I find budgeting unreliable.
Whatever method you use to budget, there is a good chance you are wasting your time, and possibly money. Just to be clear, when I say “budget,” I mean trying to predict how much you will spend in specified categories over a certain period of time and allocating money ahead of time to those goals.
When I first began tracking my spending, I also attempted to establish a budget. I found it nearly impossible to predict how much I should allocate to the spending categories I had identified, and when I would need the money to be available. Their are so many unpredictable factors that determine the cost of products and our needs at any given time. So what good is a budget unless you can see the future?
Each month there are known and unknown expenses, and within the known expenses there are variable and non-variable expenses. For instance, I know that I will have to buy gas for my car and pay my car insurance. I know exactly how much my insurance will cost each month, but the cost of gas will vary according to my driving habits and the cost of gas. Throughout the year, I will also incur unknown expenses related to my car, such as routine maintenance and possibly unforeseen repairs. Based on this knowledge, I could budget exactly what I will need for insurance, estimate how much I will need for gas and perhaps set aside a certain amount each month to cover any unknown costs. Presumably, the money I set aside will be rolled over each month until it is needed.
I believe that managing your money in this way conditions you to spend more than is necessary and ultimately save less money.
If you budgeted $50 for eating out, would you be more or less likely to actually spend that much on eating out? And if you spent less than $50, where would that extra money go? Would you spend even more the next month on eating out, or would you splurge on something else?
Budgeting also makes assumptions about money you do not yet have. Your goal should be to spend as little as possible and avoid any unnecessary expenses. Why put aside money for something unless you know you will need it? If you suspect your income will not cover your expenses, you need to do some cutting, not budgeting. So what is the solution?
Track Your Expenses
The only budgeting you need to do is to make sure that you spend less than you make. The only way to do this is to track all of your expenses and make sure it is less than your income. Once you have done this for a few months, you will begin to recognize your known expenses and will get an idea of how much your variable expenses fluctuate. More importantly, you will find areas where you can trim expenses.
Take Savings Out Of The Equation
Make it automatic. You should have money for retirement, an emergency fund and cash savings taken out before you start calculating your “take home pay.”
Know Your Balance
The best way to make sure your are spending less than you are making is by knowing how much money you have. You can then begin to make decisions based on what you know you can afford now, rather than how much you thought you could afford at the beginning of the month or year.
Maximize Your Savings
Once you have tracked your expenses for a few months and identified areas of savings, adjust your automatic savings. Instead of allocating money for future, unknown expenses, put it all in savings – preferably a high-interest account. When an unknown expense pops up, you know your savings will be there to help you out.
Now, if you are setting aside money for a vacation or a “want,” I can understand establishing a separate account, or keeping a tally of how much that fund is growing. But why not make it part of your automatic savings? Bump it up by that amount and keep all of your money in the same place. If you have a high-interest saving account, it may help you reach your goal faster.
(Image courtesy of Jaysun)