One of the most common words you hear out of any financial professional’s mouth is budget.
What if I told you that I don’t believe in budgets? There. I said it. A counter-intuitive view on the world of managing our money. Let’s take a look at this.
“You need a budget.”
We’ve all heard it before. Go to any personal finance site and you’ll be hit with the “you need a budget” rhetoric post haste.
Upon hearing said advice, you’d likely nod your head unquestioningly and mutter to yourself “of course, I need a budget. Duh. Tell me something I don’t know.”
But, what if I told I don’t believe in budgets? In fact, what if I told you budgets are bullshit?
Fact is, for most of us mere mortals, budgets are, indeed, bullshit. Well-intended bullshit but bullshit nonetheless.
To the personal finance community (PFC) this is heresy. If there’s one thing I know about the PFC, they love them some budgets.
Don’t get me wrong. Budgets sound reasonable. Actually, they sound quite smart.
Budgets look beautiful on paper. It’s all right there in front of you. All you have to do is follow the budget you created…
The problem with budgets is that they don’t translate well to how we actually live our lives.
And the problems begin right from the start. They begin from the first moment you create your budget.
If you’re like most people, you’ll start by going online and finding a free budget template because you’re savvy like that.
And, just like that, without even knowing it, you’ve set yourself up for failure. You’ve pretty much ensured that a few months from now (if that long), you’ll be agreeing with me that budgets are bullshit.
How can I be so sure?
I’ll get to that in a moment but, first, it’s important we establish what I mean when I say “budget.” Like most things, one person’s definition of “budget” may be very different from another’s. Let’s make sure we’re talking about the same thing.
According to Investopedia, a budget is:
An estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis.
Um, right. Let’s try again. Here’s my definition of a budget:
Your projected monthly take-home income and expenses broken down into different categories.
No surprises so far, right? It’s what we’ve always been taught without the financial jargon.
In today’s internet age, it’s even easier. We just Google “budget worksheet,” choose the one we like the most, and start completing it.
Okay, now that we’re on the same page as to what a budget is, let’s go back to my example.
You’re ready to start doing this budget thing and Google “budget worksheet examples” and choose the one that fits your eye.
I’ve done exactly that here.
Now, picture yourself ready to tackle this budget project. It’s Sunday morning and you’re feeling good because you’re highly motivated to get your money right. This budget is just an easy first step towards total money mastery.
You’ve planned ahead. You have your “Monthly Budget” worksheet in front of you and it’s printed in color because you’re worth it. Your favorite pen has joined you and the calculator app on your phone is open and at the ready. You’re in a quiet spot in the house, have your coffee, an assortment of muffins and fruit, and you get to work.
First step: enter how much you plan on spending in each of the categories in the budget worksheet.
- Mortgage/rent – Oh, I got this one. I know exactly how much we pay monthly. So far so good.
- Household maintenance – Hmm. How should I handle this one? What’s considered “maintenance?” Cleaning supplies? Garbage bags? Paying the plumber to unclog the basement drain? Geez, I really don’t know. Ah, screw it – I’ll just go with this…
- Taxes – Uh oh. How I hate this tax stuff. Wait, do I even need to worry about taxes since we’re working with my take-home pay? Yes, I think that’s right. So, why have it in here at all? Maybe for property taxes? Yeah, that’s gotta be it. Oh wait, but aren’t our property taxes included in my mortgage payment? I don’t really know. Stupid taxes. I’ll just skip it.
- Insurance – I assume they mean all insurances. Probably not health insurance, though, because that’s through work. Definitely, our auto insurance. Oh wait, we pay that every six months. Do I include it here? But, we don’t pay for it monthly, how can it go here? Do I just average it? Ugh. Homeowners insurance? Isn’t that also included in our mortgage payment? Grrrr. Why does this have to be so complicated?”
There are two flaws (one fatal) at play here already.
The non-fatal flaw is in not knowing what the budget is asking for. All budgets assume you know what “income” means, assumes you know what “taxes” means, assumes you know “mortgage” means to include property taxes and homeowners insurance and so forth.
As you can tell from this example, it’s not always easy to know how to classify your spending.
One way around this is to create your own definition for each category. It’s not a perfect fix but it keeps things moving along.
The second – and fatal – flaw is entering budget numbers without having a firm basis for doing so. Let’s use “household maintenance” as an example.
Does anyone really know how much they should budget for household maintenance? Not really. If you don’t know how much you’ve spent on household maintenance in the past, how can you accurately project into the future what you should be spending?
It makes no sense.
Our past spending forms the basis for our future spending. Without having a good understanding of how we’ve spent in the past, we can’t expect to have a good understanding of how to budget for the future.
And, since few people know where their money goes at the level required to complete an accurate, and therefore useful, budget, right from the outset, the system is primed for failure. You think you’re building a solid financial household when you’re really building a house of cards.
And this is just the first fatal flaw.
AREN’T BUDGETS ALL ABOUT HOW YOU’RE GOING TO SPEND MONEY IN THE FUTURE?
Yes, budgets are forward-looking.
But, their legitimacy comes from looking backward, from looking at how we’ve been living our lives.
It has been said that the best predictor of future behavior is past behavior. It’s hard not to apply that psychological lean towards budgets. You don’t automatically become someone else because you complete a budget, do you?
Budgets need to be accurate. The amounts you put down on that piece of paper need to be grounded in how you currently live your life.
Is it reasonable for someone to say: “I’ve been spending too much money on dining out and entertainment. It’s gotta stop. I don’t really know how much I’ve been spending but I know it should only be about $300/month.”
Is this reasonable? Don’t answer too quickly. You need more information to weigh in with a valid opinion.
