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).