Budgets are Bollocks

[Matt]

I’m starting to prep for my silly month of spending no money, and was going to ‘update my budget’.. however, full disclosure here, I don’t have one and I think they don’t work in the way most people rely on them.

I feel that budgets are analogous to a diet. In my opinion, diets don’t work (I don’t follow one of those either) as they are a veneer on bad habits. Unsurprisingly most diets seem to fail, and when they do the person tends to put on more weight in the process.

My approach to spending and saving is different. Firstly I take out as much money as I can from the inflows and assign that to deferred savings plans (401k, SEP IRAs, and a Roth if we can) stripping down our income gives us a ‘balance’. We then use that to pay our bills, and whatever is left over is left over. I have a strong debt aversion, so if we aren’t bringing in enough to cover lifestyle we will reduce outflows, unless there is a very specific reason and goal to consider debt such as a major purchase, quitting job to set up a new business, etc.

I’m not afraid to say ‘I can’t afford it’


I can’t afford a good steak dinner (you know, the ones with the Bone In ‘Cowboy’ Rib Eye, a bottle of good Napa Cab and some seafood appetizers). I’ve had many of these, but I’ve never done so on my own coin barring a one off at NYC Restaurant Week. My fix for this tends to be when a Casino comps me, or on a Cruise when it is a $20 upsell.

I can’t afford status. We travel a fair amount, but I can’t afford to pay my own money as a leisure traveler. I can’t afford to pay for hotel rooms or flights. That’s why i’m a big fan of points and miles.

More accurately, I’m pretty shameless


I do have some fancy touches in my life. I enjoy high end booze, the nicer clothes I wear tend to be decent, and I’m happy to spend when I think it is necessary. However, I don’t have an attitude where everything must be the finest. I think about 99% of my casual clothes come from a discount store like Marshalls, if its good enough I’ll use it. I’m a bit of a contradiction like that, I do splurge on things I want, but I don’t splurge all that often.

Macro vs Micro Budgeting


I guess you could say the difference between me and someone totally irresponsible with their money is that I have some ‘sort’ of budget. I do say that the first $18K of a paycheck must go to 401(k), and then I say we must pay our bills. But after than it become fuzzy. I think a great tool for making this work is to consider your saving goals as obligations. Rather than looking at what is left over each month and saving, just pull out X from the paycheck and spend what is left over.

In a ‘proper’ budget this would go on to break down for all things, bills, groceries, etc and have a bit of wiggle room at the end of it all for ‘discretionary spending’. Instead I pretty much have just three categories:

• Savings
• Bills (Tax, Insurance, Utilities)
• Discretionary

Because you can’t just say ‘ I have $100 for groceries this week’ when your heating bill doubles if you name everything. Instead, I pay my heating bill, and if I have only $30 left over I would be less inclined on some level to dine out or have other high expenses.

That’s a theory of course, because I don’t live that close to the wire in terms of spend. But that’s where the term ‘I can’t afford it’ kicks in. And if we can say that comfortably, we believe it. If we get a heating bill that is 3x what we expected this month, we are going to ‘think poor’ for a bit. We are also going to brainstorm ways to reduce the bill, exploring insulation, better heating systems, lower via ESCO and so on.

Tracking is critical


Despite not having a budget, I do recommend that people look at what they are spending and seek to optimize wherever they can. Indeed, I might recommend a budget for someone for a month to see how it makes them feel. IE we track in month 1, then we change habits in month 2. But ultimately, I wouldn’t say you live on one every month because it’s just too restrictive and miserable. The value of a budget and tracking would be to show a framework to someone, but it still requires internalizing.

Conclusion


It really comes down to being internally driven vs externally guided. Budgets are tools, but they are no replacement for learning, at a core level, your inflows and outflows. Personally, I don’t think the time it takes to set one up, or the rigor it takes to follow one, are worth the effort.

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[SanDiego1K]

However, there is merit in tracking when non regular charges hit. For example, we pay property tax in December and April. We pay estimated taxes quarterly. We pay car insurance twice a year. We pay liability insurance once a year. It's important to me to pay for all of these things from current cash flow. I might have a furniture purchase to make or a home renovation project on the horizon. That means in prior months, I need to be mindful that I have a significant charge upcoming. Cash in my checking account isn't for spending, it's being held in reserve for that bill.

