Why budgeting doesn't usually work
Budgeting doesn’t work, maintains advisor Stephanie Holmes-Winton, author of the books Defusing the Debt Bomb and Spent -- at least not on day-to-day expenses, not in the traditional sense anyway.
It's not that it's impossible to set a money-management plan and stick to it, it's just that most people don't, Holmes-Winton says, offering the following example.
Say you're renovating your bathroom. You decide how much you're willing to spend, figure out where you’ll get the money from, make a list, price it out, etc. You may go to multiple stores to source the best products at the best prices and get materials from different places to meet your budget.
Now let’s say you get 10% of the way into the reno and discover that there's some rotting wood under your floor and a leaky pipe and it will cost about $700 more than anticipated.
You could at that point choose to adjust other components, such as get a lesser grade of tile, consciously decide where to take additional funds from or stretch the completion date so you can carve those funds from another few pay cheques.
And that's where a budget would really work since you could make decisions as you uncovered information. But that's not what most people do.
When, for instance, was the last time you thought of things this way, Holmes-Winton asks.
Just recently, like every other year, says Bob Lowry, who blogs regularly about retirement and the financial challenges it represents.
"We set our budget on January 1st for the coming year. It is based on last year's
expenses, what we think we will need to spend, and what our income will be for
the next 365 days. Also, we have a certain amount of money set aside for
emergency expenses.
"From then on, it's my responsibility to keep things
in balance," Lowry explains, acknowledging that he regularly adjusts things to stay on track.
Could you say the same? Do you work with a budget? Are you pleased with the result?
By Gordon Powers, MSN Money
Posted by: Al-Man | Mar 14, 2022 5:01:08 PM
What kind of an analogy is comparing bathroom renovations to grocery shopping? Apples and oranges people.
Budgeting is a way of keeping cost under control. If you are renovating and everything goes great, a budget is fine. If you rip open the floor and find some rot, that is called an unforseen added cost. Something unexpected can be added into a budget or planned for.
If a budget doesn't work in most cases or it doesn't work with many people, fine. I have a budget and many times it doesn't work right due to problems. Thats how life works too. One thing I do have is a type of ledger that I use to see where the money goes at least. Then at the end of a month, quarter or year, I see where I might be able to cut back here and there to pay for something else or put the money away for retirement. If a budget doesn't work for you, try seeing where the money goes at least. It will be a start.
Posted by: karra | Mar 15, 2022 4:17:38 PM
Agree with Al-Man on keeping track of where the money goes. Budgeting works fine for me - have done it for the last 30 years.
With the bathroom scenario, say you've estimated $5000 for the necessary work, then preferably you should have $5500 available (10% extra for unforeseen expenses). Now if I find rotting wood, I have $500 towards replacing it. But say it's going to cost $6000 now. In my budget, there is $250 a month set aside for renovations. So my $500 shortfall means that I won't be doing any more renovations for 2 months - my baseboards or whatever will have to wait. I will probably "borrow" the extra $500 from my car or vacation savings category meanwhile and pay myself back.
With the groceries scenario, if I'm running short at the end of the month, I will cut back to beans and pulses and forgo treats and expensive stuff. However, if there is a super good deal on say a box of frozen chicken breasts that will save me money, again I will "borrow" against the next month's budget or take it out of the alcohol and restaurant category. If over a few months I find that the food budget just isn't enough, I will first switch to cheaper brands and then if necessary, chalk it up to inflation and increase the grocery budget whilst reducing the budget for something else (renovations maybe).
In the end, it is well worth while to take the time to analise where the money goes now, what are your priorities in spending/saving money and draw up a plan that works for you.