Question

To Budget or Not To Budget

Why do we never get an answer, when we’re knocking at the door? To budget or not to budget, one of the thousand million questions.

You would think that a sound financial plan starts with a budget. Maybe. Maybe? Surely you can’t be serious? “I am serious, and don’t call me Shirley.” Why in the world would I say maybe? Don’t I need to know how I should be spending? Well, budgeting in and of itself can be extraordinarily stressful (click here for a recent article), to the point where many will start but not complete the process or won’t do it at all. Finishing the process, by the way, means changing your spending habits such that you spend within your means. Being aware of your spending is great, and necessary, and only useful if you change (assuming you need to - and most people do) your behavior.

Therefore, what’s the point of budgeting if you start but don’t finish it in terms of actually managing your spending to your spending target? This stress is one of the reasons why we develop a spending plan, not a budget, with clients. We have an income plan, we have an investing plan, we have a saving plan, so we should have a spending plan as well. In order to effectively establish any of these and have any hope of consistently executing to the plan, we need to focus on something more emotional - your desired outcome - your goals in life. The money? It’s a tool that we can use to achieve your desired outcome and goals. But for most people, starting with the money is a losing proposition.

OK, but this sounds an awful lot like we need to create a budget. Perhaps, and perhaps not.

Let’s talk about outcomes. My experience is outcomes are unique - we all have our own vision of happiness. If we really get to the core of what you want - what you feel and are connected to emotionally, they are highly motivating. There is one outcome I find to be reasonably universal across wealth and income strata. People don’t want to be worrying about spending. They don’t want to have to focus on it. It’s unpleasant. It feels restrictive. Now, this in itself is a tough one, as money has a unique impact within the brain. So let’s postulate instead that we want to remove, as much as we can, reasons to worry about money. That’s not saying you won’t worry anyway, you may, but let’s at least do what we can to alleviate this tendency.

If you desired outcome is financial health (click here to read about my thoughts on financial health), and part of that is no money worries, well then we need to create an environment where you can spend without thinking about it. The way we do that is first determine how much you need to save. Yes, you could say this is minding your budget. What I propose is that, through sound and thorough financial planning, you determine what you need to save each time you get paid. Whether that’s a fixed dollar amount or percentage is of no consequence. We can work with either number.

What we then implement is an automatic (you don’t have to think about it) and automated (you don’t have to take any action) system that saves the right amount, into the right savings vehicles, each time you get paid. We also advocate automating bill payment for all fixed, recurring expenses (car, mortgage/rent, etc.) The tricky part is the credit card (and yes, one is sufficient for most folk). Part of spending planning is examining your credit card history, determining a target monthly amount, and then including that in your plan. Now here is where, if you find yourself overspending, you might need to monitor the balance weekly or bi-weekly. At least it’s only one thing, and not everything, you are monitoring. Fewer things to worry about is better.

Since we are saving the right amount, if your credit card spending is over plan, the way we will always know is by your inability to pay the balance at month-end, presuming the spending and saving combination consumes all of your cashflow (and yes there needs to be “fun money” in your normal and customary spending). Now, this could be by plan, since spending is always uneven, especially with regards to discretionary spending done on credit card. The key is to get the annual amount properly estimated, and I would say that is within a range rather than a precise number. There should be funds the next month or, more hopefully, from prior months, to pay the larger than average balance. A better (and recommended) way to manage this process is to maintain a cash reserve (nearly everyone needs one - the question is what balance to maintain) and use that to pay for an over plan bill - and then when you are under plan we can sweep the balance into your cash reserve.

The point here is to both simplify your use of money and remove the need to think about spending every single day, which is what we tend to do if we don’t know if we are saving sufficiently. Mental accounting, unfounded and unbounded optimism (I’ll make it up next month), and recency bias are, among others, all things that can make a mess of your spending. Experientially, an unbounded process (and therefore, free-ranging spending brain) will almost certainly make a mess of your spending, and it matters little how much you earn. There will always be, unless you strictly operate from cash, the opportunity to violate your spending plan. Effective guardrails, having fun, enabling your financial health, and removing the pain of thinking “Can I spend this amount?” are not mutually exclusive.

Yes, I am a big advocate of not budgeting and of not looking at the budget constantly. The connotations and emotions are negative. Create a spending plan. Create a saving plan. Save first and spend the remainder (Editor’s note: you don’t have to spend all of it, but you can). Compare budget anxiety to how you feel when you can say, each month, that you saved what you need to save and you live the way you choose to live, within your means - and it was easy. That’s pretty doggone financially healthy and as worry-free as we can make it.

By the way, less anxiety generally leads to better physical heath. Read about that here and here.

Bob Seawright is a terrific writer. I love his work.