 

[Andrew]

This is exactly how my wife and I approach things.

Savings (401K's,Roth's,HSA) come off the top, then bills, and finally "discretionary". This works extremely well for us. The only difficult part is when we reach the place where all tax-advanategd savings are maxed out, our bills are paid, and we have a new higher amount of "left over" for discretionary spending. At this point the conversation moves to whether to slightly increase our standard of living or funnel more money into investments or what combination of the two.

Also, I disagree that diets don't work or are analogous to the type of budget you are referring to at the beginning of your post. I think the issue stems from how you may be defining or perceiving a "diet".
Diets (and I don't mean the myriad of overly restrictive, specific food or food group demonizing crap that is so pervasive in our culture) are about proper constraint application (just as your preferred method of "budgeting" is) in order to build lasting habits. And habits are key for behavioral change. A diet, or rather "way of eating" which is successful (over the long-term) and sustainable is about understanding "at a core level, your inflows and your outflows [calorically speaking]"

I agree, tracking is critical, in both scenarios, at least for a period of time. Most individuals simply have no clue of how their inflows (intake) relate to their outflows (expenditure).

 

[Matt]

However, there is merit in tracking when non regular charges hit. For example, we pay property tax in December and April. We pay estimated taxes quarterly. We pay car insurance twice a year. We pay liability insurance once a year. It's important to me to pay for all of these things from current cash flow. I might have a furniture purchase to make or a home renovation project on the horizon. That means in prior months, I need to be mindful that I have a significant charge upcoming. Cash in my checking account isn't for spending, it's being held in reserve for that bill.

True, I do put bills up there as my number 2 priority (below Saving, before other stuff). But we 'know' when these bills come, so we also factor that in. For example, you know that your property tax bill, estimated tax, insurance etc are all going to be X+ 2~5% so you should have that covered.

I guess i'm saying its more of a fuzzy approach to it rather than saying each month 'this is my grocery money' 'this is my gym money'. It's all in there, but at the same time,it isn't so rigid, and you can use your ability to drop expenses downward to gain some wiggle room.

 

[Matt]

This is exactly how my wife and I approach things.

Savings (401K's,Roth's,HSA) come off the top, then bills, and finally "discretionary". This works extremely well for us. The only difficult part is when we reach the place where all tax-advanategd savings are maxed out, our bills are paid, and we have a new higher amount of "left over" for discretionary spending. At this point the conversation moves to whether to slightly increase our standard of living or funnel more money into investments or what combination of the two.

Also, I disagree that diets don't work or are analogous to the type of budget you are referring to at the beginning of your post. I think the issue stems from how you may be defining or perceiving a "diet".
Diets (and I don't mean the myriad of overly restrictive, specific food or food group demonizing crap that is so pervasive in our culture) are about proper constraint application (just as your preferred method of "budgeting" is) in order to build lasting habits. And habits are key for behavioral change. A diet, or rather "way of eating" which is successful (over the long-term) and sustainable is about understanding "at a core level, your inflows and your outflows [calorically speaking]"

I agree, tracking is critical, in both scenarios, at least for a period of time. Most individuals simply have no clue of how their inflows (intake) relate to their outflows (expenditure).

I'm defining a diet in the way most people do (which can be incorrect I agree) the ones that pop up every few months that enforce restrictions on you, vs the diets that consider the quality and quantity of your caloric intake.

With regard to too much money left over, that's a great place to be. I'd certainly look at building out the 'savings' pile and create a new 'debt burden'. I look at it like debt as I consider it really important to maintain the payments, even though failing to do so creates no penalties, unlike debt.

When I earned large bounty style payouts in the past I started thinking about flat acquisitions -eg I earn X I buy 4 bonds - even if they aren't exactly what my investment strategy might be. These days I'd be more savvy and allocate it into areas where I want to focus. Personally, my saving goals are very much focused on retirement accounts right now, with the next play being investment property when I have time to really examine it. So if there was too much money coming in I might set an aggressive goal that kept me lean in terms of saving for a downpayment on that property.

