Budgeting is one of the trickier issues of personal finance. It can be very tricky to make a budget work for you.
For starters, you don’t need a budget to be financially successful. I like to compare a budget to a power screwdriver. You can definitely get that screw into the wall without that power screwdriver, but it can be much easier in many situations to simply use the power screwdriver. In much the same way, you can get rid of debts and achieve financial independence without a budget, but it can be much easier in many situations to use a budget.
Plus, budgets often fail. There are a lot of reasons for this which I’ll delve into throughout this article, but most articles and books on budgeting overlook many of the pitfalls when discussing a budget, choosing instead to focus on how to build one and the potential positive outcomes.
Taken together, those reasons – and many others – make it easy for families to try out a budget and fail, disregard budgeting when their life changes, or never bother to have a budget at all.
That doesn’t mean that budgets are useless. It just means that an exciting “get started budgeting” guide isn’t going to be enough to carry you to successful use of a budget in your life.
Sarah and I have budgeted using a few different systems for the past several years. Those years have taught us a ton of valuable lessons about budgeting that typically don’t show up in books and articles and chapters about budgeting.
Budgets are like training wheels.
Budgets alone don’t solve all of your problems, just like training wheels alone don’t make you into an expert bicyclist. Instead, both training wheels and budgets teach you the basics and enable you to get started on your path. They can stick around for as long as you need them and you can easily remove them when you feel you’re ready to move forward on your own.
Budgets are not law. They are not a “leash” that you’re going to have to wear for the rest of your life. They are not a prison. They’re more like braces on your teeth.
Budgets are a tool to help you mold your normal behaviors into a set of more financially responsible behaviors, nothing more, nothing less. A budget succeeds when it becomes so transparent that you no longer actually need it, like a six year old who starts being able to fly along on her bicycle with both training wheels off the ground.
It’s only what you make of it.
This also means, of course, that a budget itself won’t magically solve all of your problems. Building and following a budget for a month or two won’t suddenly transform your situation into one of wealth. There’s nothing on earth that can do that and if you’re expecting that kind of transformation, a budget will fail you. It is not a turbo-blasted rocket ship of financial freedom.
Instead, a budget is a tool with which you can gradually shape your financial life onto a better track. It’s simply a way of looking at your finances and how you spend your money to make sure that your choices are actually smart ones and that you can, over time, move to making smarter and better choices and that eventually those smarter choices become the natural ones.
A budget is really what you make of it. If you look at it as a constraint that’s keeping you from what you really want to do, it’s not going to help. If you look at it as a magic solution to all of your problems, it’s not going to help.
But if you look at it as something that will show you where your spending problems are, it can help a lot. If you look at it as something that will help guide you over time to smarter spending decisions in your life, it can help a ton (I speak from experience here). If you look at it as something that will help you “try out” different sets of financial choices to see how they affect your life with the ability to “roll back” if you find out that they don’t mesh with you, it will work wonderfully.
You have to start in reality.
Quite often, people start off with some kind of budget template provided by someone else. Those kinds of templates are almost always doomed to fail.
Most of them provide listings of categories with which to divide your spending, but those categories often don’t reflect your own life at all. With an electronic budget form, if you have a little bit of computer savvy, you can alter things a bit and remove and add categories, but if the budget is pre-printed, you usually can’t do that without turning things into a garbled mess.
Even worse, sometimes budgets will pre-load numbers for you based on your income (or sometimes not based on any information about you at all). Those budgets are particularly awful because very few lives are exactly the same. Maybe everyone in the household commutes 50 miles a day, or maybe everyone commutes only a mile a day. Maybe it’s a two parent household with three kids or maybe it’s a single parent with one kid, or maybe it’s a married couple with the husband’s mother living with them, or maybe it’s a single person renting a tiny bedroom somewhere. Perhaps a person has to spend several hundred a month on prescription medications. You get the idea – everyone’s situation is way different.
The only way a budget is ever going to work for you is if it reflects you. The categories and the numbers in those categories have to match how you actually live your life or else the whole thing is largely useless.
So, how do you do that? The first step in creating your budget shouldn’t be to fill out a form. The first step should be to figure out your categories.
