Tuesday, April 22, 2008

Budgets Are Overrated

Author: Nick
Category: Money

comic 16 - budget

(My apologies to the 17 people who just had heart attacks after reading the title.)

I’m sorry, but it’s true. While any personal finance expert will tell you that you must have a budget or else you’re going to spend all of your money and end up homeless and destitute, that’s not always the case. For example, I know for a fact that there’s a guy in Kansas who doesn’t have a budget and he has $8,000 in the bank right now. Shocked? I was too!

All right, I’ll stop being a smart-ass for a minute. (Stopwatch start.) It’s very possible to survive and thrive financially without putting together a detailed budget and sticking to it. I know a few people who do just that, but they’re either too rich to spend all of the money they have no matter how hard they try, or they work too much to have a chance to spend it all.

And then there are people like Stephanie over at Poorer Than You—someone who doesn’t have a budget or a million dollars, and she’s doing just fine, thank-you-very-much. Oh, and before you ask, I do have a budget, but if you promise not to tell anyone, I’ll let you in on a little bold-texted secret:

I totally ignore my budget.

If I fire up Quicken, you’ll see that I have a very nice little monthly budget that looks something like this:

Housing 35%
Groceries 5%
Dining 5%
Entertainment 5%
Utilities 5%
Education 5%
Charity 5%
Ceramic Rooster Collection 5%
Miscellaneous Expenses 5%
Straight to Savings 25%

When I first put this budget together a couple of years ago, I religiously checked it against our actual expenses every month for several consecutive months only to find out that we never came close to overrunning our budget numbers. So I stopped checking. And you know what? Looking back now, sometimes we went over our budget numbers. For example, in December of 2007, we spent 7% of our income on charity. And yet, we still met our savings goal for the month. How? Well, in my mind, I knew that we were giving a bit more to charity that month (though I didn’t know exactly how much), so I cut back on funding my ceramic rooster collection a bit.

Some other months, we only contributed 25% or 20% or even 15% of our income to savings due to unexpected or higher-than-usual expenses. But then other months, we contributed 30% or more of our income to savings.

For all intents and purposes, we don’t have a budget since having a budget sort of implies actively following it and trying to meet it consistently. In any given year, we do meet our budget—and with plenty of room to spare—but it’s not through excessive penny-counting or obsessive record-keeping. It kind of just… happens.

Well, maybe it doesn’t just happen. We do have some degree of natural financial discipline, so we’re not in the habit of dropping $3,000 on a whim. Plenty of people don’t have that sort of discipline, so a budget might help them guide their spending and meet their financial goals. But saying that everyone needs a budget is just plain wrong. Sounds like someone should rename their software to something not so insisting.

Perhaps a better way of putting it is you either need a budget or the financial discipline to function without one. (Stopwatch finish.) I guess that means only reckless people need budgets?

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