I’ve decided to write this mostly because of this post at the great I Will Teach You To Be Rich called How do you budget when you have irregular income? The sum of the post is a reader asking Ramit how he should budget with his very irregular income. Check out the post, but I won’t cover it more than I have to because you can just read the original if you like. I’ve left my own comments under the pseudonym MyNameIsMatt.
Yes, budgets are bad. Not just because we don’t like doing them, but for many of the reasons I’ve covered in previous posts in how they relate to your money mentality. Now, budgets aren’t necessarily bad, and they have helped a number of irresponsible spenders, so I can’t say everyone should swear them off. However, they’ve been tauted by the “wise ones” almost as some magic bullet that should sit on a pedestal for anyone desiring responsible personal finance. The problem with this is that it leads to the type of question asked of Ramit where the individual has no real problem. He just feels that he isn’t budgeting correctly for his irregular income. He feels out of control, and thinks that the only means of correcting this is by correcting his budgeting. This is far from the truth and actually establishes a bad habit for any responsible personal finance.
The budget is not king, and your budget has no direct relation to your income. Your expenses, and hence what you derive your budget from, is based on your lifestyle. Income provides options that support your desired lifestyle, but has no direct relation to your expenses. If you make more money, then you don’t inherently increase your expenses. If you make less money, then you may need to change your lifestyle, but that doesn’t mean you therefore budget based on your income.
If your budget is based on income you’re doing two things wrong. First, you’re succumbing to the always “need more” affluent society that corporations pressure us to live in. Living based on income means you’re limiting yourself to your current financial paradigm and not based on how you want to live your life nor how your need to live your life. The money numbers that you see now define your life instead of you defining it yourself.
The second thing that happens is the budget becomes king. When the budget is king you’re more likely driven to two extremes. Either you live at the short end of your money numbers where you live within your mean (all very good and well), but less likely to stretch out of those means. Instead of being driving by needing more (or less), you should be driven by personal growth. That is expanding yourself and not necessarily your possessions. Taking adventures and living life through all of your opportunities. However, if you can only see the opportunities that you’ve budgeted for, then you’ll invariably miss out of tons of great life experiences.
The other extreme you could go in by making the budget king is by living beyond your means. Not caring about your budget in the least because it’s just too much trouble, too painful, and therefore not worth your time. In the comment thread of Ramit’s posts two points were made obvious, and they’re right for any situation (irregular income or more regular annual income), which is that you need to know your minimum living expenses and have a small emergency buffer so that you can handle any challenges from changes in income or lifestyle. This is really the extent I think anyone should budget unless you have specific goals like buying a house or saving an extra 5%. However, when you take the view of budget is king yet too troublesome to take seriously, you begin living life beyond your means. All you see (or don’t see) are the money numbers driving your growth and life adventures (”gotta have this and that – be the rockstar”), and not the numbers that actually support that life.
Budgets are bad because they have a tendency to limit and limit not based on personal needs and wants, but probabilistic situations (”I’ll probably need $X for this and $Y for that”). For many people, they have a problem spending and saving responsibly without that kind of help. That’s OK, but that doesn’t mean every one of us has to do the same, and then that we’re irresponsible for not doing it. Life is not about control, so don’t try and control your life with a budget. When you’re facing the fear of control, whether it’s a mental manifestation or a real problem, you need to address the problem directly and not hide the issue behind a prescribed and overly glorified process (harsh I know, but true).
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February 12, 2007 at 3:14 pm
Jesse
Your post was very interesting, and I whole-heartedly disagree
(not really).
I spend quite a bit of time convincing people that they need a budget. I only wish people would stop seeing a budget as some type of tool for variance analysis and start to see it for what it really is: a method for aligning your money management with your values.
I think you were spot on with tying in personal growth. Thanks for some thought-provoking content — tougher to find these days!
