Why You Should Not Keep a Budget

With all of my writings about living frugally and maximizing your hierarchy of savings, you might be shocked that I’m completely against keeping a budget.

Here’s the deal, I have never kept a budget. Not only are they a waste of time, but they can actually deceive you and cause you to spend more money.

Aside from causing you to spend more money, managing a budget definitely takes more of your time. After all that work, they turn out to be easy to manipulate, meaning the final budget won’t be accurate.

There’s a better way to manage your money. I’ll walk through the problems of budgeting, and share my recommendations for saving money and maximizing your savings.

Budgets Cause You to Spend More

This sounds counterintuitive. If budgets are created to help you save money, how could they cause you to spend more?

It turns out people do exactly this. Studies found that when gas prices go down, people buy more expensive gas. If gas prices go down, they can buy more expensive gas and stay within their budget!

But what if they just saved that money instead? That’s the exact fallacy budgets create. You granted yourself a ceiling for maximizing your spending, instead of maximizing your savings.

Gas may sound trivial, but extrapolate this mindset across everything you budget. Happy hour drinks are half priced? Might as well get two. How many times has somebody bragged about how much money they saved after they spent light years more?

Don’t fall for this fallacy. Minimize your spending instead of having a spending ceiling. Focus on lowering your expenses as much as possible by Negotiating for better prices, getting cash back when you shop, and cancelling your gym membership as soon as possible.

Your Budget is Easy to Game

Have you ever tried the Mint app? This free service aggregates your spend, and sends you summaries of where your money went between groceries, bars, and restaurants.

Mint makes an educated guess about where your money went. For example, if you went to Buffalo Wild Wings, they will probably put that in the “restaurant” bucket.

Now here’s the question – if you met friends at Buffalo Wild Wings, or any other restaurant, and ordered a bunch of drinks without any food, did you then move that expense from “restaurants” to “bars”?

Me neither. Even though I went there to grab a drink or three, it feels a lot better looking at how “little” I spent at the bars. For better or worse, these budgets are too easy to game, and we’re kidding ourselves if we act like we don’t.

Budgets are Time Consuming

Even clicking a button on Mint takes time. Imagine going through your credit card and bank statements, and manually accounting for all your expenses each month.

Your time is worth too much to worry about stuff you have already done. Spend that time learning a new skill, reading a book, or connecting with someone you care about.

None of this accounting is necessary if you were frugal to begin with. Focus on saving money, and spend your free time doing things you care about.

Save First & Minimize Expenses

If budgeting doesn’t make sense, what should you do instead?

First of all, budgeting should be done in reverse. Instead of focusing on expenses, focus on how much you want to save.

One popular rule is the 50/30/20 rule, where you immediately allocate at least 20% of your after tax income to savings. The remaining 50% goes to needs, and the other 30% goes to wants.

Decide how much you want to save first, and throw all that money into savings before it lands in your checking account. Allocate that money to your hierarchy of savings before you spend it somewhere else. Once again, your home does not count as savings.

Run a tight ship everywhere else once you decide your savings. That savings rate you determined is your floor. The less you spend on other stuff, the more money you can save in addition to your floor.

Do you love running up the score in sports? Treat your net worth the same way.

Budget Disadvantages – The Bottom Line

Budgets are great in theory, just like the next fad diet. Unfortunately, they both work a lot better in theory than in reality.

Budgets cause people to spend more money. Studies show that people will spend at their ceiling instead of saving the difference.

Even worse, budgets are easier to game than dieting. Column A can move to Column B at the click of a button, and suddenly your budget looks light years better than reality.

Finally, all of this takes time. Time to account for your spending, time to say that the six pack you bought at the liquor store was actually for “groceries”. There are much more useful ways to spend your time instead of focusing on the past.

By spending more of your time saving money instead of budgeting, you’ll save a ton of time, and will end up with a much higher net worth.