be on how little we can spend.”
I can just see people reading that, nodding their heads, and high fiving each other. Of course we like to read things like that. It implies that we’re off the hook from exerting a tiny bit of effort and doing one of the most financially responsible things within our power.
To me it seems totally counterintuitive. Budgeting is definitely not focused on how much we can spend. It’s more reasonable to say it’s about how little we can spend, but I think that misses the point as well.
The focus of budgeting should be reaching your financial goals.
Maybe it’s because I work in finance and the budgets are constantly being scoured for ways to earn more and spend less. They are not being scoured to see where we can spend more (except, perhaps, by the marketing people, but do they really count?). Budgets are goals. We write them down.
Budgets will set you free
For most people, budgeting is not fun. That even includes me now. I still derive a level of satisfaction from it, but with kids, work, and so many other things demanding my time, it can be a chore. It can seem like taking the time to budget is holding us back, but it is doing just the opposite!
Let me illustrate with the following story:
There was a young boy who went out with his father to fly a kids. It was his first experience with kite flying. His father helped him, and after several attempts the kite was in the air. The boy ran and let out more string, and soon the kite was flying high. The little boy was so excited; the kite was beautiful. Eventually there was no more string left to allow the kite to go higher. The boy said to his father, “Daddy, let’s cut the string and let the kite go; I want to see it go higher and higher.”
His father said, “Son, the kite won’t go higher if we cut the string.”
“Yes, it will,” responded the little boy. “The string is holding the kite down; I can feel it.” The father handed a pocket knife to his son. The boy cut the string. In a matter of seconds the kite was out of control. It darted here and there and finally landed in a broken heap. That was difficult for the boy to understand. He felt certain the string was holding the kite down.
This story was originally told in a religious context, but I’m applying it to budgeting 🙂 While we might feel restricted or oppressed by having to sit down and plan out our short-term financial future, that planning is what will eventually help us progress farther and farther financially.
Keep in mind that I am talking about most people. (People with money like Bill Gates probably won’t crash without budget, but they could probably do alot more with what they have if they kept track.)
If that little budgeting parable wasn’t enough for you, here’s another:
Some time ago while visiting Australia, I traveled to a beautiful horseshoe bay renowned for its surfing. As I walked along the beach, I was enthralled by the magnificence of the large crashing waves breaking just outside the bay and the smaller waves rolling in closer to shore.
As I continued my stroll, I encountered a group of American surfers. They were obviously upset about something, talking loudly and gesturing toward the sea. When I asked them what was wrong, they pointed to just outside the bay where the big waves were breaking.
“Look out there,” one of them angrily told me. “Can you see the barrier?” Looking more closely now, I could indeed see a barrier stretching across the entire mouth of the bay, right where the large, enticing waves were breaking. The barrier appeared to be made of a heavy mesh and was supported by floats on top of the water. According to the surfers, it dropped all the way down to the ocean floor.
The American surfer continued, “We are here on a once-in-a-lifetime trip to surf these big waves. We can surf the smaller ones breaking within the bay itself, but the barrier makes it impossible for us to surf the big ones. We have no idea why the barrier is there. All we know is that it has totally spoiled our trip.”
As the American surfers became more animated, my attention was drawn to another nearby surfer—an older man and obviously a local. He seemed to be growing impatient as he listened to the ever-increasing complaints about the barrier.
Finally he rose and walked over to the group. Without saying anything, he pulled a pair of binoculars from his backpack and handed them to one of the surfers, pointing out toward the barrier. Each of the surfers looked through the binoculars. When my turn came, with the help of magnification, I could see something that I had not been able to see before: dorsal fins—large sharks feeding near the reef on the other side of the barrier.
The group quickly became subdued. The old surfer retrieved his binoculars and turned to walk away. As he did, he said words I will never forget: “Don’t be too critical of the barrier,” he said. “It’s the only thing that’s keeping you from being devoured.”