My personality is that if I don't feel poor I slack off, so I would rather take it off the top.

 

[Andrew]

I'm defining a diet in the way most people do (which can be incorrect I agree) the ones that pop up every few months that enforce restrictions on you, vs the diets that consider the quality and quantity of your caloric intake.

With regard to too much money left over, that's a great place to be. I'd certainly look at building out the 'savings' pile and create a new 'debt burden'. I look at it like debt as I consider it really important to maintain the payments, even though failing to do so creates no penalties, unlike debt.

When I earned large bounty style payouts in the past I started thinking about flat acquisitions -eg I earn X I buy 4 bonds - even if they aren't exactly what my investment strategy might be. These days I'd be more savvy and allocate it into areas where I want to focus. Personally, my saving goals are very much focused on retirement accounts right now, with the next play being investment property when I have time to really examine it. So if there was too much money coming in I might set an aggressive goal that kept me lean in terms of saving for a downpayment on that property.

My personality is that if I don't feel poor I slack off, so I would rather take it off the top.

Makes sense to use that definition for the purpose of this article, as it truly is analogous to the type of budgeting you advising against, and really (unfortunately) is the way most people interpret the word diet.

I am similar, the moment I feel "comfortable" I slack off and start a gradual creep away from where I want to be. Its important for me to force myself to stay just a bit "hungry" even when I am in a very good place. This is true for every area of my life.

 

[Annie H.]

I enjoyed your point of view but I have a bunch of caveats especially for those in their 20s that don't have all the experience that an old guy like you has. Secondly, you're in the financial profession and you have a better grip and understanding (and education) than the average person. Third, you acknowledge you "don't live that close to the wire"-- well, at your age you shouldn't but lots of folks that do can't afford to follow your advice.

I agree with your priorities especially retirement accounts (mantra is ALWAYS pay yourself first) but the fuzzy part could use some work. One of the most important things a budget can do in the beginning is that OMG or aha moment and you can't get that information in just one month-- it takes 3-6 months of tracking. It's mundane stuff you read everywhere like (perhaps you think everyone here is more sophisticated?) OMG I spend $100 a month on lattes or $150 on lunch or $900 eating dinner out or $400 on porn websites or at bars, etc. You need to track that for a bit and figure it out. For folks like you and me with a background in finance it may be second nature but to lots of folks it's not. They need to track-- cellphone, telephone, heat-winter and summer, etc. Then you need to be absolutely clear what's in Cat 2-- must do, and Cat 3- discretionary and I'd propose a 4th, expressed in a percentage-- "fun" --a target-- no matter what I want to spend 4% on -- you name it--gambling, individual stocks, lap dances, e-books-- I might even put this before Cat 3-- strange, I know. You'd be surprised at what you and I consider discretionary that others consider Cat 2. I did this for a living for a number of years and continued to be astonished until the end.

I was astonished at the number of folks who spent loads of time tracking their expenses, via Quicken but then did nothing with the data. Some never prepared a budget to begin with, some never compared their monthly spending to the budget--WTF? The act of tracking makes folks feel as though they are following a budget and if there's any slack they get away with inadvertent things. When working in this field with individuals I was *astonished* at how many folks would sock away 1/6 of their property tax payment in their checking account but not reflect it in the balance-- hide money from themselves. Astonished at how many folks never balances their checkbooks. Astonished-- still today-- how many folks have their CCs on auto pay and NEVER look at their actual bills.

There's a whole 'nother subset of folks out there who can discuss Quarks or have other expertise in stuff you can't do (maybe you can?) butcher hogs, write cookbooks, counsel developmentally disabled, etc. It took me a long, long time to realize that financial acumen is a skill and talent and not everyone can just "do" it.

 

[Matt]

Good points @Annie H. i'll give them some more thought.

 

[Annie H.]

Good points @Annie H. i'll give them some more thought.

Take yer time, I know it takes longer when you're older.

 

[Matt]

Take yer time, I know it takes longer when you're older.

Takes longer when I'm spending most of my time bickering

Now I'm trying to figure out how to squeeze in 300 hrs of study between now and March for the CFP exam. I decided making it 200 helped... when I'm through with that i'll think some more..

 

[Annie H.]

