3 Dangers of Conventional Budgeting
Share This
If you really want to save more than you earn, the conventional wisdom says you’re gonna need to start a budget. It’s only by seeing where your money goes and figuring out where you can cut back that you’ll be able to get your financial act together. But conventional budgeting is fraught with danger. Here are the three main things you should avoid.
Budgeting Danger # 1: Relentless Focus on Minor Expenses
Bring your lunch to work. Cut back on your lattes. Don’t order dessert. Rent videos from your library.
All of those over-hyped strategies are sure to cut expenses, but will they make a big difference? Will such small dollar changes enable someone currently living paycheck-to-paycheck to move comfortably beyond? Usually, it will not.
Lattes, video rentals, and the like are all real expenses that indisputably leave you with less money for everything else. And, if you cut out $3 of spending every day of every week of every month of every year for several decades, yes indeed—your savings will add up to a ton of money. Such are the benefits of the miracle of compounding interest.
But do those minor expenses represent your biggest opportunities to save? Unlikely. Spending an extra few dollars on lunch a couple of times a week or meeting a friend at a café every so often is probably not what keeps you in a financial hole or prevents you from achieving your financial goals.
The more likely culprits: the size, timing, and frequency of big-ticket expenses like your car and home. Focus your energies there. Can you delay the purchase of a new car for another few months—or even longer? Can you buy a used car instead? Can you buy a house that costs less than the one you’ve been told you can “afford”? Are you willing to do your homework to ensure that when you buy or refinance your home you save a quarter or half of a point on the interest rate you might otherwise pay? Such one-time decisions can have a far greater impact on your financial fitness than nailing the latte choice every day for decades.
Budgeting Danger # 2: Reduced Spontaneity and Flexibility
Are today’s budgeting tools too powerful? You can slice and dice your personal data every which way to Sunday with minimal effort. You can categorize everything. You can create budgets based on your actual historic data and then update the numbers constantly.
But should you?
Certainly not the last part. Not only because constant updating may indicate some sort of obsession, but also because it’s utterly unnecessary. Worse, it could negatively affect your life. Like all tools, you have to use it properly. Use the budgeting tool to increase the value of the life you live, not to decrease the cost to get through it.
Say there’s a week left in the month and while you still have $50 left in your dining category, you’ve spent all of the money in your entertainment account. Then a friend calls and asks you to go to a movie that you really want to see. If you tell your friend, “Sorry, I can’t afford to go to the movies tonight but I can take you to dinner,” you’re missing the point of budgeting.
Don’t let budgeting overtake your life. Don’t micromanage. As with a few baseball statistics, just because something can be measured doesn’t make it meaningful. Understand what’s truly important and ignore the rest.
Budgeting Danger # 3: Easy to Miss the Big Picture
Instead of budgeting your spending, budget your savings.
Start with a goal like “I want to save $X per month,” or “I am going to increase the amount I contribute to my 401k plan by Y%.” Keep this goal top of mind as you undertake any budgeting process. By doing so, you establish your specific budget parameters with your eye on the prize: your savings rate.
Yogi Berra said, “You’ve got to be careful if you don’t know where you’re going because you might not get there.” You can create and live within the most detailed budget in the world—and still live paycheck to paycheck. That’s neither a happy life nor one likely to lead to financial security.
On the other hand, if you’re saving 15% of your income, who cares how you’re spending the other 85%? Don’t lose sight of the big picture.
Michael B. Rubin is the author of Beyond Paycheck to Paycheck and the blog of the same name. He is the President of Total Candor, a financial planning education company.
Organize your financial life.
Use Mint.com to see where your money goes, get bill reminders and alerts, track your investment performance, and find extra savings. It’s FREE!
Find Out MoreHow Mint Can Help
See Where You Spend
Mint.com auto-categorizes all of your transactions so you’ll always know where your money goes. Find out more »
Popular Articles
10 Comments so far
leave a commentI’m not big on budgeting (or frugality for the most part) and I think your three warnings hit the nail on the head – you should enjoy life and look to expand your horizons. I think that budgeting too much might take away time from possibly learning how to increase your income – thereby offsetting the budget “cuts” you had to make. I also believe learning how to bring in an extra line of revenue is much more valuable than the time spent counting pennies.
This is a great blog! the information here is very insightful! I learned so much from this post!
Thank you!
So far for me, budgeting is the tool I use to avoid using credit for my everyday expenses. That’s because there is not enough money for everything ad something has to be left out.
This is more an income problem than a budgeting problem. But due to some circumstances on my life, budgeting allows me to live by.
Really liked the point about budgeting your savings. Focusing on the minutiae is tiresome and tedious. Focusing on the big picture seems the right way to go. It also feels like you are focusing on a positive rather than on what you can no longer have. Great post.
If you stick with the big picture and maintain focus on your goals, you won’t need to sweat the small stuff. Budgeting can be tedious. But after you have done all the tedious stuff to see how you spend your money, sit back and review the results to see how you have gone against your big picture goals.
The article is right and wrong in some ways. As long as you don’t “overspend” in the small expense area it’s fine to continue that way. However, if it is taking a large chunk out of your expense and you’re still pining away for that Ipod or new jacket you saw in the store, then maybe it’s time to rethink how you spend your money.
I absolute agree with the last paragraph on looking at the big picture. I have a set amount that I’m determined to put away every month BASE on the amount I’m comfortable in spending and an amount that’s reasonable. So far it has worked fabulously for me.
$3,000 of little items a year might seem like a small dip into your overall debt, but $3,000 on a $24,000/yr salary is all but insignificant.
These ‘tips’ seem to be to those with a large paycheck, and little debt. Those types most likely aren’t on Mint looking for tips to save.
I enjoy the mint budgeting tools, however two changes would really help my budgeting immensely:
1. The ability to create a budget before the month begins
2. A calendar feature where I can note the days that certain bills are due or create reminders for when they are due (ie. rent due the 1st, cable bill due the 15th, paycheck comes the 12th etc.)
I would enjoy these changes. I have a feeling others may benefit from them as well. I hope developers read this and take these suggestions into consideration.
I have been putting due dates directly into my Outlook calendar, which syncs to my iphone. If I put the due date a few days BEFORE it’s actually due, then I can make sure i pay online and on time. Calendar works for me.
Does Mint record pay transactions for years and that may be used in reports or IRS filings?
Regards;
PS I like the idea of running an accounting program on the net.
Super cool.