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Throw Out The Budget

By , September 18th, 2008 | 13 Comments »

throw it out

I find budgeting unreliable.

Whatever method you use to budget, there is a good chance you are wasting your time, and possibly money. Just to be clear, when I say “budget,” I mean trying to predict how much you will spend in specified categories over a certain period of time and allocating money ahead of time to those goals.

When I first began tracking my spending, I also attempted to establish a budget. I found it nearly impossible to predict how much I should allocate to the spending categories I had identified, and when I would need the money to be available. Their are so many unpredictable factors that determine the cost of products and our needs at any given time. So what good is a budget unless you can see the future?

Each month there are known and unknown expenses, and within the known expenses there are variable and non-variable expenses. For instance, I know that I will have to buy gas for my car and pay my car insurance. I know exactly how much my insurance will cost each month, but the cost of gas will vary according to my driving habits and the cost of gas. Throughout the year, I will also incur unknown expenses related to my car, such as routine maintenance and possibly unforeseen repairs. Based on this knowledge, I could budget exactly what I will need for insurance, estimate how much I will need for gas and perhaps set aside a certain amount each month to cover any unknown costs. Presumably, the money I set aside will be rolled over each month until it is needed.

I believe that managing your money in this way conditions you to spend more than is necessary and ultimately save less money.

If you budgeted $50 for eating out, would you be more or less likely to actually spend that much on eating out? And if you spent less than $50, where would that extra money go? Would you spend even more the next month on eating out, or would you splurge on something else?

Budgeting also makes assumptions about money you do not yet have. Your goal should be to spend as little as possible and avoid any unnecessary expenses. Why put aside money for something unless you know you will need it? If you suspect your income will not cover your expenses, you need to do some cutting, not budgeting. So what is the solution?

Track Your Expenses

The only budgeting you need to do is to make sure that you spend less than you make. The only way to do this is to track all of your expenses and make sure it is less than your income. Once you have done this for a few months, you will begin to recognize your known expenses and will get an idea of how much your variable expenses fluctuate. More importantly, you will find areas where you can trim expenses.

Take Savings Out Of The Equation

Make it automatic. You should have money for retirement, an emergency fund and cash savings taken out before you start calculating your “take home pay.”

Know Your Balance

The best way to make sure your are spending less than you are making is by knowing how much money you have. You can then begin to make decisions based on what you know you can afford now, rather than how much you thought you could afford at the beginning of the month or year.

Maximize Your Savings

Once you have tracked your expenses for a few months and identified areas of savings, adjust your automatic savings. Instead of allocating money for future, unknown expenses, put it all in savings – preferably a high-interest account. When an unknown expense pops up, you know your savings will be there to help you out.

Now, if you are setting aside money for a vacation or a “want,” I can understand establishing a separate account, or keeping a tally of how much that fund is growing. But why not make it part of your automatic savings? Bump it up by that amount and keep all of your money in the same place. If you have a high-interest saving account, it may help you reach your goal faster.

(Image courtesy of Jaysun)

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  • Uncommonadvice says:

    Good advice – budgets are like diets, they don’t work! We need to make as much as our savings as automatic as possible and then just live off what is left.

  • DP says:

    There *IS* a budgeting technique that addresses fixed vs variable spending. Take a look at Stackbacks (http://stackbacks.com/blog/?page_id=4). It involves using two checking accounts, which might seem confusing and tough to manage, but it works really well for me!

  • fern says:

    I really have to agree with you on the unrealistically constraining aspects of budgeting, and the importance of simply tracking one’s expenses.

    I’ve been tracking my expenses…to the penny…for probably close to 20 years. Some people may say OMG what a pain, and doesn’t she have better things to do with her life? But once it becomes a habit, it’s really no big deal, and i rather enjoy it. Having ready access to those numbers has allowed me to analyze many different facets of my spending.

    It helps me keep my eye on the ball, ie, my long-term goals, and i’m always in control.

  • Annie Jones says:

    I disagree. I’ve tried just tracking what I spend, which was eye-opening, but did not help me to NOT spend.

    For me, the only way to keep control of my spending is to both track it to the penny and to budget our money carefully. I use a computer version of the envelope system and zero-balance budgeting.

    If your method works the best for you, that’s great. My method is the only one that has worked well for me so far and I plan to stick with it.

  • Doug S says:

    I disagree. Tracking your expenses to try to save money is like opening the barn door and then trying to saddle the horse.

    A good budget includes an “emergency fund” to cover unexpected overages. You know how much you’ll spend on groceries and gas, and you can always put in a category for “car repairs.” If a car repair comes up that is over the amount you have saved in that budget category, you dip into the emergency fund.

    Budgeting tells your money where to go, putting you on a written plan. “You happen to your money, instead of your money happening to you” as someone once taught me.

    Of course, what do I know. My wife and I only live on half our income, saving the other half for a full 20% downpayment on a house. We’ll actually have close to 40%, plus a 6 month emergency fund, when we’re ready to buy. But if you think budgeting doesn’t work, more power to you.

