Why we don’t have a budget
I’m scrupulous about watching our spending, but don’t have a budget. Instead of budgeting I treat our finances like a company would. I make plans for our future based on the level of income and spending I believe we’ll have, then I track our results at the end of every month. I’ll refer to this as the personal financial statement approach.
Personal Financial Statement Approach
At the close of every month I download all of our credit card activity into excel. Most websites make this incredibly easy, I can literally export data into excel for the date range I want. We don’t pay for anything with cash, so all our spending is captured online.
Once I’ve downloaded everything I start assigning categories to each transaction. I have 4 columns to fill for each expense, starting with 8 broad categories and adding more detail with each new column. This allows me to quickly see where our money is going and drill-down in as much detail as I want.
For example: I can see how much we’ve spent on food, what portion was for dining out and then how much of that was Starbuck’s. I can easily get a big picture and deep dive where I want to do a little more analysis. Dropping it in excel also allows me to keep a record and compare our spending over time.
Yes, I know it’s a bit much, but once you get the initial setup done it really doesn’t take long to maintain. Being completely honest I spend probably 2 hours total at the end of the month updating our spending and net worth spreadsheets. This includes some time for analysis. Two hours may even sound ludicrous, but really it’s a small amount of time to give to personal finances. Also I like this stuff, don’t know if that comes across.
Why is this Better than a Budget?
I don’t like budgets because they’re restrictive and try to control behavior. Budgets paint personal finances in a bad light. It’s all about denying yourself and being vigilante in self-control. The word budget adds the connotation that you’re restraining yourself – that what you really want is to spend infinitely and staying under budget is a sacrifice.
Budgeting also has some practical negative side effects. People will spend up to their budgetary limits in each category. At first blow this seems like I’m just defining the word budget, but hear me out. We keep mental track of where we’re at in a budget and know when we can spend more. So if we haven’t gone out to eat during the month we might go to a 5 star restaurant on the 30th just so we can use our $200 dining out budget. It feels like a free meal!
Budgeting also causes us to do funny tricks with mental accounting. Maybe instead of going out to eat we’ll spend our unused dining out budget on some new shoes. Hey, even though I was over on clothing it’s ok because I was that much under on dining out. It all balances.
Governments are on a Budget
There’s a pretty well-known problem in government spending that is caused by the way government finances are handled. Unlike corporations, governments have a very good idea of how much money they are going to bring in in a year; their revenue is more or less fixed. So they determine spending by assigning budgets to each department and then checking at the end of the year if they stayed within their budget.
The problem is that it causes each department to spend exactly up to their budget, if not more. No department willingly spends less than they’re budgeted. The reason is, as soon as you’ve totaled up your expenses for the year, they set the budget for the next year. Do you get a reward for spending less than allocated? Heck no! Instead they just reduce your budget for the next year. By lowering your annual spend you’ve established a new baseline, and now you’re expected to stick to that every year.
I think people on budgets do the same thing. You decide at the beginning of the year that you want to spend $4,000 on clothes. If Black Friday rolls around and you’ve only spent $500… woohoo shopping spree! I mean why not? 11 months ago you came to this arbitrary number so you gotta stick to it.
Personal Financial Statements
Instead of prospectively assigning spending I recommend retroactively measuring performance. Looking back to see what you’ve spent your money on allows you to reflect and determine what’s important.
The thing about humans is – we are super bad at predicting what will make us happy, and a budget is a prediction. Instead of trying to guess at what spending will give you the most joy in the future, look back and see what actually happened. This allows you to form an understanding of where your money is going and how it’s working for you.
To see a reconciliation of where our money went in 2016, check out Our Financial Year in Review.
Let Me Illustrate
When I first started using the personal financial statement approach I noticed we were spending a lot on eating out. Most of it was take-out and delivery, seemingly inexpensive meals that we’d have 3 or 4 times a week. That and a few nice dinners put us at $500 a month dining out. On the surface this seems like a pretty reasonable amount for a young couple with no kids. But reflecting on it I realized most of these were eaten at home, or at fast-casual restaurants for convenience sake. I didn’t have a problem if we were out with friends or family, but that wasn’t really the situation.
It occurred to me that I wasn’t getting $500 of value out of this category of spending. If we were going to eat in front of the t.v. I might as well make something at home. If time was my concern, then I could make easy meals. It doesn’t take that long to boil spaghetti, buy some nice sauce and a premade loaf of bread from the grocery store and you have a meal and leftovers for <$10. That takes no effort, I enjoy it as much as the take-out we were ordering, and it’s healthier. Easy.
Last year we spent an average of $166 a month dining out. That is 1/3 of what we were doing previously and it didn’t feel like a sacrifice at all. Not even a little. By cooking more we discovered we kind of enjoy making new dishes. Now we’d rather buy $30 of fancy ingredients and have a nice dinner at home to celebrate instead of going out for an expensive meal.
Make What You Spend Your Money on Part of Who You Are
I want my spending to reflect my values. I love to travel. Every year our travel spending grows and grows and I never feel guilty about it. I get so much joy out of going on trips that I use it as a measuring stick. One of the big reasons we don’t have any desire to move into a larger/nicer/more expensive home is because we realize we don’t get as much enjoyment out of where we live as we do from going on trips.
Another thing we realized is that we like quantity over quality when it comes to travel. We want to see as many new places as we can. By realizing this we know we’d rather go on 4 trips taking red eye flights and staying at Holiday Inns than 1 trip flying business and staying at the Ritz. You may be the opposite! I’m not here to judge, I’m just telling you that looking back on your spending is going to give you a much better understanding of your values than trying to project forward.
Wrap It Up
It’s easy to break budgets because they are an oppressive restraining force. They don’t represent our values and they cast our spending in the light of what we can’t instead of what we can.
A personal financial statement tells me how I performed and allows me to reflect on what is working. If I’m spending more than I’m bringing in I can see that quite plainly, and can identify the things that provided the least joy and cut those out. Being aware of where my money is going informs my future self.
A budget will cause you to go to a restaurant and order a hamburger instead of a steak. You’ll be disappointed because you think that you really want the steak but feel like you have to deny yourself. Someone aware of their personal finances doesn’t even go to the restaurant because they know nothing in there brings them value.