Sit down with all of your expenses over the last month or two and divide every dime you spent into categories. What categories? It doesn’t matter, as long as they make sense to you. You can make a bunch of categories or just a few (“wants” and “needs,” for example). What matters is that you come up with categories from which you can intuitively put all of your expenses because it all just makes sense to you.
Once you’ve sorted everything into those categories, total up how much you spend in a month in each of those categories. Be sure to think about irregular bills as well like your property taxes and so on.
That’s your starting budget. What areas are you going to trim and where will your savings go? In the end, that’s what a budget really does: it helps you push money from one spending area into another one – say, from “food” to “retirement savings.”
Revisions are vital.
So, you’ve created categories, you’ve totaled up your spending in each category in an average month, and you’ve set some new targets for the coming month. You’re spending, say, $50 less on food and $50 more on building an emergency fund. Great. That’s what a budget is supposed to do.
At the end of the month, though, you find that you made your food target just fine, but then your energy bill was higher than you expected, gobbling up that $50. Now what?
Some walk away from this kind of result believing that budgeting is a failure. Doing so ignores the fact that a budget is not an end result – a budget is a process.
The first budget you make is not going to be the be-all-end-all of your personal budgets. It is not going to be perfect and it is not going to account for everything that happens in your life. No budget will ever be perfect unless your life literally stops changing in every single regard – and no one’s life is that static.
You’re going to have to revise. You’re going to have to update. You’re going to strive to make it better with the recognition that it will never be perfect.
So, if it’s never going to be perfect, why do it at all? Simple. It’s because a well-built budget, even with its imperfections, is better than wandering around with no budget at all.
Every time you see a way to make your budget a little bit better, you get further away from the financial problems that plagued your life. It’s not going to be perfection – nothing ever is. But it is going to be better than before.
Think about the consequences of failure.
What exactly does it mean when you don’t meet your budget at the end of the month? There are a lot of things that might be true.
For one, it might simply mean that you forgot about an irregular bill. Maybe you didn’t account for extra food purchases at the holidays. Maybe you didn’t remember the insurance bill. That’s not a major problem – it just means you need to account for it in the budget for future months. It’s also a perfect example of why you need a bit of flexibility (something I’ll discuss next) and an emergency fund.
The real problems come in when you try your best and you simply fail to reach your budgeting goal. You budgeted $500 for family food this month and come in at $550, even though you really tried to cut back.
Again, it is easy to see this as failure and it can be easy to just walk away from budgeting at this point, saying that it doesn’t work. But here’s the secret: these are the very points where your budget is at its most useful.
So, you know you wanted to only spend $500 but you spent $550. What did you spend that $550 on? Missing a budget category is a good reason to dig into the specifics of that category and figure out why you missed your target.
Maybe you ate out a few too many times. Maybe, as you look through your grocery list, you notice that you spent way too much on overpriced convenience foods or sweets. Maybe you just rolled some of your household expenses into your food budget category.
That’s the process where most of the value of budgeting comes from. It forces you to look at your actual spending choices and think about how they actually affect the rest of your life.
It’s easy to stand at the grocery store and toss a few pints of Ben and Jerry’s in the cart without thinking of the bigger picture. After all, it’s only $10 or so and it’s yummy and it’s not really going to matter.
At the end of the month, though, when you total things up and you see that you’re $50 over your food target and you see that $150 of that money was spent on things like pints of Ben and Jerry’s and on things like potato chips and on things like soda, it becomes clear that it’s the junk food that’s causing the problem. So, you decide to split the food budget into $400 for essentials – for which you were on target – and $100 for junk foods – for which you were actually $50 over.
This brings us to the budget-behavior connection.
Every target you have in your budget that isn’t trivially easy to reach is actually a suggested lifestyle change.
In that example above, the new budget has a very specific lifestyle change that’s advised for the person making the budget – cut “junk food” spending from $150 to $100 this month. That simple budgetary suggestion will translate into a real-world behavior change.
When that person stands at the freezer case and contemplates buying a few pints of Ben and Jerry’s, they’ll remember that they’re trying to cut their junk food budget by 33%, so they’ll choose to toss only two pints into the cart instead of four.
The budget doesn’t mean austerity or misery. It simply means that the person might skip ice cream for a snack some days and eat a bit less on other days. It’s very likely that the person will barely notice the changes or might even come to appreciate the ice cream as a treat a little more.
