Why Nobody Budgets

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I was watching a Techcrunch interview about finance start-up Personal Capital (review) and was surprised by a comment about budgeting. The founder was Bill Harris, who was former CEO of Intuit and Paypal, and Product VP was Jim Del Favero, who was also a former Product Manager of Quicken. While guiding us through their new iPhone app, they shared:

Our #1 takeaway over the years was… nobody really uses budgeting. Everyone means to do it; Nobody really does it. The more important concept is cashflow. It doesn’t matter that you spent $200 on clothing this month or last month, what matters is at the end of the month, do you have more money than you spent.

So the guys in charge of the most popular budgeting software admit that… nobody budgets. Well, maybe not nobody but it’s probably safe to say that the great majority of people don’t track their spending monthly. This is an issue I’ve thought about many times. I often talk about budgeting, but I don’t really budget either.

Why is it so difficult? I point to recent books and research about willpower and how it is similar to a muscle. If we have to track every purchase, it causes us fatigue and sooner or later we give up because it becomes just too hard. Doing one push-up isn’t that hard. Doing a hundred push-ups in a row is another story.

The sheer number of choices we must make each day — what foods to eat, what products to buy, what information merits our attention, what tasks to prioritize — can be overwhelming. […] Put simply, the more conscious willpower we have to exert each day, the less energy we have left over to resist our brain’s primitive and powerful pull to instant gratification. According to one study, we spend at least one-quarter of each waking day just trying to resist our desires — often unsuccessfully.

Behavioral psychology has also found that happiness is earning $60,000 a year. As Del Favero suggests, perhaps it’s because all we really want is to spend comfortably and at the end of the month have something left in the bank account. That number just happens to be about $60k in the US.

So what should the personal finance “experts” be pushing instead of budgeting tools that nobody will use? Here’s one possible plan of attack.

  1. Determine a safe savings rate. What percentage of your salary do you need to save for retirement? The idea of a safe savings rate was introduced and researched by Wade Pfau, and varies based on the assumptions. 15% is a good minimum number to start with, although if you don’t want to work for 30 or 40 years you’ll have to save more.
  2. Automate that savings. Automatic 401(k) or 403(b) deferrals are great, as well as automated contributions to Roth/Traditional IRAs. It’s best to have the money taken away before you even see it, so there is no temptation to spend. Every automation means one less decision.
  3. Check your cashflow. Are you good? Then stop, and enjoy your life. Or do you still spend more than you earn, net of the automatic savings?
  4. Don’t think about the small things. Deciding not to get that coffee or not to order lunch with all your coworkers every day may exhaust more of your willpower than is worth it.
  5. Instead, try attacking one BIG thing. Housing and cars are the biggest expenses for most people. Moving into a smaller or cheaper apartment or house. Move closer to town, sell a car, and use public transportation. Switch to a economical car and drive it for 10 years. Look for something you can cut once, albeit painfully. You may not like it initially, but it’s much easier to get used to that than to rely on repeated displays of willpower.

For example, a prospective college student with limited financial resources can choose to go to in-state university instead of private, as opposed to worrying about the price of every textbook and having to constantly choose between studying, socializing, or working at one of three part-time jobs on the side.

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  1. #4 and #5 are good advice. so many people get overly focused on saving a few nickels by running all over town for their shopping, or getting a rebate worth a few dollars. They’re missing the forest for the trees!

  2. Well now that makes sense why Quicken is such an awful budgeting tool, or at least it was the last time I tried it several years ago. I finally made my own Excel spreadsheet a few years back since it was the only way I could budget in a way that made sense to me, which was basically envelope-style budgeting. Switched to YNAB a couple years ago since it basically did the same thing I was trying to do with my spreadsheets, it’s been fantastic. We probably don’t spend much more than an hour a month on it.

    I think cash-flow budgeting can work if you have a relatively high consistent income and/or low/consistent expenses. No way it would be very useful to us (baby on the way, house renovations needed, saving cash for new “used” car, my income temporarily halved and wife about to quit job). I’d be a lot more stressed out about it if I didn’t already have a plan in place for every dollar before it’s spent.

  3. Dan Jurich says

    A while back I was shopping around for a place to park cash, and was surprised by the rates and fee’s charged at banks. Many of them have clauses that cost you a year of interest and/or charge a fee if you bail (i.e., in a time of rising interest rates). What I did find is that several credit unions in my area have forfeiture fee’s of 3 months and no penalties if you decide to bail, so you can look at 3, 4 or 5 year horizons, lock in a higher rate than you could otherwise and worst case only surrender the last 3 months of fee’s should interest rates rise significantly that it warrants a sale and a move into another long term CD paying higher rates. Then I looked for a credit union where my parents live and found one for them. Many credit unions no longer place restrictions on who can join. We are locked in at 2.3%. I checked the current rates and they are 1.36% ($1000 for 5 years), and 1.41% ($20 for 5 years).

