You probably weren’t expecting to hear Frugal Dad advocating getting rid of a budget. Well, I’m not, entirely. What I am advocating is that you take a look at your monthly budget with a critical eye to determine if your budgeting process is negatively effecting your life.
Yes, budgets can set you up to succeed, or set you up to fail. Make them too strict, and you’ll never stay within a spending category’s limits. Have too many budget categories, and you’ll spend too much life energy hunting and recording receipts. Like everything in life, try to find some balance when setting up your budget, but err on the side of simplicity. Here are a few reasons why.
1. Strict budgets are as successful as strict diets, they aren’t. Ever tried to lose weight by drastically cutting calories or eliminating all foods you enjoy from your diet? Let me guess – you lost weight the first two weeks, had a slice of cake at a party, and derailed your entire progress.
Humans just don’t like big changes. We are more successful over a longer period of time when we implement small changes that continue to put us on the path towards reaching a larger goal. Like the old saying goes, you have to eat an elephant in small bites. But hold the butter, or you’ll have to go right back on that diet!
2. Strict budgets create money micro-managers. A couple years ago we took the kids to the Smoky Mountains, their first trip to see a hill over 300 feet high. My wife and I were enjoying the vistas along the Blue Ridge Parkway, but noticed our kids had their heads buried in a book, or their Nintendo DS, and were missing the scenic views. I spent a great deal of the time reminding the kids to look up at the overlooks. Sometimes they did, most times they didn’t.
That’s how adults who are consumed by managing their money appear. Our heads are buried in spreadsheets, or Quicken, and we forget to stop and look up at the overlooks. Pretty soon, we were off the Parkway and realize we missed an opportunity to see the sights; to stop and smell the roses.
3. Budgeting is boring. I confess; I just don’t like budgeting. I don’t like creating them or updating them. I realize they are necessary for proper money management, so I create one each month. However, I make it as simple and painless as possible. I haven’t always been this way.
When I was younger I had dozens of budget categories. Instead of a simple “Food” category, I had a category for meals out, snacks from the vending machine, groceries, etc. I meticulously tracked debit card (and at the time, credit card) purchases, and receipts to be sure I put the expenditure in the correct category. Oddly enough, this was also the time when I accumulated the most debt. In my attempt to be sophisticated, I failed to recognize and adhere to one of the simplest personal finance principles around: spend less than you earn.
4. Strict budgets limit opportunities. By opportunities, I mean opportunities to experience something or save money by buying something at a deep discount. How many times have you passed on something you’d really like to do, or really like to own, because it “wasn’t in the budget.”
It is almost as if the budget is controlling us, rather than the other way around. Then again, for the most impulsive shopper, that’s probably how it should be. But for those who have displayed discipline with their finances, a strict budget feels more like a tight-fitting jacket than a useful tool. It restricts us, and keeps us boxed in from the chance to live a little.
5. Budgets cause money fights in relationships. I saved the best for last. My wife and I don’t see eye to eye on the concept of budgeting. She is the free spender, and I’m the nerd, at least when it comes to finances (though she would probably say the nerd label extends further!). Early in our relationship I tried to force my elaborate budget system on her. It didn’t work. For a period we scrapped the idea of budgeting altogether.
These days, we have compromised and met in the middle when it comes to budget categories. Instead of including infinite layers of budget granularity, we now separate our money into larger piles of logically separated categories. Here’s a sampling from our monthly budget (I’m leaving out the amounts because I don’t want to get hung up on the numbers):
- Mortgage
- Utilities
- Food
- Auto
- Household Supplies
- Savings
- Debt Repayment
- Insurance
- Clothing
- Medical
- Entertainment
Our goal was to keep the budget at ten categories or less, but we did add one for entertainment. It’s hard to think of an expense that doesn’t broadly fit into one of the categories. Last month, we thought we ran into one such example: birthday presents for kids’ friends. We decided to just take it from “Entertainment” for now, rather than create a new category for infrequent purchases (although I made the argument that friends’ birthdays seemed to happen at least once a month!).
Another way to combat budget fatigue is to create a number of sinking funds for irregular expenses. We’ve done this in our household. Notice in the budget above I’ve simply listed “Savings” as a top-level category. That represents a single transfer to our ING Savings account, but from there the money is split into several “buckets,” or sinking funds.
We have a sinking fund established for things like the annual renewal of our car tag, the semi-annual payment of our auto insurance, Christmas shopping, vacations, and a couple others. When these expenses come up, we transfer the money from the sinking fund and write a check. No impact on the monthly budget.
I have written this post with sort of a negative spin on budgeting. I hope that’s not what you will take away. Rather, I’d like for you to take away the idea that by making your budget too complex you are setting yourself up for failure. I urge you to consider consolidating categories, or setting up sinking funds, or allowing yourself more “fun” categories so that you can enjoy life. And please, remember to look up at the overlooks!
