Alright, I’ll take the bait. 🙂
Paul at Payoff.com entitled his article, “Budgets are a Waste of Time.”
And, as my 7th grade science teacher said, with all of us poised over our frogs, “Let the dissection begin.”
…budgets are a pain!
So is brushing my teeth (and flossing).
And now the definition:
Budgeting is making a plan
Yes! Like when you plan a vacation (to get the most out of your time there), or plan your day (to help you be productive).
…that takes the money you (expect) to have from savings or income…
Nah, don’t budget based on expectations. Just budget what you have on hand. Budget for the present, keeping your eye on the “seasonal” things (more on that below).
…and assigns it to different uses that you (expect) will occur…
Yes. You do this based on expectations and discussion of goals (with your spouse if you’re married). Your expectations’ accuracy improves as you continue budgeting.
And anyway, do they really help us at all?
The average YNABer makes a $3,000+ turnaround (debt paid, or money saved) in nine months. That’s the median number based on our surveys. So yes, they really help.
Paul then goes through four reasons why budgeting doesn’t work:
Life Doesn’t Add Up to Round Numbers. You’ve set a budget of $200 per month for gasoline. You end up spending $210. What does this mean? You “broke” your budget, but did you do something wrong? Does this mean you can only to spend $190 on gas next month or does it mean you underestimated your usual gas expense? This kind of confusion is a problem. You’ll never exactly hit your budgeted numbers, and it’s difficult to understand what it means when you don’t.
If you overspend by $10 in gasoline, you’ll have $10 less to budget the following month. That’s Rule Three (Roll with the Punches) and the software does that for you automatically. Little overages shouldn’t bother you at all. If you have $10 left over in your gasoline category? That’ll roll forward to next month. That’s a taste of Rule Two (Save for a Rainy Day), dessert comes next…
Different things happen at different times of the year, and this year will surely be different from last year. When setting up a budget, how could you possibly predict how much you’ll be spending on different items throughout the year?
Paul brings up a great point here, and he’s right, a lot of people budget all wrong, so “Seasonality” (Christmas in December, taxes in April, Vacation in June) makes people think budgeting doesn’t work. They just haven’t done it right.
Enter Rule Two: Save for a Rainy Day. Christmas comes in December and you want to spend $1200 (which you decide beforehand, kind of like when you decide what you’re going to do for the day, before the day is over). Break up that $1200 into 12 chunks of $100 and budget $100 each month into your Christmas category.
Repeat this exercise for any large (Braces), infrequent (European Vacation), estimable (Property Taxes), or inestimable (Car Repairs) expense.
Your cash flow, which was all over the board, is now evenly keeled. It’s as if you’re celebrating Christmas each month.
Budgets Create Guilt. Budgets can accomplish at least one thing: making you feel guilt and anxiety. You spent too much this month. What’s going to happen next month? Did you categorize your expenses correctly? Did you forget to plan for anything? Did surprise expenses throw your budget off, causing you to feel like your entire month is a financial failure? Guilt is not going to get you to your financial goals any faster—in fact, it will probably discourage you from making progress.
Some anxiety will drive action. If you’ve buried your head in the sand because you’re in a house you can’t afford, or your spending is out of control…that’s reality. Some anxiety may be just what you need to drive you back to reality and have you deal with—well—reality.
The question of what’s going to happen next month? Should people not be asking themselves that question? Should people just take a “wait and see” approach? Yikes.
Surprise expenses are learning experiences. You won’t keep being surprised. It’s almost eery how accurately you can predict your outflows when you’ve been budgeting frequently.
No, there’s no normal month, but things do tend to gravitate toward the mean.
Budgets are Hard. Yes, this is a legitimate reason. There’s a saying, “No pain, no gain,” but that doesn’t mean pain always leads to gain. Some pain is pointless. Budgets take a lot of time to set up. It takes time to choose a category for every expense. It takes time to “fix” every month when the numbers don’t work out perfectly. There are easier ways to get your money under control, like letting Payoff automatically track your expenses by store…
This circles back around to numbers I cited from YNABers — there is gain to be found in budgeting, you just need to make sure you’re budgeting effectively. Follow YNAB’s Four Rules—you haven’t budgeted like this!
(Also, exercise is hard. Eating right is hard. Raising kids is hard. Effecting political change is hard. Starting a business is hard.)
Budgets do provide one good thing: awareness. It may be pointless and frustrating to try to maintain a budget from month to month, but making a list just once of all your income and expenses, savings and debts can be incredibly valuable. Taking the time to see your current financial picture can give you a sense of confidence and a new way of thinking about money in your day-to-day decisions.
Now we’re getting somewhere!
Awareness is the key. If “making a list just once of all your income and expenses…can be incredibly valuable”, then why doesn’t it continue to be valuable if you take inventory of your income and expenses on a frequently (ahem monthly) basis?
That’s budgeting, and it’s incredibly valuable.
Thousands of YNABers can vouch for me on this one 🙂