Why We Don’t Budget
The personal finance blogosphere is bound to be abuzz with New Year’s posts centered on goals and budgeting this week. I’ll spare you another piece on goal-setting, but since starting this blog I’ve been meaning to share why we don’t follow a monthly budget. Anathema, I know! Don’t tell Dave Ramsey our dirty little secret, okay?
Despite this apparent negligence, we live on less than half of our one (five-figure) income. Not budgeting is clearly working for us, and while this approach may not be for everyone, we believe it illustrates much about our financial philosophy and practices. Most people’s definition of budgeting is doing their money a grave disservice. We hope to shed some light and help you get your money where you want it this year.
Don’t Eat All the Leftover Christmas Cookies (or Money)
Despite our irreverent financial customs, we do create an annual budget around this time of year to determine ahead of time where we want money to go. But this exercise is about bigger picture goals like investing, accelerated debt payoff, travel, Christmas, other gifts, and charitable giving. We don’t want to fall prey to the strange phenomenon where you never have anything left to invest or share if you wait to use what’s leftover.
Money is kind of like all the Christmas cookies and candy still lurking in my house after the holidays. If I waited till I had my fill of sugary delights, I’d eat every last confection. Instead I evacuate it from my home ASAP so I don’t develop diabetes or have little people whining at me all day about treats. Though these reasons are a bit more selfish, the same principle applies to investing, saving, debt payoff, or giving. Get it out of checking and into its destination without delay.
Once our annual aims are clear, we list our living expenses and estimate costs based on the previous year. While we track our spending in Mint.com and Neil’s custom utilities spreadsheet, we don’t tally every single dollar we spend. Instead we focus on those big-picture goals. Many are automatically withdrawn at the beginning of the month. As with cookies, the less will-power involved, the better. Let EFT substitute for will-power.
Let Goals, Not Receipts, Be Your Guide
This approach simply allows us to hone in on our money’s important destinations, instead of nit-picking minor fluctuations in the mundane areas. For example, while I’m mindful of our variables like groceries and household items, I know I’m on track for those when we’re meeting those big goals, rather than meticulously categorizing each and every output.
For example, I can’t tell you offhand precisely how much we spent on household items in 2015. What I can tell you is exactly to what extent we met our goals for debt payoff, investing, and giving. And that’s way more telling than how much we spent on toothpaste and toilet paper last year.
Our big-picture focus is doubly powerful because it not only tells us if our spending is on track, it motivates us to avoid over-spending. We’d be in big trouble if we didn’t pay attention to our living expenses, only to realize we were falling far behind on our goals. Being sold on our objectives clarifies the purchasing choices we’re confronted with throughout the year. This is a large part of the reason Why I’ve Banned Shopping Bans.
What is a Budget, Anyway?
In common parlance, people use budget to mean a plan about how to spend money. It’s considered a list of expenses. And too often when it’s written down, it’s accepted as an inexorable reality. Electricity costs $80. We need light. No questions asked. Used this way, a budget becomes a license to spend. No one wants to “go over budget,” so people feel compelled to write down every possible expense for every month, even though many expenses don’t necessarily occur on a monthly basis, such as clothing. Over-estimating is also tempting under this paradigm.
So many financial gurus exalt the discipline of monthly budget meetings. Some even depict it as a sultry date night topic. Faced with so much hype (SULTRY!?), we tried the exercise for 3 consecutive months. We even found ourselves accounting for extra areas like blow money and ministry expenses, “just in case.” The verdict? BORING, not sultry. And more relevantly, we found that our monthly budgeting led us to spend MORE money or made no difference. We thereby declared it a waste of time, much to my joy.
Instead of viewing the budget as a spending plan, we think of our annual budget as a plan for what we want to accomplish with our money. Where do we want that money—in the stock market, early debt pay-off, a car fund, other savings, or the pocket of a nonprofit? Then we get it there ASAP. And financial progress is as exciting as budget meetings are boring.
If normal budgeting is deciding how to spend money, we prefer to decide how to NOT spend money! Of course we’ve got nonnegotiable monthly expenses, but instead of accepting with carefully budgeted resignation that electricity has to cost $80 a month, or groceries have to cost $600 per month, we find ways to optimize, and thereby minimize, those expenses. Just think about how many people are proud to stick to their monthly food budget of $600 when we have no problem sticking to about half that amount for a family of four. I’m not trying to boast or get into a debate over how much to pay for groceries; I just want to illustrate the point that budgets can be used as a license to spend. As the Frugalwoods have so aptly expressed, “budgeting asks how much one can spend; we like to ask how little we can spend.”
This monthly license to spend is akin to pretending to be frugal rather than pretending to be poor. We’re not looking for permission to maintain our lifestyle; we’re looking to actively deflate in order to inflate our usefulness, instead.
At the same time, we recognize our laissez faire approach isn’t for everyone. It depends on many factors including your financial personality. We hope our definition of a budget helps you align your money with your goals this year. We also plan to provide some useful tools, such as an upcoming post to help you think through what budgeting strategy is best for you, and an epic spreadsheet share.
What do you think about this definition of budgeting? What is your approach to budgeting? Don’t worry, I won’t tell Dave Ramsey, either 🙂