As we stood on that beautiful beach, our perspective had suddenly changed. A barrier that had seemed rigid and restrictive—that seemed to curtail the fun and excitement of riding the really big waves—had become something very different. With our new understanding of the danger that lurked just below the surface, the barrier now offered protection, safety, and peace.
So there you have it. Don’t be too critical of the barrier! In this case, the budgeting process. It may be the one thing (or one of the things) keeping you from getting devoured by debt or financial failures.
The false front of the anitbudgeter
How often have you heard someone say “I don’t need organized religion. I have my own personal relationship with God.” While some might truly mean it, let’s be honest, most would just rather watch football than go to church.
Many people say that they don’t spend more when using credit cards. But again, while this may be true for some, studies show just the opposite.
In the same vein, some say that they are as just as well off not budgeting. While this may be true for some, most probably just don’t want to exert the effort.
Budgeting will not hurt you. It will only help you.
Benefits of budgeting
Last year, I set up a financial plan for the entire year. The further out you can be accurate, the better. I still updated my budget every month to account for life changes, but let’s take a look at my original 2015 budget vs the results.
We made $3K more than what I planned, which is pretty darn close. I underestimated how much we’d pay out for babysitters so Amanda could teach some of her violin lessons, but overall we still came close.
Almost $5K of our overall savings miss is due to me underestimating our investment contributions.
In the beginning of the year, we were only contributing 5% to our 401k in order to get my full company match, but we increased that to 15% after we felt good about the size of our emergency fund.
We also opened 529 plans for the kids, which I failed to account for in the beginning.
Below are my biggest insights are from looking at my actual expenses versus what I originally planned.
#1 Budget more for auto expenses
My car is 14 years old, and our van is about 10 years old. Both are in decent condition, but we still have to take them into the shop occasionally. This is a tough area to plan for because most of the spending relates to unplanned events. Maybe part of me thought that if I didn’t plan for unexpected repairs that they wouldn’t happen. That theory failed, so I decided to budget the $2,500 I actually spent last year for this new year.
#2 Remember you probably won’t always travel for free
While I’m a huge fan of using points for hotels, car rentals, and airfare, sometimes it might not be feasible. That was the case for the places we stayed on our trip to central america a few months ago. I was able to use points for the flight and car, but not the hotels, which is a big part of why we went over budget.
#3 Healthy food is expensive
In addition to having sensitivities to wheat and dairy in the family, we generally try to eat healthily–and it’s not cheap. We spent an average of $750 per month, or about $185 per week. (That also includes a lot of household items that we didn’t break out separately.) While I think we could spend a lot less if we wanted to, I am very hesitant to sacrifice health in favor of saving a few bucks.
#4 Kids costs money
Kids don’t cost nearly as much as people think, but I think I underestimated in terms of activities, sports, and homeschooling. Two of our three are in soccer and piano. One has a reading tutor. All that adds up.
#5 Eating out adds up
Even though going out to lunch during the day might cost around $5, doing it frequently quickly adds up. That’s even more true with going out to dinner.
Personal finance = taking action
Now I have an entire year of data, I can see where my initial assumptions fell short. I can see areas of improvement in both my behavior and my financial planning. I can see how to challenge myself going forward.
Finance is about taking action. It’s about using data to drive better decision making. That’s exactly what a budget does. It’s not designed to make your life painful. It’s designed to help you earn and spend well as well as to learn from the past.
Seeing a large variance between what I budgeted and what I actually earned or spent doesn’t make me feel like a failure. It gives me hope because now I’m armed with better information that I can use to make smarter financial decisions going forward.
Don’t cut the rope
The next time you feel like your budget is holding you back and are inclined to just let it all go, remember the kite analogy. Maybe you just need to let the string out some more. Maybe you have some reeling in to do. Just don’t give in to the current trend of cutting the rope entirely by failing to budget.
What about you, are you too cool for budgeting?
PS. It’s the last week to sign up for my tax giveaway! See more here.