She thinks she should only be spending $300/month on “entertainment and dining out” because those aren’t “necessary” expenses according to the personal finance blogs she’s been reading. No one needs to go dine out, right? Perhaps not.
But, this is bigger than “dining out.” It’s about how it makes you feel.
Her dining out and entertainment budget is spent on going out with her girlfriends for lunch and dinner and drinks after work. She also loves movies and enjoys seeing them on the big screen. She loves going to concerts and seeing shows at the theater – something she partakes in several times a year.
These activities, and the people she’s spending time with, bring a tremendous amount of joy to her life. And that budget just put a serious constraint on her joy.
Added together, it costs her about $700/month on average for these activities. Of course, she’s unaware it costs her this much. And she hasn’t inspected what she’s getting for her money. She just knows she’s spending “too much” because all of the stuff she’s reading says “dining out” is a great place to cut spending.
Knocking $400/month off your monthly spend is really easy when they’re just numbers on a page. But, to take that out into the real world where you actually live your life? That’s an entirely different thing and it’s another reason why budgets don’t work.
Do you really think she’s going to stop participating in some of the most enjoyable aspects of her life just because she wrote $300 in the entertainment category?
This isn’t a $400 decision. She hasn’t asked herself to stop spending $400 a month. She’s asked herself to change the way she lives her life and how she interacts with the most important people in it.
Is this a reasonable ask?
If she knew how much she normally spends on entertainment and examined what that spending meant to her life satisfaction, she probably would have put down a different number. But, in order to get an accurate entertainment spending number, she would have to already be tracking her spending and do so over an extended period of time (6-12 months at a minimum). Who does that?
Budgets are supposed to guide your decision-making, they’re supposed to be the lynchpin of your new financial life and outlook. They’re supposed to be the first step to getting your financial life on track.
And yet, they’re built on whims and best guesses, unrealistic time and data tracking commitments, on the propensity for people to take the path of least resistance. They end up being nothing more than “numbers-on-a-page.” They’re meaningless.
The reality is we don’t take our budgets into the real world and live it. Because when we do try to implement our budget and cut out “$400 of unnecessary entertainment expenses” we quickly realize the difference between writing down spend “$300/month for entertainment” and actually living it. We realize this isn’t about “money,” it’s about how we live our lives.
Against such formidable opposition, budgets don’t stand a chance.
Budgets are built for failure. They’re bullshit.
“Yeah, but what about all those people who are using a budget effectively?“
What about them? What about those people who can eat anything they want and remain annoyingly thin? Should we follow suit and pull up a chair at the all-you-can-eat-buffet?
Look, there are always going to be a few outliers who can do something us mere mortals cannot. They’re the exception. You never want to compare yourself to the exception.
Put the odds on your side. Budgets work great on paper. They’re terrible in practice.
So, you’re saying we shouldn’t know where our money is going? That we shouldn’t have a plan for where we spend our money?
Let’s not get crazy. I do believe we need to track our expenses. But to what level of OCD detail is really necessary?
Most people don’t know where their money goes. At least not at the level of detail where a budget is useful. With a budget, you can’t “sort of” know. You must know where your money is going.
In the real world people don’t manage their money at the “budget” level.
For example, every budget I’ve ever seen has a line item for groceries. Makes sense. We all have to eat, right? So, without giving it a second thought, you fill in a number and are ready to go.
Next step, hit the grocery store and buy groceries. But, you don’t only buy groceries, do you? No, you buy other stuff too. You buy household cleaning products. You buy books and magazines. You buy shampoo and personal care items. Sometimes, because you’re tired and don’t want to run to another store, you buy items like light bulbs and school supplies and a bunch of other items that are more expensive at the grocery store.
You pay with a debit card so you have an official record of how much you spent and where. You save your receipt because that’s what you’ve been taught to do. You do this multiple times throughout the month.
It’s month-end and you’re feeling pretty good as you begin to calculate how you did compared to your budget. As you review your “grocery” receipts you realize what is probably already obvious to you and I. You can’t just add up your monthly receipts ‘cause there’s a bunch of non-grocery spending in there, can you?
No, no you can’t.
In order to get an accurate “groceries” number, you need to strip out any items that weren’t spent on “groceries.”
That means going through every receipt line-by-line and adding up only the “grocery” items into your budget.
How long before you to say “screw it” and just add up the receipts? Like 20 seconds max. And just like that, your budget is wrong (again). And that’s just one budget category. You have 24 more categories to go. And this is just the first month!
How much longer do you need to go through this horrible exercise? Um, how does THE REST OF YOUR LIFE sound?
Budgets are like incredibly strict diets. Diets with strict rules for what you can eat AND strict rules for recording EVERYTHING you eat.
Like diets, budgets are well-intentioned but almost always fail to live up to their promise. And the biggest reason for their failure is simple — we’re humans, not computers.
We live our lives in the real world, a world where things rarely fit into tidy little categories. Life is messy. Further complicating things, unlike diets, budgets aren’t only applicable to one person. They apply to the household.
Meaning, if I go on a diet, my wife isn’t obligated to go on the same diet or any diet at all. But, that doesn’t work with budgets. Budgets require both of us to be on the same budget. When was the last time you and your partner agreed on anything spending related, much less 25 categories of spending every month of every year for the rest of your lives?
This “budgets are bullshit” idea is starting to make more sense now, isn’t it?
You might be saying to yourself, “okay, If budgets are, indeed, bullshit, what’s the alternative? There must be a reason why everyone touts budgets as the lynchpin of financial responsibility.”
I’m glad you asked. There is a better way. A way that builds on the good qualities of budgeting while acknowledging, and eliminating, many of its deficiencies.
If you’re ready for a new way of thinking, join me here.