The Dark Side of Budgeting
A friend approached me the other day with a question,
“Hey, do you use the Mint.com app? I think it would be a great way for me, for example, to take a look at my restaurant budget and determine whether to get filet Mignon or to get chopped sirloin when I’m out at a restaurant.”
It was a seemingly simple and harmless question and instead of just responding with, “Sure, Mint is great!”, I decided to make it a teachable moment.
Budgets are everywhere. I have created, shared, and used a budget planning spreadsheet on 20somethingfinance. The gurus all recommend them. Surely, there is nothing bad that can come from a budget, right?
When used correctly, budgets allow you to:
- See where you are bleeding money and where to cut back.
- Analyze whether your income will cover your expenses over a period of time.
- Prioritize in tough times.
These are all good things that can be derived from tracking your expenses effectively.
But, budgeting is not always your friend. It has a dark side. It can be harmful if used as a bar to spend up to as my friend was planning to use it as.
What good can come from setting an arbitrary budget cap in a given category based on past expenses and then spending up to it?
When you do that, you are giving yourself permission to spend, kind of like an “allowance”. And then your expenses never decrease.
I’ve known people who do this, and then increase their allowance in each category by the % raise they receive each year.
There is a better way.
It is absolutely essential to track all of your expenses over a period of time. Keep doing that.
Next, forego the setting of categorical budgets entirely. Instead, look for ways you can lower your previous and existing spend levels. Start thinking about your spending differently.
I told my friend,
“Instead of asking the question, “will it be filet mignon or chopped sirloin tonight, as determined by my budget?”, the question should be, “how can I learn how to cook filet mignon, chopped sirloin, or better yet, switch to a cheap vegetarian diet, so that I can cut the cost of dining out, but not miss out on good food?” instead.”
When you adopt this line of thinking, your lifestyle begins to shift, and your expenses start to drop dramatically. More than anything else, spending is a byproduct of how we value consumption in our lifestyle.
The more I think about it, the more I am convinced that we might all be better off to scrap our budgets and simply track our expenses instead.