BeforeYourNext Birthday-DeniseFisher’s Blog

Get fit, get organized, & get your financial affairs in order

Don’t Bother with a Budget

Posted by denisefisher on January 23, 2009

Almost every book I’ve ever read about personal finance starts with this advice: “create a budget to track what you spend on a monthly basis.” That’s usually followed by some sort of list or chart that gives an itemized schedule of expense categories with lines next to them, where you are supposed to fill in the amount of money you spend. They usually look something like this:

 

 

 

Mortgage/rent

 

 

 

Utilities (water, electric, gas, phone, cable, internet)

 

 

 

 

Groceries

 

 

Eating out

 

 

Car payment

 

 

Insurance

 

 

Gas

 

 

Clothing

 

 

Entertainment

 

 

 

 

 

Books/magazines/newspaper

 

 

 

 

Who comes up with these things?

 

I can’t imagine that anyone has ever used them – certainly not the people who’ve drawn these up. Do these categories cover the entire range of expenditures? Determining the appropriate category for individual expenses is confounding enough. Let me point out a few common expenses that don’t seem to fit into a category on most budget lists:

 

Credit card payments

Pet food

Housewares

Service contracts

Membership fees

Tuition

Office supplies

Garage sale purchases

School fundraising sales

Computer software/premium online services

 

On the other end of the spectrum are crazy budget forms which break out mortgage payments into categories of insurance, interest, principle, and taxes. Does this suppose that the typical homeowner will be able to adjust the amount of principal, interest, tax, and insurance that comprise their house payments?

 

There are some budgeting programs and online financial services that attempt to categorize debit and credit card purchases. Most of them allow users to re-categorize expenses with their own labels. These systems seem to be an improvement in simplicity and flexibility, for purposes of tracking spending. But it still neglects another problem.

 

How do you categorize a purchase from Wal-mart that includes groceries, a prescription, a box of envelopes, a DVD, and a bag of grass seed? Will budget trackers actually split up the categories of expenses from a multi-category purchase? And what about the associated sales tax on these items? Even if the issues of categorizing expenses were resolved, there’s still a huge problem with this whole “budget” concept.

 

These so-called “budgets” are nothing more than a spending ledger – an expanded version of the checkbook register. Most of the expenses are treated as fixed costs. Only a few of the categories are even considered as discretionary spending. Are cable TV and cell phone packages with unlimited texting actually utilities? If the money being spent on these budget items is only tracked after it’s spent, is there really any “budgeting” going on? What is driving the bottom line? The money spent after the fact or a planned purchasing limit (the more conventional meaning of the term “budget”)?

 

From what I can see, the only purpose of these so-called budgets seems to be showing how much has been spent each month (apparently for purposes of comparison with one’s monthly income). The idea being this: if you spend less than you bring in, you can save or invest your remaining money; if you spend more than you bring in, you need to adjust your discretionary spending.

 

Do you really need one of these budget forms to tell you that? If you pay your bills each month (including whatever balance that’s accrued for the month on your credit card) and you have money left in your checking and savings account, you can come to the same conclusion without the futilely laborious budget exercise.

 

When a person realizes they’ve put on too much weight and needs to lose a few pounds, it’s not all that helpful to determine in exact detail where all those extra calories came from. What’s more important is to change the undesirable behavior to habits that are healthier and more beneficial.

 

That same kind of focus is what’s needed to change one’s spending and savings habits. The details of such a plan are a topic for another day. For now, just realize that you can probably skip the detailed budget exercise with no ill effects to your finances.

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