No one needs or should use a budget. I realize this may seem like a bold statement. Before you begin forming arguments to disagree with me, please understand that I am a huge fan of spending plans. But I hate budgets.
Budgets are difficult to maintain because people don’t like feeling restricted for long periods of time (or ever). Budgets have a negative connotation because they aren’t fun. The main goal is to spend less. As soon as spending differs from your budget, it feels like you failed. Then, it’s difficult to uphold the motivation you once had to spend less.
Can You See the Big Picture?
Spending plans on the other hand are wonderful and necessary. The goal isn’t to spend less; it’s not about restriction. The goal for a spending plan is to gain control of your money so that your money doesn’t control you. It’s enlightening to know where your money is going because your spending is either aligned with your values or it isn’t. When spending is aligned with your values, it feels like your dollar goes further. This leads to better decision making when it comes to tradeoffs. For example, if travel is your top value then saving for that trip next summer will likely feel better than spending extra on eating out.
A spending plan is a zero-sum game. Your inflows should equal your outflows. What’s great about a spending plan is that it provides flexibility. If you spend more than planned in one expense category, you can adjust another expense category down. Adjustments are a regular part of a spending plan, which is good. When you are making adjustments, you are maintaining control of the big picture – you are taking an active role in the outcome.
A Focus on Values
To create a spending plan, first determine which expense categories need to be included (eating out, personal care, pet care, savings, etc.). Then, determine which categories are needs vs. wants. Next, include reasonable goal amounts for each spending category – remember that total outflows should equal inflows. As you tackle this part, keep your values in mind. Of the “want” categories, which ones bring you the most joy and which ones bring you the least? Does the answer to this match your current spending habits?
One common pitfall is forgetting less frequent or one-time expenses. Be sure to include Christmas gifts in your categories for example. Also, keep in mind that occasionally there will be a big expense that temporarily affects other spending (like new tires). New tires may not be a fun purchase but there’s a silver lining; they get you to work every day so you can continue to spend money on the things that matter to you.
After you’ve created a spending plan, it’s time to test it. Expect that you’ll need to make adjustments and pivot from time to time. You can track expenses through the use of software like Tiller Money, YNAB (forgive the name), Mint, and a plethora of others. Conversely, you can track expenses on your own in excel. A spending plan results in empowerment because you repeatedly decide the best way to utilize your money.
If you would like help aligning your values with your spending, let’s chat!
Hannah Szarszewski is a Certified Financial Planner(TM) professional and Accredited Financial Counselor® practitioner who helps clients with retirement planning and other financial issues. To learn more about her background and the Keener Financial Planning approach, please visit the Interview Hannah page.