John Maxwell said it best. “A budget is telling your money where to go instead of wondering where it went.” Budgeting is one of the most powerful tools in your personal finance arsenal.
Many people hear the word “budget” and immediately start channeling their inner Cole Porter: “Don’t fence me in!”
“Budgets are too constrictive.” “I don’t like being told what I can’t spend money on.” “I tried a budget once and it didn’t work.”
It’s not that budgets are limiting or restrictive—quite the opposite. Most people just don’t know how to budget, and it’s largely the fault of the very tools that are supposed to help us create and stick to a budget.
There are four myths we need to bust, then the budgeting process falls right into place.
Myth 1: Our Expenses are Regular
We tend to think of expenses as being fixed amounts that never vary: Rent is $500; Insurance is $600, due twice a year; and we spend $400 on groceries every month.
This is the classical model of budgeting. Regular, rigid expenses that never vary. If you’ve tried budgeting, you’ve probably used software like Quicken or Mint, which only handle this kind of budget, or you’ve written out a static template of what your expenses should look like every month.
But every month is different! Rent may not change, but Insurance is $0 most months, with two spikes in May and November. That $400 per month on groceries is actually $100 per week; if you go shopping on Saturdays, what about the months that have five Saturdays? You’re sticking to your plan, but all Quicken sees is a $500 grocery bill that month.
(Don’t forget—it’s not $100 per week on groceries, either. Sometimes it’s $85 because you found some good sales, sometimes it’s $140 because you found a really good sale and you bought a six-month supply of frozen waffles. Those will fit in the freezer, right?)
Myth 2: Ideally, Income Should Be Regular
Very few people have a regular income. I don’t. I have what most people would consider a steady paycheck, but what shows up in my checking account varies from month to month. The amount withheld for taxes varies ineffably over the year. There’s the occasional bonus and twice a year there are “magic months”, with three paydays instead of two. (Score!)
I’m not complaining by any means, just pointing out that my income wouldn’t work with the kind of rigid budgeting that Quicken does, either.
If you’re paid on commission (even partially) or you do freelance work, the swings in your income are amplified. That doesn’t mean you don’t need a budget. In fact, that means you need a budget more than ever.
Myth 3: A Budget is a Rigid Allocation of Resources
If you put myths 1 & 2 together, you can see why Quicken and Mint work the way they do. Your income is the same every month, your expenses are the same every month, so your budget is going to be the same every month. Allocate your paycheck to the penny, let Quicken monitor your spending, and in a few months, you can pull up a report on your spending that shows every time you bought groceries five times in a month, every month that you paid the insurance premiums, and every time you blew the Gas budget on a trip to the lake.
That’s the point where you throw your hands up in the air, swear off budgeting, and head out the door with whichever card can handle two pints of Chunky Monkey.
The problem isn’t your income. The problem isn’t you. The problem isn’t the fact that you’re down to one card that you can buy comfort food with.
The problem is that static budgets don’t work. You need to create a budget that is as dynamic as you are.
Myth 4: A Budget Only Works if Everything Goes According to Plan
You never know when you’re going to walk out to your car one day to find a flat fire. But you do know that tires go flat. Water heaters go out. Arms break. You may not know the details in advance, but it’s safe to assume that unfortunate things are going to happen.
This is why you need an emergency fund, a pile of cash that stands between you and a bad day. When the unexpected happens, your emergency fund is the difference between an inconvenience and a panic attack.
Emergencies are unexpected. Christmas is not an emergency—it comes every year. A vacation is not an emergency—save up for it and pay cash. A new set of tires isn’t an emergency—you know they’re going to wear out eventually, so plan on replacing them.
Myth 5: A Budget is Going to Work from Day One
When you first start budgeting, you’re not going to get it right. That’s okay. You’re doing something you’ve never done before. Why should you get it right on the first attempt?
It takes three months to get your budget dialed in. The second month will be better than the first, and the third month will be pretty close. That’s how long it takes to get the feedback of how much you spend in each category and what it feels like to create a plan and stick to it.
Budgeting is a skill. Like any skill, it’s worth doing poorly at first. You get better pretty quickly.
Budgeting isn’t supposed to be hard. But it can be if you approach it the wrong way.
Quicken and Mint approach budgeting the wrong way. If you want to see how a budget is supposed to work, check out tools like YNAB (referral link), EveryDollar, and MoneyWell. They’re built around the envelope system and walk you through how to create a living, responsive budget that can handle your busy life.
Whatever tool you use, remember that the budget is a plan. Like any plan, it can change. Revisit your budget during the month if you start drifting off track. Adjust the plan. Then stick to the new plan until you need to adjust it again. It’s a process.