Are Budgets BS? The Experts Weigh In
The first time I made a budget, I was working in Development for a small non-profit, and I quickly learned that budgets, in our context at least, were a game, a necessary fiction. Our spreadsheets represented what we hoped our outcomes would be, not what we could expect based on experience.
They were mathematical expressions of untethered optimism, delusion made authoritative by being rendered in black and white.
And I objected. I wanted numbers to mean something: to be memoir, not fairy tale. A budget should strive to be as accurate as an audit. Since in practice they so often aren’t, though, one has to ask, Are budgets bullshit? And if so, how should we manage our money?
My colleagues have varying degrees of allegiance to budgets. Nicole, for example, can seemingly account for her money down to the dollar. Here’s how she recently explained her stance to me:
Budgeting from the front end, as in “I will only spend $300 on food this month,” has never been super useful for me. Life happens, and sometimes you need groceries. Budgeting from the back end, in the “pay yourself first” method, has changed the way I interact with my finances.
Right now I put 20 percent of my income towards taxes, 20 percent towards debt, and 10 percent towards savings, and at the end of the month I actually have savings, instead of spending all that money on other stuff. I know that this system only works if you have excess money in the first place—like, if I had to choose between groceries and savings, I’d always pick food—but it’s a good way to deal with my money without having to tally up every single expense and make sure I don’t “go over.”
Mike acknowledges that budgets can be of use, especially for people who reach the end of the month and routinely wonder, “Where did all my money go?”—but he himself doesn’t find them helpful.
Budgets never worked for me because my circumstances changed frequently. For example, I have two weddings to attend in California next month, which means 10 days at my folks’ place where I don’t have to do any grocery shopping and get to eat for free (besides a visit to In-N-Out, and that great Mexican food joint on the corner). As long as I’m paying the bills, getting some money into savings, and not running out of money at the end of the month (which has yet to happen on my budget-less modus operandi), I’m ahead of the game.
So if you’re paying your bills, and saving at least 20 percent of income, you really don’t need a benchmark for how much you should be spending on weekday dinners out, shopping, or whatever it is you like to do.
You’ll notice that Nicole saves 10% of her income while Mike suggests socking away 20%. That’s because there are no hard and fast rules for doing money “right.” If you have high-interest student loans or credit card debt, for example, paying that down may be more important in the short term than saving. If you’re living with your parents and not paying rent, your savings target could exceed 20%.
Because of these and other vicissitudes of contemporary 20- and 30-something life, our friend and now financial writer at Slate Helaine Olen agrees that budgets are overrated.
The ability to make and stick to a financial budget defies the realities of most people’s lives. Budgets assume a level of consistency in our finances that doesn’t exist.
Worse, they give us the illusion of financial control and that can lead us to make poor decisions. She summarized her opposition for me this way: “It’s important to know your largest regular expenses, but budgets have a way of encouraging us to give equal weight to small expenses, probably because they are the ones that are easiest to control. It’s easy to give up one mani-pedi a month, not so easy to find a less expensive living situation.”
Olen makes an excellent point. The three primary expenses in our lives are what we really need to have a handle on in order to be financially solvent: housing, transportation, and food. The Motley Fool crunches the numbers:
these three accounted for 64% of the average American family’s yearly expenditures. While focusing on skipping your daily latte has become a popular way to save for retirement lately, you’ll get the most leverage by focusing on these three categories. … As it stood in 2013, families earning less than $80,000 per year — which accounts for almost three-quarters of all US households — were devoting over half of their pre-tax income to these three categories.
If you’re spending more than you’re earning on a regular basis, these then are the three areas to focus on. You can economize on food by cutting down on Seamless, by cooking more and bringing lunches to work; on housing by moving to a cheaper neighborhood or getting a roommate; and on transportation by choosing a more affordable car, biking more, and relying less on taxis and Uber.
Making these vital shifts will do more for you, especially in the long term, than stressing over individual line items like Netflix and Sephora.
I asked the amazing Carmen Rita Wong for her take on this. As she put it to me in an email:
I’d love to say that budgets are bullshit. It sounds sexy. I wish they were bullshit. But, your money has limits. It’s as dull as normcore, but as useful as your laundry service. Think of your budget less as a too-tight belt and more like a pair of stretchy yoga pants. They have their limits–maybe you can gain 5 or ten pounds max before they don’t make it over your thighs–but they stretch and shrink and let you move around.What is bullshit is the whole suffocating shame spiral that your debt (usually student loans or medical bills) is bad and your daily coffee habit or subscription service is your doom.
TL;DR? You don’t need to hit the spreadsheets, especially not from what Nicole calls “the front end,” to be good with money. You do need to understand your own financial situation in terms of what’s coming in and what’s going out. Then you can focus on your reducing your largest expenditures so that what you earn generally exceeds what you spend.
It isn’t budgeting that allows you to live within your means. It’s recognizing that living within your means can be a priority.