What is REALLY wrong with budgeting

There are many pitfalls and mistakes in budgeting.  We can say that because we prepare budgets for a living.  In fact, we like to say that a budget is a lie as soon as it is written. When you think about what a budget really is, you are attempting to predict the future.  You can predict some of it, but all of it?  We don’t think so.

Why is so much financial guidance out there right now not working?

The need for certainty and predictability is hardwired in our brains. We tend not to do well with uncertainty.  But what if you begin to think of a budget as a self-learning machine that can allow for uncertainty?  In other words, it changes all the time as challenges and opportunities arise.

For those of you whose eyes glaze over at the word “budget”—you are not alone.  Some stereotype the accountant as a nerd with a visor.  Who really wants to deal with all those columns and numbers?  It’s as though “budgeting” is the geeks’ table in the lunchroom.  No one wants to sit there.

And another thing we may associate with budgets:  We have been taught to approach our spending as limiting the bad (eating out, bars, and entertainment) and increasing the good (investment, savings, groceries). But categories can be arbitrary and inconsistent, and even downright misleading.

In the way banks come up with the credit card categories, not all financial institutions are the same. If we go to a drugstore and buy toilet paper on one credit card, the category says drugstore. On another credit card, it might say health and fitness.   If we go to a restaurant in Arlington, VA, and pay for parking, it may be recorded as transportation.  Is that really what we need?  Shouldn’t transportation be for gas and tolls?

Also, you may have two common, prominent categories that rarely show up correctly–vacations and gifts.  When you are on vacation, you spend on hotels, restaurants and so many other things which may best be labeled as a vacation.

Well, can’t I just recategorize the expenditures?  You can, but you may open another can of worms, especially if you have a significant other or spouse.   A common pitfall is to play the category game.  This is problematic for budgeting software that hands you the controls, allowing you to move money around from one category to another if you are exceeding your budget. Otherwise known as robbing Peter to pay Paul.   If we take our adult daughter to a winery, is it eating out or bar or entertainment–or a children’s expense?

“Any a&%$ can make a balanced budget on paper,” according to Lane Kirkland, former head of AFL-CIO.

Think of a budget like preparation for a long war.  And consider this quote from US Army General and President Dwight D. Eisenhower:

“In preparing for battle, I have always found that plans are useless, but planning is indispensable.”

Budgets should be viewed as planning, not plans.

All sample photos courtesy of wikihow.com