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Budget Busting

Jonathan Clements

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.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His recent articles include All Better, Archie Is Scum and Favorite Questions.

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Thomas Taylor
Thomas Taylor
2 years ago

When my wife and I married (second marriages and a little later in life), I had this crazy idea to combine finances, prepare and monitor a family budget. Boy, was that a mistake. We had some of the biggest fights the first year. We ultimately went back to her account/my account finances and lived happily ever after – with the caveat being we always paid ourselves first. She was in a required contribution state pension fund and in addition, contributed another 20% to a 401(k) plan. From my first job, I always funded an IRA and/or a 401(k) plan in my private sector job(s). This was the foundation we laid along with living within our means. We both think the other spent money on foolish things, but that was ok as the big picture was already taken care of.

Bob
Bob
2 years ago

I agree, budgets are like New Year’s Resolutions. When we got married 35 years ago we tried to work out of one checkbook. Disaster! Our solution was to split up our bills and saving contributions between us as if we were roommates rather than a married couple. We both worked and had income. Once the bills and savings contributions were made each month, the leftover cash was play money.

We retired last year and I found a great app to track our expenses. It’s called Spending Tracker. I enter every cent we spend. Very easy to use. I wanted to know how much we were really spending compared to all the pro forma retirement calculators I filled out over the years. I used the 4% rule in my retirement forecasting. In reality we are actually spending 3.5%.

Peter H.
Peter H.
2 years ago

The argument presented is, “I am skinny and don’t diet. I suspect dieting makes overweight people feel even worse because they will fail anyway. Therefore people should not diet.” Fat-shaming and non-sequitur aside, it’s a terrible message for those trying to get their financial house in order.
Budgets are one of the most basic financial tools for any entity, business or household. Understanding spending and setting objectives for future spending is core to any financial planning process. The fewer resources you have, the more important it is to plan carefully. “For many people, the big weakness is spending too much.” Really? Tell that to the median U.S. household living on $5000 a month.
For affluent denizens of the blogosphere a budget may be a nuisance. For the millions of people trying to make ends meet down here it comes in pretty handy, bub.

Daniel Heiser
Daniel Heiser
2 years ago

I couldn’t agree more. At 62.5 years old my wife and I have NEVER budgeted. Let’s say you budget $2,500 for travel and spend $2,000. Do you spend the extra $500 because that’s what you budgeted? Heck no. You save/invest the $500 or spend it on something you really need. My advice — spend money only if you need to or if you want to stock up on items that are perceived as great bargains that make you feel good. Forget budgeting. Thanks Jonathon (1st heard on Gordon Deal’s This Morning).

Ginger Williams
Ginger Williams
1 year ago

Instead of budgeting, I have payroll deduction for retirement account, part of paycheck transferred to savings automatically, and bills assigned to paychecks. For example, rent/mortgage is paid from first check of month. After paying the assigned bills, the rest of the paycheck is available for groceries, gas, theater tickets, or anything else. If my checking account balance is over a specific amount at end of month, I transfer the excess to savings. Early in my career, when I was paid weekly, I ate ramen noodles the first week of month, because that was the week I paid rent and I was always broke. Assigning bills to paychecks kept me on track without a detailed budget.

SanLouisKid
SanLouisKid
9 months ago

It might depend on where you are in life. If you’re making minimum wage and living paycheck to paycheck, it might make sense to carefully allocate funds. If you’re making $100,000 a year and living a $70,000 lifestyle, things won’t be financially tight. Personally, we track expenses to get an idea where things are headed. One noted trend: Over the past 23 years, expenses have not been going down…

joeaverage21
joeaverage21
6 months ago

We’ve automated our bills and investments. Everything left over is for gasoline, groceries, entertainment, etc. And we try to minimize those too. We look over the online banking website to look for unauthorized spending by third parties who might have tapped into our accounts but never find any. Wife and I are pretty careful with our spending. We don’t shop for fun. It’s worked well and we owe nobody but the mortgage bank.

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