Updated on 04.24.07

The Real Reason So Many Personal Finance Gurus Encourage A Written Budget

Trent Hamm

moneyIf you’ve ever read many personal finance advice books, you’ll find that the vast majority of them encourage the reader to make up a formal budget and write it down (in fact, I even wrote a guide along those lines myself). Without a doubt, making up a formal budget is a very good exercise for getting a clear picture of your spending and setting some goals, but formal budgets are notoriously hard to continually follow.

This begs the question: if traditional budgets are so hard to follow, why do books keep encouraging people to make them? If you go through all of this trouble of setting up a budget, only to discover that it’s very difficult to follow, why go through all the trouble in the first place? After all, it’s much like starting a strict diet: you try so hard to follow it, but eventually you binge and you’re right back where you started – or worse. A grid on a paper can never truly contain the complexities of a human’s life, nor is it meant to – that’s why strictly following a paper budget (for most people) is doomed to failure in the long run.

Given that, there is a compelling reason for constructing a budget, but it’s not the reason that most people think of when they think of a budget. The truth is that a well-constructed personal budget is a psychological tool, not a financial one.

If you actually go through the appropriate steps of building a budget for your own life, which includes tallying up all of your spending in various categories, seeing where the fat is, and determining what you can spend in each category, you’ll discover quite a bit about your true financial state. This picture of your financial health, in black and white, should scare you a little. Are you really spending $600 a month eating out? Is it really necessary to drop $750 a month in entertainment expenses? Did you really spend $360 this month on music concerts and CDs?

This is the part of the process that has power for everyone. Are you really spending your money in a healthy way? For almost all Americans, the honest answer to this question is “no,” and a budget is just a detailed image of this fact.

This is not to say that a budget in the traditional sense doesn’t work; it can and does work for some people, just not everyone. The important thing to remember is that the construction of a budget is the part that can really have a great impact on anyone if it’s done right, with a lot of care and thought.

If you’re in a situation where you really need to turn things around, but you don’t know where to start, one of the smartest moves you can do is properly construct a budget and think about what it really means. Actually following the budget to the letter may not be the best path for some people (it wasn’t for me), but the process of actually constructing one can be valuable for everyone.

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  1. jake says:

    Well for me budgets do not work as financial tools because it depends on the “me” factor. That is when it fails it’s because when it came down to it I fall apart and violated the budget each and every time. I cant count on myself to follow my rules it hinges too much on the fact that I’ll do what I say but of course that’s not always the case.

    It’s always an excuse that I tell myself. If I am close to my budget something seems to always creep up and I’ll constantly say that its worth going over budget, but when I think about it later it is not.

    There is a saying that goes something like the worst thing you can do is deceive yourself, and a budget allows you to do that. What I mean is if you set up a budget without changing who you are and how you see and spend money it isn’t gonna be much help. It’s the same as a diet. Most people see a diet as a short term goal, “oh I want to lose X amount of pounds in X amount of time.” A diet like that will set you up to fail in the long run. A diet much like finance requires a lifestyle change. A budget is just one of many tools to change your financial lifestyle, it is not something that should be the only tool, it should be use in conjunction with others.

  2. Trent Hamm Trent says:

    Jake, if you’re just saying “I’m only going to spend $20 on movies this month” without some real insight, it’s never going to be good for anything at all. A budget only has a chance if you work to build it correctly right off the bat, and that experience is worthwhile even if you don’t follow it.

  3. jake says:

    I agree but you have to be careful because if you keep setting up a budget and do not follow it then there is no point. I think it can cause bad financial habits, like saying you will save money or an emergency fund but you never follow it. I think actions are just as important or more important than words.

  4. Ben says:

    The reason most budgets fail is because the monitoring is retroactive. My wife and I have started using the envelope method and it has made all the difference in the world. It is easy, there is not crunching numbers and it is self correcting.

  5. Saving Simply says:

    My “budget” is very simple. I never write anything down, I never keep track of anything, and I never spend more than a minute or two thinking about it. I merely decide if I truly, absolutely need to buy something, while keeping all of the future ramifications of the decision in mind.

    I call it “budgeting at the source”, and I challenge anybody to find a budgeting method that is more effective or efficient. (if executed properly, of course)

  6. chris says:

    My wife and I use the envelopes (cash system) as well, but, we do have to re-evaluate our budget often, our goal is to know (or better) direct every dollar spent.

    I like the term, spending plan instead of budget.

    Saying a budget is like a diet and that it will not work for most, is basically allowing yourself to accept ones inability to want to change something.


  7. chris says:

    I wanted to comment on the previous post….I like having money that could be spent on crap I don’t need, but I like even more, not spending the money, and having no regrets.

    BTW, Trent, I read an article on MSN about living at 60% of take home, great article.

