Budgets don’t work. I say this as a person who budgeted religiously for over 8 years. Back then, I would have told you I was even using them successfully. Until I found a much better way and stopped using them.
One day as I was going through my finances I realized I had a total of $80,000 in credit card debt and no disposable income. Every spare dollar I had was needed to pay the credit card minimums. It was a crushing realization that scared the hell out of me. I felt utterly trapped with no way out. The only solution I could come up with was budgeting. I would have to budget to find extra money that I could apply towards the debt and get it paid down.
And it worked. Sort of. I became the budget master. I had budgets for everything. And for 8 years I took on no more debt (a very conscious decision not to take any more money from banks, friends, or family) and I was able to reduce my debt by tens of thousands of dollars. So overall, it seemed to be working and I would have told you that budgeting works.
I was in the process of creating a specific grocery budget, the last bastion of spending inefficiency. I often lumped non-grocery items into my cart and still called them “grocery”. As I was working on it, it occurred to me that something just didn’t make sense. At this point, I was making decent money - much more than I made 8 years ago. I hadn’t taken on new debt. So why the Hell didn’t I have any money?
That one question started me on a whole new journey. By the end of the year, I was debt free, paying off more in 11 months than I had in the previous 8 years. What happened? I quit using budgets because I found out that budgets don’t work.
Budgets don’t work for the same reason that diets don’t work. On a diet, you restrict the foods you eat. Sometimes you’re faithful to your diet plan and it works. Sometimes the temptation overcomes you and it doesn’t. But even when it works, at some point you either end your restrictions or ease up on them. And then the weight comes back.
Your weight is an indicator of your eating habits. On a diet, you are making temporary external changes to your behavior. You’re doing nothing to change your underlying values. You’re not eating the cake, but you still value the cake. While you manage to change your behaviors, at great effort I might add, your weight changes to reflect it. Once you resume your normal behavior, you resume the corresponding weight.
The same is true of budgets. Budgets are you applying external modifications to your behaviors while doing nothing to address your values. You may decide not to buy the new video games right now, or whatever your guilty pleasure is, but you still value them.
And there’s nothing wrong with valuing video games or anything else for that matter. The problem arises when there’s a disconnect between what we think we value, our goals, and what we actually value, our behaviors.
When I ask people what they value, they’ll usually tell me answers like education for themselves or their kids, retirement funds, housing, cars, and the like. But when you look at their behaviors, they value entirely different things. Movies, big TVs with payment plans, lattes and fast food, and the like. Budgets will not close the gap between your perceived values and your spending behaviors. You may make temporary gains, but they will be with great effort, very inefficient, and usually temporary.
So if budgets don’t work, what does? Tracking your expenses. Every dollars. As you spend it without restriction or judgment. And then regularly reviewing them.
Sounds simple? It is. And it takes less time than budgeting does. So why does it work? And why does it work so quickly?
Just like your weight is a reflection of your diet behaviors, money is a reflection of your wealth behaviors. When you change the behavior, your bank account changes to correspond with it.
By tracking and reviewing your expenses, you bring your spending behavior into your conscious awareness. If you can do so without judgement, your behaviors will quickly begin to match your perceived values. This gives you much greater efficiency in spending power because you’re no longer losing money to the things you don’t care about. It’s like sealing all the gaps in your house and then watching your heating costs plummet.
So why no judgement? This is a critical aspect of it. And if you share the spending decisions with someone else, you both need to be able to review purchases without judgement for yourself or the other person. They are not you and consequently they are not going to value all of the same things you do. Judgement results in denial and denial reinforces the same behavior. You have to be able to review objectively and with an open mind.
As an example, when I first started this process, I was amazed at how much money I spent eating out. When I tried to think of where I went or what I ate, I couldn’t really remember. I was eating out habitually. I’d get home from work, wouldn’t feel like making anything, and so would either order food in or go out and eat. I asked myself if this was really what I valued. It wasn’t, so I began to eat out much less. When I ate out, it was for a special occasion or to celebrate something. I can now remember where I’ve gone out to eat and what the occasion was. I’ve learned to be more efficient in my cooking, preparing food ahead of time to make it easier when I’m tired. As a result, I enjoy food a lot more. Nobody knows my preferences better than me, so I enjoy the food I eat at home more. I also enjoy the occasions I eat out a lot more, because they are special and not just habitual. As a further result, I spend much less on food and that money is now free to do other things for me.
I learned this from Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Fully Revised and Updated for 2018, written by Vicki Robin and Joe Dominguez. It’s a book that was transformative for me, resulting in me eliminating my debt and accumulating wealth rapidly and I highly recommend it.
I’ve yet to find an expense tracker that I like, so I just make my own. I've created an easy to use expense tracker that you can find here. This simple technique of tracking versus budgeting will make a world of difference in your financial well-being.