Takes longer when I'm spending most of my time bickering

I've seen, I feel your Pain... arghhh, bad joke. I thought you were bicker monitoring. Much higher calling!

 

[TheBOSman]

There's a whole 'nother subset of folks out there who can discuss Quarks

Shall I start a thread? Hopefully we can get a few string theorists to join as well .

 

[Annie H.]

Shall I start a thread? Hopefully we can get a few string theorists to join as well .

Wow-- would ya? I'd be forever grateful. My SO is one of these folks, could it be a path to him embracing MS? How 'bout the "Black Hole" thread -MS with no return.

 

[Haley]

I may or may not have posted one of my SO's photographs to 'bait' him to at least look at these boards. He can call in on an application if I need him to (although my son does better, easier to coach).

He would probably participate in a Black Hole or String Theory thread, although what he really would love is a Turing thread.

 

[Annie H.]

I may or may not have posted one of my SO's photographs to 'bait' him to at least look at these boards. He can call in on an application if I need him to (although my son does better, easier to coach).

He would probably participate in a Black Hole or String Theory thread, although what he really would love is a Turing thread.

MS Women and their fascinating partners-- now there's a thread. Women who MS and attract fasincating partners? ooops-- I'm not on the WoS sub-forum.

 

[MJonTravel]

In general, I've come a long way on budgeting to the point that I'm much more like Matt. I keep things down to a few categories - Retirement, cash savings, the mortgage, the other bills (utilities, interweb), what I call "flex money" and medical. I am blessed with very good health care coverage, but being a type 1 diabetic, any out of pocket medical costs are a key data point for me...so it is something I am keen to track. Otherwise, I've found myself to be happier and more well-adjusted since I stopped tracking 40 different categories of various expenses.

 

[Andres]

Annie has very good points. When you start out working, you are lost. I didn't know what I could afford with 50k starting out. Could I afford a new car? Luckily for me, I didn't need a car badly and took me 8 months to buy it. By that time, I was more aware of what my costs where, how much I had left each month, etc.

A budget is a nice tool. You just need to avoid becoming a slave to it. And wanting to track everything. I just set up a simple budget in Mint. I barely check it, but when I do, it is as simple as looking at the categories that are marked RED. If none are, you are good.

But more important than a budget is to keep track of all your transactions. It comes handy in lots of situations (taxes for example).

 

[SanDiego1K]

When I was young and poor, I made up a spreadsheet by month for all the major categories of spend. I've spoken earlier in the thread about the expenses that occur once or twice during the year. I plugged those in so that I knew how much short spend I needed to do in prior months in order to meet those obligations. Then there was discretionary spend, such as the first time we purchased new furniture for a room in our home. Prior to that, we had early marriage furniture, donations, ads, and so forth. We didn't buy furniture til we had cash to pay for it. I had a master plan as to which month I expected that to be. Slowly, we bought our couch, chairs, tables, and lamps. I never actually held my spending by category to that target, but I did keep my total spending within my current cash flow. In parallel, I kept an annual assessment of our net worth. We maxed our our company retirement savings and 401ks when those became available. At the end of each year I looked at how we were doing compared to the prior year. I track this to this day. I look back and what I did re net worth was very raw and unsophisticated, but at least I was thinking about these issues.

I no longer keep an annual spreadsheet as I know intuitively where we are. Life is a lot more flexible than it was in my early 20s. But every year I do set a goal for our charitable giving and track that. I keep a spreadsheet and state the goal on it. I don't worry about being even month to month, I just know where I want to be at yearend. There are some needs that come up across the year that touch my heart. These will be in excess of our core charitable giving. This is a great place for me to get my minimum spend on a new credit card.

I journal a number of recurring expenses, such as water, gas, electric, and trash. About once a year, I look at our usage compared to the prior year. Has our drought resistant landscaping actually paid off with reduced water usage? No, we don't spend enough on electricity to install solar panels.

I keep an annual tax file. I've got donations, quarterly taxes, property taxes, and vehicle taxes all on spread sheets. I have a box that I fill with the backup information any day I pay such an expense. At yearend, all I need to do is wait for tax forms to arrive and then I have everything I need for our accountant to do our annual filing.