I Don’t Budget—Here’s Why

If you like budgets, you don’t need to read more. If you have never tried a budget, then give one a try because experience is the best teacher.

This article is meant for people who have tried budgets, realize they have faults, and are confused why financial people keep yelling at everyone to budget.

I think everyone is told to budget for reasons you’d find in a textbook. A budget shows how expenses trade off and how certain expenses, like housing and taxes, are disproportionately important. The theory is that a budget can help you plan and keep you on top of things. But let’s not confuse theory with practice.

A budget is not realistic. My opinion is unpopular but not singular. I found similar opinions at popular sites fivecentnickel and GetRichSlowly. These authors primarily bemoan that budgets are time-consuming and mentally demanding.

I am more critical. I would like to question the point of an individual budget.

Budgets Don’t Work

Here’s the dirty little secret of budgets: most of them fail spectacularly. Even people who regularly use budgets will admit they:

often fail for seasonal or sporadic spending (ex. gifts, vacations)
often fail for irregular earnings (how much will my bonus be?)
cannot account for emergencies—disability, accidents, market crashes
require discipline

With all these problems, can you still say that budgets work?

Budgets Can’t Help You Predict

With a budget, you need to predict earning and spending for a month in advance. Randomness makes this an annoying, and occasionally, an impossible task.

An example: you budget $200 for a heating bill–$50 more than last year’s—but an unusually cold winter combined with high gas prices make your bill more than $300. How can you budget for that?

You can’t. The numbers you plan for are highly suspect because a budget can’t help you predict.

I suspect that people who budget either frequently modify them or force their spending into predictable patterns. These workarounds suggest a larger problem.

Budgets are a fundamental misunderstanding of the randomness in life.

There is at Least One Alternative

I don’t budget. I’m not going to say my way is the right way, or the only way. But it works for me. If you know of a better way, I would be happy to investigate it.

Here’s my system: I aim to lower controllable expenses (typically the goal of budgeting) while creating a large cushion for unpredictable fluctuations (the things that ruin budgets).

Here is a summary of my money system:

Build good spending habits by aggressively cutting wasteful expenses
Stash money for emergencies
Save for planned goals like a new computer, a house, etc.
Create a “cushion” to cover unexpected spending
Set aside fixed savings

My system isn’t as precise as “write down your category spending,” but I think it is more realistic. I know that I will blow my saving goals some months. If I take a trip to my friend in another state, I’m going to try to enjoy the time instead of keeping to an artificial budget.

Who knows what fun opportunities might arise?

I can’t predict, so I don’t budget.

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22 Responses to “I Don’t Budget—Here’s Why”
It sounds like you don’t have a budget for spending, but rather a budget for saving. Much more practical approach.

By Monica O'Brien on Apr 17, 2008
Monica O’Brien: Thank you, and I can see you understood my point

Just a small clarification though: I don’t like say the savings are a budget(detailed category projection) but rather a plan (a general roadmap). I agree the words are interchangeable casually, but I think a financial budget suggests a more detailed plan.

By Presh Talwalkar on Apr 17, 2008
I think that there is a lot of truth in this. I do something similar–I keep track of every dollar I spend on a spreadsheet (except for the last few weeks, when I’ve gotten out of the loop) and this has forced me to really ask myself whether I need to buy something or not, even recently when I’ve gotten out of the habit of tracking everything.

I think it’s a good idea to keep track of how much you’ll need to spend on rent etc., 401k savings, and other fixed expenses and then figure out how much you’ll have left over per week to spend on groceries, going out, etc. This gives you an idea of how much of a cushion you have for other things.

By John on Apr 17, 2008
John: I’m glad you brought this topic up, since I too am a big fan of tracking money. It makes you immensely more conscious of spending and does give a rough idea of category spending (though I find this fluctuates a lot).

I have discussed tracking money many times, like this article:

http://mindyourdecisions.com/blog/2007/12/31/start-2008-with-saving-advice-from-the-richest-american/

I offer a free and simple spreadsheet for everyone to get started:

http://mindyourdecisions.com/blog/excel/The_2008_Simple_Expense_Tracker.xls

By Presh Talwalkar on Apr 17, 2008
Oddly enough, while I’m doing what John is: Using Presh’s spreadsheet to track my expenses…it kind of has the opposite effect. When I go a few days without lets say, eating out, I feel more justified in doing so.

By RohoMech on Apr 18, 2008
RohoMech: Haha. I guess the point is to be more conscious of what you’re doing–there is such a thing as saving too much, so I’m guessing that’s what you’re doing.

By Presh Talwalkar on Apr 18, 2008
You are so on-target. I get so sick of financial gurus and their complex budget systems.

You say, “These workarounds suggest a larger problem.” I wrote a post responding to frustration about people wanting get rich quick schemes to work and having no financial clue.

I also think if people are struggling repeatedly with money, they do need help, not with a budget, but from a doctor.

By Milena on Apr 22, 2008
Milena: Thanks for sharing your article. You make a lot of interesting points, and I agree that people blame too many problems on money. There are usually other mental factors as you point out.

By Presh Talwalkar on Apr 22, 2008
I agree for the most part that trying to predict spending with a budget is inaccurate and frustrating.

However…

I think there’s definitely room for learning to budget at the beginning of a “money transformation” in many people’s lives.

Not everyone is starting out debt-free or with the kind of fiscal discipline you obviously have, Presh. (I commend you for that, I’m just saying that not everyone can be (or learned to be) as disciplined as you.)

Budgeting in hindsight (tabulating your spending for a month AFTER you’ve spent it) can be a great tool for finding leaks in spending and areas where you can save money. It can also be a tremendous “eye-opener” for people who are unaware of just how much money they’re wasting every month.