  • Ceejay74 says:

    Budgeting saved my family. Before, we were spending almost $1000 more than we made each month. Trying to rein in spending didn’t work, because so many things were automatic for us in this consumer society. Budgeting helped us make choices and keep our discretionary spending under control. We all wish we could have more things and money, so I know if I relaxed the budget categories we would gradually lapse back into overspending, and be out of money by the end of each month.

    Some people are naturally frugal. Others need some structure. I need the structure.

    Oh, and we put 5% of pretax income away automatically, and put 36% of post-tax income toward debt repayment (not counting mortgage payments). So the disciplined budget is helping us reduce our debt dramatically while still saving a tiny bit.

  • A Marino says:

    By tracking your expenses you learn how you are spending your money so that you can use it as a tool to cut down in areas that you are overspending. After tracking your expenses, you can set up your budget. My budget tells me everything I need to know about my finances.

    As for having money left over after a month in a category say clothing; you can transfer that money over to a savings account and put it in a clothing category. You may not have bought any clothes this month, but you may need to spend more money in the next two or three months and the money is there.

    I also have a category for a catch all that I allocate each month. I pay out all of the bills and then I allocate money to items that could fall into a miscellaneous category. It could be purchasing photo prints, purchasing stamps, stationary,etc. Your electricity bill may have been higher and you have the money to cover it.

    Budgets free you to direct how your money will be spent not the other way around. I find budgets freeing.

  • Kenny says:

    Tracking spending never worked for me. It never controlled my spending… even when I tracked it in real time. Budgetting is the only thing that has helped me spend less.

  • t says:

    Once I’ve decided to put a certain amount of money aside each month, I use a budget to guide my spending and to have a good idea of how much discretionary funds I’ll have. I plan on doing more budget tracking in the future, but for now I just use an excel file to estimate my average costs for each month at the beginning.

  • VIJAI says:

    Like many others I also disagree but it depends on each individual’s perception. What works for one won’t work for others.

    But Budgeting is a great tool manage your personal finance and expense trackign is a part of it and should be part of it. Just expense tracking won’t do much good. You have to know how much is coming in to your pocket, how much you can spend and how much you can save. Budgeting helps you do that..


  • VanSkalen says:

    I agree with you in todays world with so many options for tracking your money in real-time. Uses a service like mint.com, or just your online banking service makes it very easy to see available vs spent cash.

    I wouldn’t disregard budgeting in general however… it’s still a great tool and one that will work better than just tracking your spendings for some people.

  • Bimmer says:

    Disagree. A budget has been fantastic for us. We tracked expenses for two months to get a feeling for where we were spending money. We then setup a budget. On the variable categories (particulary wants like eating out, clothing, kids toys), we really try to not hit the limit. In fact, its kind of game/challenge for us. We also adjust the budget monthly if we know we have certain expenses coming up (ie we will reduce eating out and entertainment allowance and bump up whatever needs extra money for the month. We always come in under budget, except when unforseen repair/replacement things happen (broken oven, car problem, etc). Those are taken care of with the previously accumulated savings of staying under budget.

    Budgeting has allowed us to understand our spending, let us lead a balanced life (we can save, invest, yet still do things to make life enjoyable in the present), let us plan ahead for financial issues, and so on.

    To each their own, I guess. The best advice is to do whatever works for you.

  • ThiNg says:

    I can sort of agree with the article. The author is trying to use a sensationalist headline to grab attention (and it seems to be working), but a lot of people are missing the main point: Trying to predict budget categories can be a confusing and time consuming act and more often than not, the amounts will be wrong. I also think that this is the main stumbling block for people who are new to controlling spending.

    There was a budget system that was quite big in the news a couple of years back, called the 60/40 budget. I use a modified/customised version of that method and it has freed my financial life.

    I used to use the envelope method and keep all of my receipts and audit everything monthly. I spent hours each month reconciling all of the items and making sure everything was under control (I still have boxes of receipts – shudder). I got caught up in the categories and details and lost site of the big picture. Living my life!

    The 60/40 budget says that your total household expenditure has to be 60% or less of your take home pay (ouch!). But you need to take care of the 40% first, 10% into Retirement, 10% Long Terms savings (House, car, etc.), 10% short term savings (emergency fund), and 10% discretionary spending. You pay yourself (40%) first. Never try to save what’s left at the end of the month, if you’re like me, there won’t be anything.

    The 60% becomes one giant category. It doesn’t matter where I spend the money as long as the total never breaks 60%. I can spend every single penny if I want to, because all of my savings are taken care of. There’s an added twist if you have debt to payback, but once you are debt free it really is that simple. Spend too much on gas? cut back on eating out. Spend too much on cable TV? skip a trip to the mall or cut back on a hobby. Once you shed yourself of the categories, you feel better because you no longer have to punish yourself for ‘guessing’ wrong at the beginning of the month.

    I do budget, I need to budget, but I don’t use categories and sub-categories and miscellaneous categories etc. So I can kind of agree with what the author said…


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