Are Budgets Overrated?

“As it turns out, the ability to make and stick to a financial budget defies the realities of most people’s lives. Budgets assume a level of consistency in our finances that doesn’t exist.“ -Helaine Olen

You’ve probably been told that you need to make a budget.

I know I have. It’s the first thing you hear from almost every single personal finance expert.

And it’s well-intentioned, but is it actually good advice?

I came across this article from Slate’s Helaine Olen (courtesy of Michael Kitces) that argues that not only does budgeting fail for most people, but that it actually “defies the realities of most people’s lives”.

The conclusion? Toss your budget.

I like a lot of what Helaine says in this article and I think she brings up some important points that may be holding people back from making consistent financial progress.

But I think the conclusion she draws is flawed. Because while I agree that traditional budgeting is often a lost cause, I DO think there are good ways to plan ahead and take control of your money.

So today I want to dive in and tackle this question head on: are budgets overrated? And if so, what should you do instead?

Helaine’s take

Helaine’s major point is that while a budget assumes a nice, neat, predictable monthly pattern of income and expenses, our actual lives almost never look anything like that.

To illustrate, she lists some of the things she experienced just over the past month that threw her budget off track:

• An annual assessment from her co-op.
• An unexpected medical bill.
• Her children’s camp bills.
• A poodle with the stomach flu. (Ugh! I’ve been there.)
• Freelance income that hadn’t been paid.

She also cites some compelling research from JP Morgan showing that, among other things, most people’s income and expenses fluctuate by at least 5% every month, and that most people experience at least a 30% change in monthly expenses from time to time.

Add in the possibility of a third paycheck every few months, an annual bonus, tax refunds, and the like, and the resulting ups and downs are enough to drive anyone at least a little bit crazy.

Her conclusion?

“As for actual budgets? They offer the illusion, not the reality, of financial control. If you don’t have enough money coming in, they won’t make it better. Things like salary increases, more predictable income, and further health insurance reform—or even legislation putting a cap on balance billing—will help us with our finances more than any budgeting app or formal plan.”

My take

I wholeheartedly agree that traditional budgeting is problematic.

I don’t use a traditional budget and I don’t encourage my clients to do so either. For a few reasons:

1. They’re really hard to maintain, especially if you’re new to managing your finances.
2. Because they’re difficult they often lead to guilt and discouragement, which stops many people from making any financial progress at all.
3. They focus on the wrong thing. Budgets are all about setting limits when the real goal of personal finance is to help you get MORE of the things you want.

So I’m with Helaine on that point. Traditional budgeting often falls short.

BUT…

Helaine seems to reach the conclusion that because traditional budgeting is flawed, there’s really no way to get ahead other than hoping for external forces to increase our income or make health care more affordable.

I don’t agree with that at all.

While I DON’T believe that living within precise, predictable, monthly spending limits is a realistic (or even desirable) goal, I DO believe that you can take control of your financial situation by preparing yourself for the kinds of irregular expenses that knock many people off track.

Helaine writes that “There is, for example, next to no way to budget for the practice of balance billing—that is, when you’re charged by doctors for the difference between what they bill and what your insurance will pay.”

Actually, yes there is. While you can’t precisely predict the amount and timing of those expenses, you CAN set up dedicated savings accounts for things like medical bills, car maintenance, and travel and automate some monthly savings to each, effectively making these irregular expenses a regular part of your monthly plan.

You can also:

• Automate savings towards your biggest personal goals.
• Build an emergency fund for truly unexpected expenses (good or bad).
• Track your spending so that you can make informed decisions about how to improve (a point Helaine makes really well).
• Create better habits that align your daily life with your long-term goals.

In other words, while a traditional budget may not be able to handle the irregularity of our lives, it is still very possible to set up a SYSTEM that keeps us on track no matter what life throws our way.

So, are budgets overrated?

Near the end of the article, Helaine writes that instead of trying to live by a strict budget, “it helps to think of managing your finances as surfing a wave.”

Now THAT’S a point I completely agree with. Because while I do think it’s useful to set spending and savings goals, I think it’s most helpful to look at them as long-term targets rather than monthly limits.

Your actual spending and saving may fluctuate month-to-month, but over the long term you can still stay close to your high-level plan.

So yes, traditional budgets are overrated. There is no need to set strict limits on your monthly spending and beat yourself up when you go over them. In fact, that’s often a quick way to giving up on personal finance altogether.

But having a financial system in place that prioritizes your biggest personal goals, handles your day-to-day needs, and expects the unexpected is definitely NOT overrated.

It’s really the only way I know to make consistent progress towards the things you care about most.

What do you think? Is it possible to live by a budget? What does your system look like? Let’s talk about it in the comments.