There are a number of things that get on my nerves. Flat surf (no waves), when people are impolite and/or think they’re entitled, when people don’t use blinkers, no English Premier League football on a Saturday morning. But most of all, I can’t stand the thought of a budget for my finances.
Don’t get me wrong. I know a lot of people are passionate about their budgets and enter every dollar spent into an Excel spreadsheet. And then there are those who budget only $50 for an occasional night out but will teeter on the verge of a nervous breakdown if they spend $51. If that works for you, great. I admire people who are good with their money and if a budget helps you stay within your “line,” then more power to you.
I happen to think that a budget is a crutch that is holding you back from saving even more money.
There are two overarching forces that affect your level of saving: your household income and the amount of money you spend. There are a number of ways to increase your savings rate ((income-expenses)/income). You can either increase your income and hold your expenses steady or you can decrease your expenses as your income remains constant. In my experience, it is far easier to have immediate effects on your expenses as opposed to your income. By setting a budget, you’ve inherently made the decision that those figures are your yearly expenses by category and that your task is to stay within that budget, rather than work to decrease the amount allocated in each category on a daily/weekly/monthly basis. Let’s say you’ve allocated $400 to groceries/month in your budget. The mindset you’ve subconsciously fallen into is: “As long as I stay under $100/week, I’ll stay within budget.” However, what you’ve now failed to focus on is the fact that you can do things to decrease the amount spent even more (i.e. coupons, buying in bulk, etc.). By focusing on the upper threshold ($400/month) you’re removing the focus on spending as little as possible (the lower threshold). This holds true for each category of spending within your budget.
By setting a budget year after year, most people do not consider that entire categories (such as subscriptions/memberships) can be completely removed. “I’ve spent $250/year on subscriptions/memberships in the past, so that’s a good amount for the upcoming year.”
Budgets help keep you within a certain spending amount, but more than likely do not have any effect on your overall savings percentage. That nagging question pops up in your head: “How do I save more money?” Since your budget (expenses) is set, you look to the other side of the equation: income. Work harder at your job and hope for a promotion/bonus? Changes related to income are exponentially harder to change and are usually out of your hands.
Each and every day is filled with mostly small decisions. Should I go out to lunch today or bring it in from home? Should I stop at Starbucks or brew my own coffee? This is how I choose to focus on my savings rather than set budget categories like “Lunch” or “Miscellaneous.” There’s always a time to splurge (birthdays, anniversaries, winning a new client), but there’s also much more time to save.
Focus on the decisions that you have control over (your expenses) rather than those that may be partially controlled by others (your income), and you’ll see your savings rate increase slowly and steadily.
Let me know if you think your budget (or lack thereof) is helping or hurting your savings rate!