Image via WikipediaBudgets don’t work. Budgets are too time consuming and mentally draining. When I do a budget I feel defeated. There isn’t enough money to go around. I don’t have enough money to do the things I want to do.
Therefore I don’t do a budget.
I’m sorry if you like budgets or you think they are sexy (sorry to J$ @ Budgets Are Sexy specifically. Your message is still awesome). I don’t think they work and I’m not alone. J.D. Roth at Get Rich Slowly doesn’t do a budget. Nickel at Five Cent Nickel doesn’t do a budget. That doesn’t mean they don’t track their spending or have goals for their money. Because they obviously do as evidenced by the success they’ve had with their own money.
I’ve been budgeting since I graduated college. Whenever I start a budget I do pretty good for a couple of months but then I just get burned out and stop altogether. When I first started this blog I advocated Dave Ramsey’s zero-based budget (I still think this is a good idea especially if you are just starting to learn about the relationship between income, expenses, saving, and wealth-building). Since then I’ve gotten pretty good at tracking my spending, but I don’t try to put dollar figures in extremely specific categories month in and month out anymore.
Why We Budget
We budget so we don’t get into trouble. So we don’t spend money we don’t have. So we can meet all our obligations and save some money for our future. That's why most money experts say that budgets are absolutely necessary and constantly advocate their use.
Some people take budgets very seriously getting down to the penny what should be spent in a hundred different categories. Others follow very simple plans like the balanced money formula (50% needs/20% saving/30% wants) or the 60% Solution (60% to all committed expenses/30% to savings goals/10% for fun money).
Why Budgets Don't Work
Some people take budgets very seriously getting down to the penny what should be spent in a hundred different categories. Others follow very simple plans like the balanced money formula (50% needs/20% saving/30% wants) or the 60% Solution (60% to all committed expenses/30% to savings goals/10% for fun money).
Why Budgets Don't Work
- Expenses Fluctuate. Budgets don’t work when we don't budget for seasonal changes in our spending (think Christmas time or June weddings or even winter heating or summer cooling costs).
- Unanticipated Expenses. Budgets don't work when we have too many unanticipated expenses or emergencies (and we don’t have money saved for said emergencies).
- They're Unrealistic. Budgets certainly don't work when we don't allocate enough money for notoriously underfunded categories like groceries/dining out or entertainment costs.
What I do Instead
Okay, okay I kind of lied earlier when I said I don’t do budget I kind of do a budget. But I would call it more of a spending plan.
At various times of year, usually at the beginning of the year and then quarterly thereafter I create a spending plan where I forecast my income and expenses. I split the time periods into bi-weekly increments (because I get paid bi-weekly). I list my income, what I want to save, and all known expenses during the time-period. Income minus savings plus expenses equals spendable income.
As long as I am able to save what I want to and meet all my expenses I don’t really care how I spend what’s left over.
INCOME - ANTICIPATED SAVINGS + KNOWN EXPENSES = SPENDABLE INCOME
As long as I am able to save what I want to and meet all my expenses I don’t really care how I spend what’s left over.
How To Create a Spending Plan
- Choose how you will divide your income and expenses into time increments. I recommend whenever you get paid (weekly, bi-weekly, monthly, etc)
- Calculate your projected income for that time-period. It helps to be conservative here. Remember you can always go back and adjust your spending plan if things change, but if you are already committed to some spending or expenses based on money you don’t have it would be better to adjust for more money not less.
- Determine the minimum amount you want to save for yourself. Don’t worry if you think this is too much or too little. The point of thinking about this before determining your expenses is to make sure that you pay yourself first. I have found that if you don’t do this you will always find excuses and not do it (remember all the reasons why budgets don’t work? The same reasons apply to why paying yourself last doesn’t work either). One way to help you determine the amount to pay yourself first is to think about your goals. What do you want to accomplish in the next month, three months, year...calculate what it will take to reach those goals in time. This will be how much you need to set aside for savings.
- Finally you can now list all your known expenses. This part of the process is similar to budgeting and is absolutely necessary. If you don’t do this you’re liable to spend the money you need to pay rent at the mall...Something you probably want to avoid. Make sure you list everything, including housing expenses, cable and phone bills, insurance expenses, and even your debt payments (if you have separate debt repayment goals include those into your spending plan).
- Subtract your savings and known expenses from you income to determine your spendable income.
After you have done this you can repeat the process for the quarter (like I do) or for the entire year. I find that using an excel spread sheet really helps with this because I can see multiple pay periods on one page and that way I know exactly what expenses are coming up. Whenever you get paid you don’t have to recreate your budget or your spending plan, just consult your spreadsheet and make any minor adjustments that you might need to make (maybe you got a bonus at work or a windfall or perhaps you’d like to add another savings goal to your plan or you forgot to calculate your tax bill in your known expenses). Once its all written down its easy to make adjustments here and there.
Two caveats to this spending plan. Number one: you have to live below your means (spend less than you earn) to make this work. Granted some people will be able to save more than others, some have more expenses than others. Number two: You have to be conscious of what you have in your bank account at any given moment in order to make it work (I use Quicken to track my spending and I’m pretty religious about entering every expense the same day I make it). For some people this may be more tedious than making a plain vanilla budget. But at least with a spending plan you're not put in the same straight jacket that a budget represents for a lot of people.
Do you budget (not that there's anything wrong with that) or use a spending plan?
3 comments:
Nice thoughts in this blog. Two points I'd mention - there are those inclined to budget, and those that arent - for the aren'ts, surely this idea is much to tedious. For the Are's, it's pretty much the same process as a traditional budget. Obviously the poster is inclined to budget (as I am) which brings up point number two - all those categories (defined as broadly as you can with reasonable accuracy) are absolutely necessary. And they are the main reason the "aren'ts" tend to skip budgeting all together. But they are the only way to know just how your money is slipping away. But once they are defined accurately and budgeted for, then the "discretionary" money doesnt have to be all that tightly accounted for as the write describes. Just as long as the essentials are covered first. I too use Quicken to try to monitor balance amounts and their software even - almost - makes it easy to track spending in specific areas like "envelope" style budgeting. Now what's missing is a way to quickly and easily check the amounts remaining in these "envelopes" whenever I am about to make a purchase. To my knowledge there is no accurate mobile app that ties in to current balances and that lets you divide the amounts up by envelope. But if Quicken (or other) did this, they would make a mint because I would buy it and tell everyone else I know to do the same. My dark side tells me this is the last thing the banks want - that is consumers making informed budget-conscious decisions at the point of purchase. Bad for credit card business, which is based on the myth of limitless spending.
Great insight. I haven't really thought about it that way. You're right about unexpected and seasonal expenses because even the slightest one can ruin an entire budget plan, especially the really tight ones.
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