  4. Kurt @ Money Counselor says

    I think you make some interesting and useful points. Part of the discussion may be just semantics–what does one mean by ‘budgeting?’ The five-point plan of attack you outline is, to me, a form of budgeting.

    I key test I think of whether one has an effective “budget” or spending plan or whatever you want to call it is this: If you cannot give a reasoned answer to the question “can we afford this?” when considering a major expenditure like a new, costlier car, a new home, a 2-week trip, etc., then no effective budget is in place. (Note: A “good answer” is not, ‘well, we have the money in our bank account, so we must be able to afford it!’)

  5. We’ve had a budget for about the last 8 years, but it was only last year that we looked at it really hard. We know exactly what it costs to run the household and have allocated amounts not to exceed what is in the budget. We may from time to time update the budget to account for things we missed earlier. We annualized everything and then divided by 12 to get a monthly outlay (so even though property tax may not be due till May or November, we allocate for it each month). What we’ve learned from this was what could we change and could we do it without increased risk, or could we manage the risk (an example is the deductible that we have on our auto insurance and the type of coverage). Also bundling of the Home Owners insurance into the auto policy to save even more. We allow ourselves to all go out as a family once a month (whereas in the past we did so 5-6 times per month). We try and prepare meals at home as much as possible and from fresh ingrediants. Aside from the health benefits it’s also cheaper. The biggest expenditures are the mortgage and auto/home/health insurance. We look for ways to get more bang out of each buck that we invest as well. 1% may not seem like a lot, but over a very long time, it adds up.

  6. One thing you need to consider is what you are going to do with all that info once you calculate it. If you need to cut something, I think you can determine what to cut without knowing totals & statistics. Good for making a report, nothing more.

  7. Call me an obsessive quant, but I do track each expense in a spreadsheet. When the previous month’s number is in the black, it gives me a sense of “we’re in control” and frees me from agonizing over every small decision.

    But even I can’t bring myself to do good accounting and put a “reserve” charge on the books every month for the day when the roof caves in and wife dings up the car. It’s just solid accounting, but just too painful to charge yourself for something you didn’t do.

  8. I find cashflow budgeting the best use for my lifestyle. I took an author from MSNmoney’s idea of the 50/30/20 budget, figured out my needs and am trying to keep those as close to 50% of my budget. Then I figured out my 20% savings, and put that away with automatic deposits. The remaining 30% is a plug number that tells me how much my wife and I can spend going out, buying unexpected things, or irregular purchases (things like Dry cleaning, which I do once a month, cat food, which I don’t even know how often we buy, etc). I’ve been doing this for 6 months or so and it’s been working out great. Created a timeline breakdown of when bills are due, when cash is coming in and out, and I carryforward money that we put aside for certain things and haven’t spent yet as we get past that date (like house decorations, we budget $75 a week (just purchased the house so we needed lots), then if we don’t use it, then it’s $150 the following week).

  9. In our case we’ve been able to save nearly $500 per month since we aggressivly got behind our budget. We have plans on reducing the budget by another $2000 per month (by paying off the mortgage and the cars). Now even if we put that money into a savings account earning paltry interest or invested a portion of it into the stock market, we come out way ahead. In the meantime, we plan on retiring earlier and taking more frequent, but frugal vacations. We no longer want to be the Jones or attempt to keep up with them, and we did not have to go to Financial Peace University to do this.

  10. If you make enough money and can really control yourself not to spend wildly, there’s really no need to budget. By “enough”, I mean housing, auto, meal, retirement and reasonable amount of leisure spending.

    A lot of people set a budget for something. If the budget was not totally used up, some people view the leftover as like extra bonus money from nowhere, and go on to spend it on other stuff they were not going to have. Budgeting is setting a limit. Whatever left goes back to your bank. It’s not like you ordered a huge steak and cannot return what you can eat back to the restaurant.

  11. Jenna, Adaptu Community Manager says

    So true, that is why the Adaptu Wallet gives you the ability to track your cash flow. Check out our new video: http://www.youtube.com/watch?v=SgPea0Erm2U

  12. I’ve been trying to budget but the wife just won’t buy in. We’ve at least agreed on an all cash grocery budget which helped. Like the article says I just now check at the end of the month to make sure outflows didn’t exceed inflows.

  13. After doing this for nearly a year, it’s become a habit and we don’t look at the budget everyday, but when it comes to purchases we look at things in a different light (i.e., is the item a need or a want). We’ve never been happier. Our budget is done in multi-tabbed excel file and ties into the other excel spreadsheets that track our retirement/non-retirment savings, checking, credit cards, etc … It took several years to develop these spreadsheets. I wish I could have done it all in one sitting, but they evolved over time and make it easy now to see our financial health at a glance or in detail. Keep up the good work in these articles. They are refreshing.

