Change your money habits, change your future
I’m not a huge fan of using monthly budgets for personal finance.
I’ve found that while they do work for a certain segment of people, they can create some bad spending habits for others. People tend to estimate expenses when creating a budget at the beginning of a year or a month (or a semester for students), and they don't typically make adjustments based on real costs as they unfold over time.
For example, a person budgets X for going out to eat each month, then it’s the last day of the month and he still has $75 left. So he decides to go out and blow the full $75, when perhaps $50 could have been just as enjoyable—or maybe even saving that $75 would have been more satisfying.
Here's another example for why “set it and forget it” budgets don’t work: car payments. So many monthly budgeters create their budget and say their car payment is $300 a month, so naturally $300 goes to that each month. The payment is just that much, and the car is paid off in X number of years. That’s just how it is. I would encourage people to look at their money surplus and maybe ask whether paying off the vehicle a year earlier and parting with an extra $100 a month to meet that goal helps them get closer to their goals faster. They create more value by ending that debt sooner than by blowing that money somewhere else each month.
To me, a budget seems so static ... I’d prefer people focus on understanding where their money has been going and establish some goals for how they’d like it to change in the future.
I see the "use it or lose it" mentality a lot when people use monthly budgets. To me, a budget seems so static—once it’s made, a person feels like she doesn’t have the power to change her situation. I’d prefer people focus on understanding where their money has been going and establish some goals for how they’d like it to change in the future.
I like to use what I would call a spending analysis. A spending analysis looks an awful lot like a budget, but the difference is how you use it—and think about it.
Here’s an example: I was working with a veterinarian yesterday who’s going to start paying her student loans shortly. I told her I thought we’d be able to get her payment down to about $500. She told me she could only afford about $200 a month. I ran some calculations, and I just couldn’t understand how she came up with that.
So, I asked her to fill out a form similar to a budget starting with her monthly after-tax income and then listing out what she spends on each item every month. We could then work on reducing some of her expenses as necessary. If she could justify to me why she could really only afford $200, that was OK. When she finished the spending analysis, she actually realized that a $500-a-month payment was doable. I also asked her to circle items she felt she was spending too much on. We were able to lower one of those recurring monthly bills by almost $100.
Thinking about monthly budgets can create a passive approach to spending. What happens is a category is estimated too high and the person overspends for that, but they’re OK with it because they fall within their monthly budget. And the opposite is also true: A friend of mine, while she was in vet school, waited a week to go buy a pack of Diet Coke because she’d used her grocery budget for the month. Did the expense of that Diet Coke really make any difference in the long run? Absolutely not. Did she worry about it for a week and go without something she really loves because of her monthly budget? She did.
I basically just want something that can help a person remember all the things they spend money on each month. A budget template works well for that, but I never ask clients to worry about using the projected columns. I’m just interested in factual numbers of what they have spent.
The big picture is that we trade money for happiness. As an individual starts to treat spending with this mindset, they can start making more informed decisions. Is this $100 dinner going to create the most happiness, or will saving $50 be more valuable to you overall? Once money is budgeted to a certain category, it’s almost like it’s no longer your money. If you start to take a more active approach, psychologically the money is yours and you’re deciding to spend it on whatever category creates the most value.