    My wife and I are trying to live at 70%, 10% to our future, 10% tithe, and 10% in HSBC.com savings @ 5.05%


  8. boomboom says:

    Hello Trent,

    I am sorry to bother you with that off-topic post, but I have to warn you that I stumbled upon a site which is translating some of your posts in French without crediting you:

    The site feels like a French thesimpledollar, and there is a reason:
    The guy is translating some of your posts in French, and is awkwardly trying to localize them (ie adapting them to French culture), but you will never find a link to your site.
    Your contents are under the CC Attrib-NoDerivs license so I’d say that the guy could at last credit you.

    One blatant exemple is your list on reasons to turn off TV:

    Here is what he made:

    Even without making an automatic translation you will recognize most of your content.

    It’s up to you know, but damn, even if he doesn’t know anything about CreativeCommons, I guess that the guy is aware that what he’s doing look a lot like stealing.

  9. John says:

    Hi Trent:

    I would recommend looking into the “60% solution”. There really is no reason to track every single minute category in a budget. It is time-consuming, and as you hint, most often counter-productive.

    The goal is to live below your means by knowing the difference between what you have to spend versus what you want to spend.

    Check it out at http://moneycentral.msn.com/content/common/P139593.asp

  10. John says:

    Hi Trent,

    As Chris mentions, you should really check out the 60% Solution to budgeting. Tracking every little category is time-consuming and as you hint, often counter-productive. It does not free you from money, but chains you to it.

    The real goal should be to live within (and below) your means by taking care of the big picture. And understanding the difference between what you have to spend and what you want to spend. The 60% solution is a good way to get there, in my opinion.

  11. Baba Ghanoush says:

    I find that I can’t follow a traditional budget. But what does work for me is earmarking funds ahead-of-time for a specific purpose and contributing a bit monthly to each fund. You can start with just a couple of fixed-quantity items, like saving for a bi-annual auto insurance payment or a Roth contribution. Once you have the habit, add categories as desired, to the level of detail that works for you. If you want to have categories for variable spending, like monthly food and clothing allowances, then add them. At the beginning of the month “transfer” funds into your earmarked funds. At the end of the month, “transfer” money out for any spending you’ve done which relates to the earmarked fund.

    This is just a laid-back version of Mary Hunt’s Freedom Account. It has the advantage that I only have to be budget-focused once per month, when I make that transfer into my earmarked funds. A traditional budget requires me to be strong enough to limit my spending to budget levels at all times. I’ve never been able to maintain that kind of consistency.

  12. Tim says:

    I have to say that knowing my budget shortcomings doesn’t help me a whole lot. In my case, it’s a place we simply refer to as “The Evil Empire [SuperCenter]”. I can always find something more to buy when I’ve got a list and it’s not ALWAYS a bad thing….I’ve gotten some killer deals like 30¢ triple-chocolate brownies mixes and various other things that slipped my mind when making the list, or we needed in general, etc. That blows a major whole in my budget. Another facet that causes problems is the Cashback option when using a Discover card. For a little while, you could get 1% bonus on your entire purchase, plus have the cash in pocket. All too convenient (vs. the Credit Union ATMs which aren’t exactly in the best places for me after I moved across town). THOSE are my budget holes I need to work on.

    Overall, I like to keep a handle on my cashflows (I’ve got everything I can predict up through the end of October) Sure there are more things in there, but it’s all the fixed expenses I can predict (utilities, savings/investing, and my wife’s tuition). I suspect some will go up, but I can’t predict by how much.

    I’m still working on making a “normal” budget, but I think there will always be something new to finance creeping into the budget. Right now it’s Master’s tuition….who knows exactly what’s next. That’s my 2¢ on the issue.

  13. Amy says:

    My budget works along two dimensions. The first is the total amount of money I have available to spend, which I calculate simply by having my savings directly deposited into a separate account, debt payments automatically debited, and making sure my debit card balance doesn’t dip below zero at any time.

    However, the second breaks out money by categories. I calculate that at the end of every month, but my goal here is not so much to reduce spending as to make sure I’m spending my money in a way that aligns with my goals. For instance, if I go over my budget on pilates classes and under budget on takeout that’s good, the other way around is bad.

    Finally, keeping a budget helps me understand how much infrequent purchases really cost me on a monthly basis.

  14. justin says:

    [OT – answering boomboom]

    I stand corrected, but don’t mistake me : I fully respect intellectual property and am pleased to link back to TheSimpleDollar.com

    FYI, only 4 out of +20 posts have been “adapted” from Trent’s TSD.

  15. Alex Tran says:

    That’s an interesting insight. Now that you’ve said it, I think it makes perfect sense. Now I don’t feel so bad about making a budget and not following it. ;)

    Not following in a good sense. The past few times I’ve made a budget the only thing that I’ve really had to check myself on has been eating out. I don’t spend extraneously on anything else.

    With that knowledge, there’s no real need to keep a budget as long as I continue my current habits with some minor tweaks when I think about eating out.

    I can not keep my budget because the budget I made makes me feel good about my current money situation.

    But this only works under the assumption that you are taking an objective look at your finances and not lying to yourself.

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