WHO SHOULD DIET? This isn’t exactly a tough one: It’s people who need to lose weight.
Who should budget? If you listen to conventional wisdom, this is another easy one: It seems we all should. Creating a written budget, and then tracking our spending against it, is considered a sign of high financial rectitude.
I think this is nonsense. I have never created a written budget and I don’t track my spending—because I don’t need to. I suspect many HumbleDollar readers are in the same camp.
Let’s say you’re in the workforce and save at least 12% of your income. Or assume you’re retired and each year you withdraw no more than 4% or 5% of your portfolio’s beginning-of-year value. In either case, you clearly have your spending under control, so why does it matter exactly how you spend your dollars?
I’m not the only one who feels this way. You would be hard-pressed to find a group of people who are thriftier than the Bogleheads, devotees of Vanguard Group founder John C. Bogle. A recent discussion on the Bogleheads’ forum focused on the need to budget. Among those who commented, an overwhelming majority said they don’t bother.
In other words, budgeting really is the same as dieting. The only people who should budget are the people who need to budget—those who save too little and spend too much. And my hunch is, like so many dieters who fail to lose weight, those who budget often make scant financial progress.
Why not? A written budget is no competition for our human failings. We all have weaknesses. It might be smoking, drinking, gambling, failure to exercise, infidelity or overeating.
But for many, their big weakness is spending too much. A minority of folks—like those found on the Bogleheads’ forum—are supremely disciplined about money. But most people aren’t: Controlling their spending is a daily battle and, more often than not, it’s a battle they lose. A written budget could potentially help the spendthrift. But I suspect it serves mostly to deepen their sense of failure.
How can we win this fight? My advice: Forget budgeting—and do what many of the Bogleheads do, which is to “pay yourself first.” That might sound trite. But it works—and the best way to put it into practice is to automate your savings program. That might mean making payroll contributions to your employer’s 401(k) or 403(b) plan, or it could mean signing up for mutual-fund automatic investment plans.
Both strategies helped me get started as a saver. Indeed, when I was a young, penniless reporter at Forbes magazine, with a newborn at home and a wife in graduate school, I didn’t initially sign up for the 401(k). To my surprise, I got a call from the company’s treasurer, telling me I ought to contribute and saying I’d never miss the money. He was right.
These automatic savings programs are effective, because they get money out of our paychecks and bank accounts before we have a chance to spend it. We’re then forced to live on whatever remains. Yes, there’s always a risk we’ll keep spending recklessly and rack up the credit cards instead. But if we can resist that urge and stick with our automatic savings program, we’ll likely be astonished by the results.
While I don’t think there’s much virtue in budgeting, I do believe there’s great value in knowing one number: How much we spend each month on mortgage or rent, utilities, groceries, car payments and other fixed living costs. That’s crucial information if we find ourselves out of work and it should guide the size of our emergency fund. What if our fixed living costs are consuming a large portion of our income? That may be the reason we find it so hard to save.