This is the first of a Friday series called “You’re a sucker to….” which explores whether conventional financial wisdom is necessarily the best advice out there. Everyone’s situation is different; if you’re doing something that I tell you you’re a sucker to do, it doesn’t mean it’s bad or wrong. There’s just other options out there that you should be aware about.
I’m about to tackle one of the pillars of personal finance, having a budget. According to conventional thinking, for a person to get ahead they first have to control their spending. After all, one can’t save if they’re spending more than they make, right? And what better way to control spending than with a budget? By figuring out how much to spend on food, shelter, entertainment or utilities, one can have a great road map to saving money. I’m not denying any of that.
Even though budgets can be a great tool, they have some weaknesses that I think take away from their overall effectiveness. Kind of like diets, the vast majority of budgets ultimately fail miserably. They’re a complicated, time consuming, inflexible way of managing your money. Sure, they can work, but would you call something that has a very high failure rate successful?
Think about the time spent doing your budget. If you have any sort of detailed budget, it can be incredibly time consuming. First there’s the inputs. Those aren’t really that bad. It’s tracking your spending that gets so time consuming. You have to save all your receipts, enter them into a program (or add them up yourself) and then tabulate the results from there. I don’t know about you, but I don’t have the time or energy to do all that.
There’s a much easier solution. Figure out what you’d like your savings rate to be (I’d recommend 10% of gross income, but whatever does it for you) and set up your bank account to withdraw it every time money comes in. You can do it in 10 minutes at your local bank and it’s done. Use the money for savings, investments or to pay down debt faster. It accomplishes the same goal in a much simpler way. No fuss, no mess.
If budgets work for you, by all means, keep at it. How about the large part of the population that, for whatever reason, just can’t stick to a budget? Before you condemn them for being irresponsible morons, realize that there are different ways to the same financial goals. My way happens to be much easier to implement. Isn’t the result more important than the process?
Just because I advocate paying yourself first, doesn’t mean that I want you to ignore your spending entirely. It just doesn’t have to become a monthly thing. Yet if you’re accomplishing your savings goals, then what you spend the rest of your money on doesn’t really matter. The heavy lifting of saving is what matters, not the other part. Ideally I’d like to see someone start their savings at 10% and use spending cuts to get it to 15-20%. But for most people, I don’t think that’s really feasible. So let’s get some new ideas out there that will hopefully get more people off the hamster wheel of debt.
This post was featured in the Carnival of Personal Finance, edition #245.