Why Budgets Don’t Work (And What You Should Do Instead)
Ready to start budgeting, but unsure where to begin? We’ve got you covered.
At Triune, we believe that being good stewards of everything we’ve been given leads to less stress and more fulfillment. This means managing your money well, and subsequently, spending less than you earn.
But here’s the catch: your traditional budget is likely NOT the best way to do this.
Read More: How to Stick to Your Financial Goals
Why don’t budgets work?
We know it’s a bit contrarian to say budgets don’t work, but here’s why:
Budgets don’t work because you essentially create a “pass/fail” exam for your future self, and your future self is not really concerned about you.
We’ve seen it repeatedly. Our clients create a detailed budget, but they aren’t able to stick to it perfectly, so they feel defeated, and then they give up on it.
You set a strict budget for yourself, and then you’re surprised when you don’t stay on budget because you’re HUMAN and decided to get extra guac on your burrito bowl.
We still think tracking your spending habits is important, but we don’t believe a hyper-specific budget is the best way to do this.
Instead, we think two things are important….
Create a spending plan
Track it and keep score
Let’s dive in.
5 Steps to Create a Spending Plan
Ready to track your spending habits in a way that works for you?
Creating your spending plan actually starts with everything besides spending. The model we follow is simple, and money flows in this order → GIVE → OWE → GROW → LIVE.
1. Identify your take-home income.
How much are you bringing home each month? Figuring out this number is the beginning to figuring out how to allocate your spending.
2. Determine how much you want to GIVE.
We encourage our clients to give generously, so this is the next step in our process. Ask yourself how much you feel called to give and what kinds of organizations/people you want to support. Then, incorporate this into your plan. This may be a fixed dollar amount, or a percentage of your take-home pay; both will work!
3. Determine how much you OWE.
Are you making payments towards your debts to get them paid off within the timeframe you desire? Are you on top of taxes (for business owners and self-employed folks, are you setting aside the amount you’ll owe)? Make sure this is prioritized in your plan. Your debt payments likely represent a fixed dollar amount in your plan, and depending on your tax situation, you may be saving a percentage of your income to put towards taxes, or have a specific dollar amount your CPA instructed you to pay towards your quarterly estimates. Making sure this step is done before GROW and LIVE is important to ensure you’re never behind on what you OWE.
Read More: How to Create a Debt Payoff Plan
4. GROW: Decide how much you need to save.
Are you saving for your short-term goals (travel, home improvements, etc.), and investing for the long-term? Work with your financial advisor to determine how much you need to save for each of these goals, and put that amount into savings right when you get your paycheck. As our clients have learned, the time horizon of your goals will determine the “buckets” in which you save – if you’re unsure about where to save for your goals, reach out to us for guidance.
5. Figure out how much you need to LIVE.
Now what’s left? After you’ve subtracted your giving, debts, taxes, and savings, you have your lifestyle “budget”. The beauty is that this “budget” is one that actually allows you to accomplish what’s most important, because you prioritized things properly.
Caveat: if you do this exercise and find that what’s left for “LIVE” is truly not enough to meet your lifestyle needs, then work back up the list. Reconsider your savings goals… maybe you can’t take three big vacations this year, but one. Adjust accordingly to ensure everything fits. More on this in the questions below.
Once you’ve identified your monthly budget, consider the following questions:
Can you live your everyday life on this remaining lifestyle amount? If not, consider changes you need to make to spending.
If you feel aligned with your spending and don’t want to make further changes, then look at your savings goals — would you give something up in order to spend more today?
It’s an ongoing balancing act between your savings and lifestyle – and ideally your investing, taxes, debt and giving don’t get overthrown by overspending.
Let’s Break it Down
So what would this look like in practice? Let’s take a look at Jane’s income and spending plan below.
Before we dive in, we’re going to operate under the assumption that Jane already auto-deposits money into her retirement savings each month and has an emergency savings account.
With that in mind, Jane’s monthly take home income is $8,000 after taxes. She wants to give 10% of her income to various charities, so she initially sets aside $800 for giving. She’s a W2 employee, so in her situation, she doesn’t need to worry about setting aside extra money for taxes. However, she does put $500 toward her student debt each month.
She’s saving up to put a down payment on a house in the next five years, so she puts $2,000 into her brokerage account, where it’s appropriately invested for her time horizon. She’s also planning to go on a trip to Europe next year, so she sets aside $500/mo into a high yield savings account to fund that vacation.
That leaves $4,200 for the rest of her expenses. She pays $2,200 in rent each month, so now she has $2,000 for everything else–groceries, other bills, and the fun things in life.
Read More: The Basics of Retirement Planning
Pie chart representing Jane’s spending breakdown
How to Keep Score
Keep score — use a Spending Tracker (we like Mint.com, YNAB, and Monarch Money, to name a few), and track your spending each month. These tools are fantastic because they’ll do the “heavy lifting” for you by automatically pulling in transactions from your bank and categorizing them for types of expenses (bills, groceries, personal care, etc.).
Are you within that total lifestyle amount? If so, great! Keep it up!
If not, review where you overspent, and consider how you might self-correct in the next month.
Conclusion
Spending over the course of the year is a game of averages. We all have expensive months, things we didn’t plan for that come up, like birthdays and holidays, a car breaking down, or an unexpected trip to Urgent Care.
However, if you are averaging a monthly spending that is consistent with your overall Cash Flow Plan, then you are on the path to financial freedom (and peace of mind today!).