February 12, 2007 at 5:42 pm
mattblass
I’m not sure that I’m completely right (and I do like being provocative), but I also think that there really is something wrong with the budgeting process. At the end of the day, most people don’t budget and they get by OK (we’ll see when retirement comes). I don’t believe in a hardcore regimented budgeting process, but there’s got to be a good balance, and usually once you’ve got something that works it’s less of a process and more a guide in the back of your head. That’s where most people should ideally be, but we don’t live in an ideal world.
Part of the reason I trash budgeting is because it has that bad stigma that you note. I still think people need to do it to some degree, but it’s like talking about global warming, the word itself is almost too loaded to get beyond the stereotypes.
February 14, 2007 at 4:15 am
Jon
I’m a 23 year old trying-to-save type person who works a couple of jobs and I think more important than a “I Can Only Spend $17 On Nachos This Month” type of budget is for people to be aware of what they are spending their money on and how much they are spending.
I have a lot of friends that I work with or go to school that have no idea how much money they are spending every month on eating out, or on clothes. I think if you have no realistic idea of where your money is going, you’ll never have control of it. I always tell them to write down everything they buy for a week to get started and then let shock set it.
So more important than an envelope with $12 in it that you will only buy T-shirts with, I think it is important to track and understand your spending and make appropriate adjustments.
Not budgeting, exactly, just being smart about money.
February 14, 2007 at 8:08 am
mattblass
I totally agree Jon. For me, having an idea where you money is going is key. I’ve budgeted, but for me, that was absolutely no help. It was honestly a complete waste of my time. I tried it twice in my life for a year and then six months thinking that was the responsible way to do personal finances, but each time I realized it didn’t help me because I didn’t have any problems spending and saving responsibly.
I see budgets as a solution for persons with really bad spending habits. It does work for certain types of people, and yes the world would be better if everyone did it, but the reality is that most people won’t do it, so we need an alternative. The bare minimum is, the essence of setting up a budget, is understanding where you money is going, so yes, tracking is key, but I actually track only one number now because I’ve learned that the one number I track defines how well I’ve been spending and saving, so I plan some big things I’d like in the future, but when I track, I’m looking backwards instead of looking forwards like budgeting makes you do.
Plan forward, track backwards. That works for me, may not others.
February 14, 2007 at 3:46 pm
Jesse
“Plan forward, track backwards. That works for me, may not others.”
But that’s exactly what a budget is, or should be!
You take a look at your situation, you ask yourself what you want, what you value, what you need, and you plan how you’re going to get there.
You look backward to see how well you’ve done. It’s goal-setting w/ money. Granted, some people take it to a granularity that is (IMHO) a complete and utter waste of time, but taken in moderation, it’s extremely powerful to have a monthly (or whenever) time to sit down and see how you’re doing, where you were, where you’re going…
You’re right about the one number at the end of the day, but one number is almost too high, too grob, to be reachable by most. It needs to be broken down into, excuse the cliche, bite-sized pieces.
February 14, 2007 at 5:33 pm
mattblass
I like the bite-sized pieces idea, and that’s really how I think of the one number. It’s a single number that I can digest and chew in one bite. If it’s off, then I know I should look deeper (if I wasn’t already expecting it to be off for a good reason).
Technically, a budget is probably defined as plan forward, track backwards, but it’s more often used as plan and track forward. Track forward as having everything planned out already – $X for this, $Y or that, and 42 other things that have already been planned or estimated out (like christmas presents in Feb). Not really a bad thing, especially if a person has problems with that (and many do), but as you note, it’s the extreme planning that’s at issue, and that’s sadly how people learn to budget by planning and estimating ever possible little thing.
I don’t want to do that, and hence, I don’t budget (although technically I probably do budget to some extent). What I really want is a stream of my purchasing habits tracked over time, but only there for me to look back on, not to match up to some preplanned “forward tracking” budget. Deemphasize the money and smaller items for the big longer term goals. If I’m having problems hit those bigger goals, then maybe my smaller items are getting in the way, and more hardcore tracking/budgeting is called for. I haven’t myself needed that though.