When I was younger, I tracked and budgeted for my daily expenses, and while the constant attention paid off, it didn’t pay off in the way you might expect. In that sense, I don’t think everyone needs a budget. In fact, for some, I think having a budget can be counterproductive.
Who needs a budget?
First of all, let me clarify that I think some people need a budget. If you live paycheck to paycheck, as up to two-thirds of Americans do, you absolutely need to identify where every dollar is going. And, ideally, use that information to make the necessary changes.
Anyone experiencing a major life change should also watch their budget for at least a few months. For example, as I move from a small town in Georgia to a condo in downtown Chicago, they better believe I’m focused on my expenses. Consider using apps like You need a Budgetone of the most popular budgeting apps, to guide you through important transitions.
If you’re going to have a child, start a new job, or even get married… well, you need a budget (the philosophy… and maybe the implementation too).
The folks at You Need a Budget have also written extensively about successful budgeting, which might also be helpful during your transition.
How can budgeting be counterproductive?
My move away from budgeting began in my final years of grad school. Like most graduate students, he earned very little, close to the California minimum wage while living in the San Francisco Bay Area. Tracking every dollar, every month, for years, he could no longer avoid the obvious: The problem wasn’t that he was bad at spending. Rather, the problem was I had so little to spend.
I couldn’t budget myself out of that problem. Focusing on the details of expenses, I lost sight of the big picture. I needed to increase my income…by a lot.
As I said before, tracking my daily expenses helped me; Although it didn’t help me identify my unnecessary costs as I had hoped, I learned what my real problem was.
The adage is true: if all you have is a hammer, every problem looks like a nail. So if all you think about is budgeting, every financial problem is a spending problem.
we can budget Y think about increasing our income?
Perhaps, but we must recognize our limited attention. We do not have unlimited time or an unlimited ability to make decisions. Budgeting can be hard work and time consuming. If you only have enough mental energy for an hour of personal financial work each week, determine how best to spend that time and energy.
Alternatives to budgeting
If you, like me, are overwhelmed by the budget, you need to find alternative solutions. For example:
- Focus on increasing your income. Many people settle for lower income than they deserve, however, the best thing you can do for your personal finances is to earn more money. For people who are employed, the easiest way to increase your income is to ask for a raise. If you have free time, consider joining the gig economy. And, for really big pay raises, you may have to get a new job.
- Reduce (or eliminate) fixed expenses. A major limitation of traditional budgeting is the focus on discretionary spending. decisions around discretionary Expenses must be made repeatedly, requiring constant attention and making it difficult to focus on the big picture. Most of our expenses are fixed, and according to the US Bureau of Labor Statistics: 70% of our budgets go to housing, transportation, health care, and taxes, with much of the remaining 30% going to minimum and necessary expenses for food and clothing. So if you want to see profound changes in your bottom line, you should you need to cut back on some of your fixed expenses. As painful and inconvenient as this can be, cutting expenses just once will generally improve your spending. For example, a couple selling their second car could pocket $10,000 immediately and then avoid $10,000 each year in expenses. Or, a single person living in a high-rise two-bedroom apartment could move to a one-bedroom apartment downtown and save $2,000 a month – $24,000 a year!
- Make a spending plan. While some people equate a budget with a spending plan, they’re different. Budgets tend to look backwards and focus on the minutiae. In contrast, a spending plan looks forward and focuses on broad goals. Periodically review your spending and set goals for where you want your money to go. Make sure your needs and savings are covered and paid for first before you approximate how much you can spend on everything else. Avoid getting lost in the weeds – you need to be fresh and ready when you ask your boss about that promotion.
Ultimately, the best approach to spending is the one that works for you. If you feel the need to keep a budget, here’s another idea: ask someone else to track your spending for you. Consider downloading your budget into a financial planner. So, you get the best of both worlds: the budget Y the attention you need to focus on the big picture and live your life.
Assistant Professor of Financial Planning, The American College of Financial Services
Matt J. Goren is an assistant professor of financial planning at The American College of Financial Services, focusing on the interplay of personal finance and psychology. In addition to teaching and developing content, he provides strategic consulting on financial education initiatives and hosts a personal finance radio show, Nothing Funny About Money, which was named the top consumer financial information resource of 2018 by the AFCPE.