The point is that the change in a line in the budget wasn’t just a number on a spreadsheet. It had a direct connection to the personal behavior and spending choices of the person who made the budget.
That’s where the value is. The process of making a genuinely useful budget led this person to finding a spot in their life where they could make a real change without falling back into misery. That saved $50 can now be used for something else – saving for an emergency fund, perhaps.
A budget helps with positive spending choices, too.
People often think of budgets as tools that will just tell them to cut the good stuff and, frankly, that sounds miserable. Why on earth would anyone want to cut $50 out of something they enjoy for no good reason?
In truth, the actual value of a budget comes from the fact that a good budget shows you where that $50 is going. Maybe it’s going into an emergency fund that will bail you out the next time a crisis happens. Maybe it’s going into saving for a down payment. Wherever that $50 is going, you can see it in your budget.
This requires you to step back and think about the positive priorities in your life. What are you working towards? What will help you sleep better at night and reduce your stress?
Maybe debt reduction is most important to you. Perhaps it’s saving for retirement or saving for a down payment. Whatever it happens to be for you, the money you cut in other areas bolsters that positive area.
You begin to see that direct connection between installing energy-efficient light bulbs and your retirement savings. You begin to really see how buying a little less junk food results in a fatter emergency fund. You see how cutting back on hobby spending a little can directly bolster your debt repayment.
Where do you want to go today?
A good budget has some flexibility.
Another mistake people often make when they build a budget is that they budget amounts that are very tight, meaning that there’s not much breathing room for even minor changes in events.
For example, you might calculate your food budget using a month where you didn’t eat out much because your friends were traveling, then next month you host three or four dinner parties and eat out a few times with friends. Because your month was budgeted so tightly, you blow your calculated amount out of the water.
You might normally not spend much on a hobby, but when your local hobby store has a semi-annual sale, you spend a little and it bumps you over your hobby budget.
In an ideal month, I prefer to come in under each category so that I have a pool of extra money (which usually goes into the emergency fund or something like that) rather than going over in a bunch of categories, but even if I do happen to go over in a category or two, I’m “under” in enough categories so it’s not a real problem.
How do you achieve that? If I’m not focused on a particular area of my budget, I’ll usually budget for an average of what that category was like for the past several months and add ten percent. For example, if we’ve been averaging $500 a month in food spending for our family for the past several months, I’ll budget $550 for food.
That way, if something small and unexpected comes up, like an extra dinner party that we’re hosting or something like that, we’re not going to nuke budget categories to make it happen. Instead, we’re just going to be a little closer to the line in that category.
If I’m really trying to cut back in a category, sometimes I’ll be tighter in that category for a few months. This sometimes happens with hobby or entertainment spending, for example.
A budget that’s followed will alter your routines – and that’s the success that matters.
The goal of a good budget is to push you to alter a routine or two at a time in your life. It pushes you to cut back on, say, your family food spending this month and then shows you the positive thing that happens with that money.
Over time, those “pushes” develop into normal habits and routines. Those changes become the new normal in your life – you don’t even notice the change any more.
If you do that in enough areas, spending significantly less than you earn becomes a natural thing. Your normal behavior stops revolving around spending all of your pay and starts revolving around having a surplus each paycheck. That surplus eventually knocks away all of your debts, builds an emergency fund, builds up retirement savings, and makes for a foundation of a low-stress life for you.
Budgets aren’t financial prisons. They aren’t just lines on a spreadsheet. They aren’t financial tools to make you feel guilty. Instead, they’re real glimpses of your life and how you can make a better choice here to make real improvements. They nudge you, over time, toward making better decisions on your own until eventually coming in way under budget becomes automatic and your savings are really taking off.
When that describes your life, you can feel okay removing the “training wheels” of your budget if you want (I actually still like budgeting in You Need a Budget). It has already done the valuable work – it’s changed your behavior for the better and showed you the benefits of that behavior so often that you intuitively understand it.
If you’ve been budgeting for months and now you’re skipping over foolish purchases and are enjoying lower energy bills and your debt balance is dropping, you’re seeing the beauty of budgeting at work. That’s the success of a budget, not a bunch of numbers in a spreadsheet.