By Pete Wann on Jun 17, 2008
Pete Wann: I appreciate your comment as it allows us to deeper explore the issue. I largely agree with you, but I want to clarify a bit.

1. I agree people should try budgets–in fact, that’s the second sentence of the article. But I see budgets more as an exercise in learning, like learning how to multiply by long-hand. Once you get the point, you move on to better solutions.

2. You also bring up that discipline is the root problem. Budgets do not solve this–they in fact mask the problem like a medicine for chronic lifestyle illnesses that treats symptoms and has side-effects. Life is too random to try and budget. Financial advisers should instead focus all their attention on trying to fix the root problem, which is inappropriate spending patterns. One solution is “budgeting in hindsight,” which I agree with.

3. In my definition, a budget is a list of planned expenses and that’s why I scoff at them. What you call budgeting in hindsight, I call tracking expenses. I am with you 100 percent that this is an appropriate tool. I have even made a free spreadsheet (can you believe people charge you for this?) so everyone can track expenses. Find it here:

http://mindyourdecisions.com/blog/financial-tools/

I also believe that everyone’s goal is to get people to live within their means. I just think financial advisers are misguided in claiming that budgets solve the problem.

By Presh Talwalkar on Jun 17, 2008
When I was a bachelor, a household financial system like the one you outlined worked very well for me. As other happily married men I know will attest, I can say that a detailed budget is essential. Honesty and trust are necessary, but not sufficient. Here’s why:

Economically speaking, the situation changes when a household has more than one decision maker. Households of more than one person need a budget for two of the same reasons that businesses do:

1) More than one person has the authority to spend the money. Like sharing a good dessert, this situation actually creates an incentive for each person to spend it before its gone. This makes the freedom to spend impulsively much less efficient than in a single-person household (ie. you might prefer to savor your own dessert slowly or save some for later). An agreed budget can short-circuit this problem by establishing agreed limits and controls.

2) Not everyone has the same vision of how to best spend money. A budget reduces material things to the lowest common denominator–cash–so that each person can buy the things they want most. One wants a nicer car while the other wants to travel home to visit family? No problem. A budget can help a couple work that out and keep things fair.

Money can only buy “stuff,” so a budget is thus a limited tool. But for several couples I know, having a budget optimizes spending, enables saving for goals while taking much of the surprise, emotion and frustration out of money matters.

By Erik on Jul 6, 2008
Erik: Thanks for sharing your detailed response. I don’t doubt budgets work for people, and I like your reasoning that a budget can help coordinate.

My problem is that budgets are the wrong end-goal. In a family, there are in fact more random events so sticking to a budget is even harder. The real reason people want a budget is because they overspend. It’s not because it’s actually a good idea to plan out spending in categories.

I liken a budget to a portion-controlled diet. Now some dieters can do well by counting calories and planning things out. But it’s a slow torture to eat half of a piece of fried chicken and control desires constantly. Doctors should recognize this and instead advise healthy all-you-can eat diets rather than blame a patient for not having discipline. Similarly, financial advisers should advise sustainable spending desires rather than focus on budgets.

An example: I know many first-generation families in America that don’t budget and save plenty. They always live below their means and always have enough for emergencies. (And they are very happy).

But I keep an open mind and I’m going to investigate couples and money in more depth. Thanks again for sharing your insight.

By Presh Talwalkar on Jul 7, 2008
Interesting article. The managers are work really need to see this article, and put in a place that they can see it. Maybe it should be stapled to their foreheads. With a nailgun.

I use finance software myself, but don’t prepare a budget. Like the weather, the best predictor for what will happen tomorrow is what happened today … and we all know how unpredictable that is.

To some extent, perhaps we should view the desire for budgeting as some sort of mental malady requiring treatment, rather than a smart business practise requiring adoption.

By Mark Carter on Jan 1, 2009
Glad you agree with my general idea about budgets…though I would like to make one distinction. I think individual budgets do not make much sense, but business budgets are something of a necessarily evil. Business budgets are a way of allocating money among competing departments and a coordination tool–without a budget, it would be hard to plan what to do. These problems don’t affect individuals as much (though perhaps they do for married couples)…

By Presh Talwalkar on Jan 5, 2009
are you a trust fund baby? This is the most inane BS I have ever heard…

By K on Jan 8, 2009
K: I encourage critics of my views and I like to understand where they are coming from. Could you provide specific reasons for your view? I am not alone as there are other financial experts that are skeptical of budgets (Suze Orman and David Bach).

Also, please explain what financial system you use so we can compare the relative benefits. I am open to improvement.

By Presh Talwalkar on Jan 8, 2009
Hi, I ran across this article after talking to a friend who’s single like me and we both work for ourselves. Trying to keep a budget working for myself has been HILARIOUS. It just doesn’t work. Some months I may need equipment, other months no equipment. One month I may need to do more business meals with clients, another one not as much. Subscription fees, renewals, fluctuating heat bills based on whether I’m home or not; all this makes a budget impossible.

I use Quicken (have for years) to track my expenses, a requirement for running my business. I agree that looking at expenses from the previous month is the BEST way to plan ahead or try to at least reduce a category. If I know I spend $300 in eating out, I may work to cut some of that the following month.

One of your points hit home: rethinking how I spend; changing the behavior. That’s the underlying problem. A budget won’t fix that. If I cut waste, I’ll be ahead of the game.

My friend mentioned at the outset doesn’t track or budget, he simply has a set amount he SAVES each month, so when work is out he has that money to live on. I’m going to focus my thinking in that direction vs. trying to budget each category. After years of trying, it just DOES NOT work for ME.

Thank you!

By Wilson on Sep 12, 2009