  14. Well, this now all makes sense if this guy had anything to do with Quicken and PayPal, the two most horrible money based computer interfaces I’ve ever seen. I’ve been struggling with Quicken for over a year now after very reluctantly giving up MS Money and can’t believe how slow, clunky and difficult it it to use and customize. PayPal ain’t no treat either.

    Would not trust a thing these clowns say given their backgrounds. Honestly, if you make sure you are getting decent value out of your day to day necessary purchases, splurge once in a while (again getting value) and don’t waste money ridiculously, do you really need a computer program telling you want to do?

  15. Have you looked at YNAB at all recently? I take it it’s changed a fair bit since your 2006 review. I’m just using it for my first month but really liking it. My other attempts at budgeting have always failed because our income and expenses are both too choppy, but YNAB’s approach has been handling things well so far.

  16. What it all comes down to is living well beneath your means. You don’t have to make a lot of money as long as your expenses are less than your income (but that includes saving for a rainy day, cars, college and retirement).

  17. I’m a big fan of the “cut out the BIG expenses” philosophy. I live cheaply in the arena of housing and cars, and that allows me to not worry too much about spending in the arena of clothes/restaurants/reasonable vacations.

  18. Jim Del Favero says

    Since I am the quoted party here let me chime in with more detail on my thoughts on budgeting.

    Traditional budgeting as practiced and executed by most software and spreadsheets is about keeping spending on a particular category within a certain limit each month. It’s something lots of people setup, and fail to keep up with because it just doesn’t fit with the model of how most people operate. Almost nothing except a rent, mortgage or other monthly bill fits into this one size fits all model. Do you really spend money on clothing on a regular basis each month, or do home repairs, or do all of your grocery shopping within the constraints of a fixed 30 day period?

    What most people care about is how much do I have left over at he end of the month, and am I in the red or the black.

    If you really care about budgeting, and are disciplined then products like YNAB, or the good old envelope method of budgeting are going to be the best options. I also think that payee specific budgeting is a powerful tool as well. There is a big difference in $ spent on food at Whole Foods vs Costco, or for clothing from TJ Maxx vs Nieman Marcus.

  19. Over the years, I’ve helped hundreds of people do budgets and conducted several workshops on the topic. It would be great if 100% of the people I talked with stuck to their budget 100% of the time, but I understand that is not anywhere near realistic.

    What I always encouraged people to do was at least take the time to get some “current” and “target” numbers down side-by-side on paper just to see where your money is going and where it could be going. In analyzing their current numbers, I advised people to be on the lookout for expenditures that weren’t helping them toward their life goals that they could cut back on. The example I used is that the first time I ever did a budget, I realized that I was spending roughly $2,500 extra dollars a year on buying the New York Times every day, eating out at lunch instead of brown bagging it, and buying an extra coffee in the afternoon. Because I did that budget and identified and subsituted for those expenses, I now have an extra $2,500 every year that’s helping me get closer to my real goals in life.

    I get that it’s tough to always STICK to a budget, but that shouldn’t be a reason not to periodically DO a budget.

  20. I track most of my expenses. I wouldn’t call it a budget. I keep a running total of my biggest expenditures, automobile repairs, insurance, eating out cost, and groceries cost by charging everything to my debit card. That way I can go into my account and label things in their respective categories, this transactions is available to label 90 days out, so even if I don’t feel like doing it eventually I can get around to it before the 90 days are up.

    I’m not sure if it saves me money, sometimes I look at the numbers and am mortified, but I have great cash flow and I know where my money is going. That’s pretty comforting.

  21. Shawn @ Managing The Money Wars says

    Some very good points. I think a big problem is that with many brands of budgeting software, people get bogged down because they set up too many categories in the budget and/or trying to allocate every penny in every area. It becomes very tedious and time consuming. We have found the better way for us to budget is to stick to larger categories and allow ourselves flexibility with these larger sums rather than watching our nickel and dime many categories.

  22. Dan Jurich says

    We use a spreadsheet (in fact a series of linked spreadsheets that include more than just the budget) and gave up on programs like Money and Quicken. We use tabs to represent the major categories along with a summary tab that we open to view the budget from a high level. Each major tab has the details and sometimes we use the excel group function to hide those details. It’s not hard to do, and it makes it easy to add in things you forget when you first start it out. If I get some time, I will make a template and share it with the author of this site to see if there is interest in making it available to others.

  23. gustav@ create a personal budget says

    I totally disagree with those two gentlemen, and now I know why I dislike Quicken so much. As the old Indian used to say, they speak with a forked tongue. I firmly believe in budgeting and know a lot of individuals of a like mind.

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