A friend recently forwarded me a post that appeared on Slate.com last month: Toss Your Budget – Why a pillar of personal finance isn’t nearly as essential as we think.
The essence of the post was that budgets don’t work. Sure, the piece is almost two months old now and out of the discussion cycle, but when I read it, well, it got me kind of fired up. Kind of agitated.
The voice in my head was saying, “You’re not just going to sit there and take this, are you?”
I’m not usually a confrontational sort of guy. But this one piece managed to squeeze in just about every misconception about budgeting that exists in the universe. Misconceptions that keep people from budgeting which, I know, are keeping them from sleeping better at night and achieving things they never thought possible. Needless to say, I had no choice but to respond.
The basic argument of the article is that budgets don’t work because they’re rigid and require that you have the same income and expense patterns each month.
Well, the author is half-right, I guess, I can give her that. Those kind of budgets don’t work. Any budget that requires you to have the same budget each month will surely fail.
But that’s not budgeting. That’s a misconception about budgeting.
At YNAB, we teach that the budget helps you allocate your money to your most important goals, to align your money with your priorities. Somethings are the same each month, like your rent or mortgage.. But other things aren’t, and your budget reflects that without guilt or shame.
Budget Misconception #1
“But as it turns out, the ability to make and stick to a financial budget defies the realities of most people’s lives. Budgets assume a level of consistency in our finances that doesn’t exist.”
I think I already covered this one, but just for good measure: budgets actually don’t have to assume any consistency in your life or your finances. Now, you might wish for consistency in your finances. But that’s just wishing. That’s not a budget. This argument is like saying, “Going to Europe won’t work for me because I don’t like riding in boats.”
(Admittedly, this is my weakest analogy, right out of the shoe. Stick with it, they get better.)
Our definition of a budget begins with the assumption that your financial life is unpredictable. It’s exactly why we don’t set out expenses and then try and forecast income to match, but instead use an allocation system to assign jobs to the dollars we already have. Proactively and thoughtfully making a plan for the money you have right now. Because it works.
Budget Misconception #2
“Spending shocks—as my story attests—also have a way of being unpredictable and unavoidable. As a result, keeping a budget can be an exercise in futility. There is, for example, next to no way to budget for the practice of balance billing—that is, when you’re charged by doctors for the difference between what they bill and what your insurance will pay.”
This is like saying, “I don’t know how much [groceries/summer camps/my wedding/college/retirement] will cost, so why bother?” Or for a bonus analogy, “It might rain during my vacation week, so why bother planning to go to the beach at all?”
Spending shocks in your life aren’t a reason why budgets don’t work – they are exactly why you need a budget!
You might not see spending shocks coming, but you sure can predict that they will happen. Setting some money aside for those shocks means that they actually won’t be shocks. Instead of having given up trying, you’ll actually be prepared.
If you set too much aside, great! Save it for the next time, or use it for a different need/want/treat. If you set aside too little, you know better for next time. In the meantime, find money where it is already set aside for something else.
Budget Misconception #3
“In fact, there’s nothing natural about budgeting. According to Lendol Calder, the author of Financing the American Dream: A Cultural History of Consumer Credit, budgets were all but unmentioned until the beginning of the 19th century.”
This one killed me! There wasn’t a lot of talk about how to decide whether to friend someone on Facebook in the 19th century, either! You know what else wasn’t mentioned until the 20th century? The price of gas!
Okay, I’ll stop before I get snarky. (Is it too late?) Of course people didn’t talk much about budgets in the 1700s, the average person didn’t operate much of their life with cash or currency! And where they did budget, they worked within their means and prepared for the unexpected. Have I set up enough wood for the winter? Have we set aside enough cloth for next year’s clothes? That’s some serious budgeting.
Budget Misconception #4
“And then they were as much about getting people to spend as save: Americans needed to budget to pay the bills for newfangled layaway and installment plans offered up by stores like Sears Roebuck. They were, in other words, designed to teach us to live beyond our means, not within them.”
What a misappropriation of blame! This is a little bit like blaming your to-do list for the number of to-do’s you have…
It’s layaway plans and credit cards that were designed to have us live beyond our means. A budget, by definition, is spending less than you earn, not a way around it.
Budget Truth #1
“[Harris at Personal Capital suggests] people simply monitor their expenses with great frequency, because the more you track spending, the easier it is to recalibrate when needed. In fact, it’s likely you’ll cut back altogether if you watch your outflows regularly.”
Something to agree with! While a budget is more than tracking expenses, the frequent interaction with your money described here does lead to greater awareness about your spending habits – and usually a higher bar for spending decisions, which usually translates to less spending overall. But that brief moment of mutual understanding was fleeting…
Budget Misconception #5
“As for actual budgets? They offer the illusion, not the reality, of financial control. If you don’t have enough money coming in, they won’t make it better. Things like salary increases, more predictable income, and further health insurance reform—or even legislation putting a cap on balance billing—will help us with our finances more than any budgeting app or formal plan.”
I agree that without meaningful change in habits, you could use a budget as an illusion. But not if you stick to a set of guiding principles. Like YNAB’s Four Rules.
As for salary increases? Yes, more rain does solve a drought problem. But can you always make it rain on demand? What about when you’re waiting for the rain, what do you do? More money doesn’t solve financial problems if you continue to spend beyond your means. More money may mean more choices, but you’ve still got to be proactive and thoughtful about those choices. That’s a budget.
And waiting for legislation? Go ahead, watch C-Span. Balance billing might not be fair, but waiting for legislation to put a cap on it? You might be waiting a while, and how much control does that give you over your finances? It doesn’t empower you the way an effective budget does.
More Budget Truths…
A budget really isn’t all those things that people say it is. In fact, if you’ve never tried a YNAB budget, the best thing you can do is to forget everything you think you know about budgeting. Forget what people (maybe like someone writing in Slate) tell you about budgeting, read up on the YNAB’s Four Rules and download a free 34-day trial.
I agree completely that you don’t need rigid formulas that break every time real life happens. You need something that is adaptable and flexible, one that you can change as your life circumstances change. That’s a budget, no analogies necessary.