A Budget Is Not The Answer

This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any.  Dave is from Ontario and is working towards his CGA certification.

To some people, there is a reverence paid to budgets that I don’t really think is overly deserved.  I was talking to my sister on the weekend, and she thought that a budget will solve all her problems.  She said that all she needed to do was have a good budget and she would be in good shape.  I politely disagreed around the importance of having a budget and explained to her that it wouldn’t necessarily help her financially because she doesn’t really have anything to budget for and doesn’t really have an end goal she is shooting for.

I explained to her that I didn’t really use a budget per se, I just pay all my bills put money into savings and spend the rest how I want.  My “wants” are generally a lot less than most people, which may be the reason this system works for me.  I also find that I don’t do well with the structure that a strict budget would impose on my spending.

The difference between me (I think) and most people who have no interest in their personal finances is that I have goals that I am hoping to achieve, which provides some direction and incentive for my personal finances.  I have short-term goals, such as saving up enough money to feed my golfing habit for the summer, mid-range goals for things such as a vacation, and longer-term goals of paying off my mortgage.

Without these set goals, I would probably spend a lot more money than I already do on things I don’t need and I would lose all incentive for maintaining my financial plan.  I think that this is the main problem that people without a financial plan have – without some kind of defined future goal, there is no reason to follow the carefully crafted budget that was designed to make them financially stable.  Once the budget is abandoned, all sorts of things happen, mainly by the end of the month there is less money in the bank than bills in the mailbox – creating a situation that requires (usually) debt.

In the end, I explained to my sister that she should think about what she wanted financially – does she want a car?  A nice apartment?  A down payment for a house, or some other financial goal.  Having a light at the end of the tunnel would allow her to maintain focus on her spending plan, which I see as a major stumbling block with most people’s budgeting aspirations.

Do you have short-range, mid-range or long-range financial plans?  How do you maintain your focus on the plan you have set up?

10 thoughts on “A Budget Is Not The Answer”

  1. Sounds like semantics to me. Budget = financial planning = pursuing goals. If I budget money for golf, saving, mortgage payments, food, vacation, etc., I am just being specific about where I put my “goal” money.

    A budget may not be line-by-line, but it surely is a big part of goal planning (as in the goal to have enough $ to feed the family).

  2. The key part of your post is this sentence:

    “My ‘wants’ are generally a lot less than most people, which may be the reason this system works for me.”

    My ‘wants’ are a lot less than those of other people, too. I don’t have a structured budget I stick to, either. I don’t decide ‘not’ to do something because its cost will exceed some monetary limit I have established. If I want to go out to eat, I do it. I don’t go out to eat often, but if I want to go out twice in a month, then I do so. Last year, I needed to buy three PC parts/upgrades in one month. I did not have any preset budgeted amount. I needed to buy those items so I did.

    What I have done is to build in a cushion, or surplus, into my informal short-term budget to allow for any small expenses from month to month so my cash flow is not disrupted. If those expenses don’t occur, then I can either reinvest the surplus or roll it into the next month.

    The one time I set up a long-range budget was when I was figuring out if I could leave my job and retire in 2008. There, I took my current budget and modified it to remove work-related expenses (i.e. commutation, extra taxes) and include additional expenses I would incur in retirement (i.e. health insurance), comparing it to my estimated income stream.

  3. I used to think exactly as you do about budgets. It got me deep into debt.
    Now I sit down for less than an hour at the end of a month to write down my spending plan for the upcoming one, and it’s what I always tell others to do too.
    I think your advice to your sister was very good. How could writing down the amount of money she earns, then the expenses she believes she will incur in the month possibly NOT help her?
    Even if she has absolutely NO goals or plans right now at all, maybe seeing that there should/could be an amount left over at the end of the month will prompt her to develop some!

  4. There are two kinds of budgeting:
    1) Detailing income and expenses so you make plans.
    2) Sticking to a plan.

    If you try to do #2 without having gone through #1, then success will be accidental. If you do #1 first, then you can opt out of #2 because you know the budget is sufficient.

  5. At the beginning of each your my husband sets a budget for the year. He reviewes last year’s budget/expenses and forecasts the coming year’s expenses, predicting things we will need like a new roof next year, health insurance costs will increase (we live in the US), one international trip each year, etc. We track our expenses monthly and do a monthly spread sheet to see that our expenses fall into our budget. Sometimes we are a little under, sometimes over but it usually comes pretty close.

    We have a weekly “meeting” on Saturday to review our budget as well as our investments. We also discuss things we need to do around the house (job jar) and things we are scheduled to do socially.

    Our three-legged stool – budgeting, forecasting and good investing has led to our financial independence. He retired at 52 and I am retiring in June.

  6. I can see both sides to the argument. I am very much like you and have minimalistic tastes. I also don’t have children; therefore, I am able to save a large percentage of my income fairly easily because I just don’t spend much on luxuries. Many people who only view money as a way to get consumer goods instead of a tool to financial freedom do not think the same way and a budget can be essential to keeping them on the right path.

  7. I’m with Banjo Steve above on this Dave.

    Perhaps all your sister needs is to see where the money is coming in and where it is going out. As long her income meets or exceeds her expenses and she has line items for savings and debt repayment included in her budget – I’m sure we would both agree she’s fine financially.

    That said, a tangible financial goal can be the carrot some people need to use a budget.

    S

  8. Dave, I could not agree with you more… I retired at 40 and we have never really made or lived on a budget. We would create forecasting spreadsheets that would indicate, upcoming expenses, savings rates, etc, to determine where we will be X number of months down the road as well as ones that determined monthly income required in retirement, but never “lived on a budget” (this much $ for food… this much $ for clothing… this much for $ eating out…. this much $for entertainment… etc.. ). It was our desire to accomplish our goals that motivated us to not waste money on things we didn’t need… Goals and purpose are what keeps people focused and on track with their savings and/or debt reduction. You have to WANT to save the money not just save it out of duty. Do I want that new leather couch or that Mexican vacation more that I want to see my mortgage principal reduced by another $1000, $2000, or $3000? sometimes the answer is “yes I do” but having those goals in mind forces you to at least ask yourself the question. If you don’t have the goals you are shooting for you will be WAY more likely to just spend it.

  9. A budget is a very important tool for many people. It alone will not resolve your issues, but what it will do is help make you better aware of them. And further, for those who are unlike you (I would argue the majority of people), it is an excellent aid to keeping people on track.

    I myself am much like you. I dislike spending, but it is a fact of life. I use a budget to help myself plan cashflow and investment strategies. I tend to do a lot of house buying, selling and renting, so cashflow is an extremely important thing for me to be aware of, and to keep under control.

    e.g. If I know that I will have vacancies coming up, it will be my budget that I will early on to help get me through these times of tight cashflow, and to help me get back on track once my rentals become occupied again.

  10. I do a budget once a year, to plan out my income vs. spending vs. savings for the year, but once I have that outlined, I do not track every penny that goes in or out. I have automated bill payment and savings, and don’t spend very much on non-necessities, so there is always a cushion in my accounts.

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