Don't Think Budget. Think Spending

Budgets are useless.

OK. That might be a bit hyperbolic. After all, I’m pretty sure budgets help lots of people. I don’t happen to know any of those people, because all the people I know hate their budget, refuse to make a budget or insist they don’t need a budget. Melissa, Amy’s (my wife) best friend from Louisiana, won’t even use the word. “’Budget’ to me sounds poor,” Melissa says. “I grew up not having a lot and having to shop at discount stores, and I can’t get over that in my head. So I look at ‘budget’ and ‘poor’ in the same light.”

Amy and I have had a budget for all the years we’ve been married—sort of. The reality is that our budget is all but worthless because we’ve never really adhered to it.

We’ve tried to alter our budget to make it better fit our spending patterns. We changed the way we allot money to categories and how we allot money to each other. We’ve tried to save receipts and track our spending patterns—all to little avail.

No wonder so many people give up on budgets, or don’t even start them.

There has to be a better way. And there is.

For several months, Amy and I haven’t used a budget at all. Yet we’ve saved more of our salaries than we have in the past, and we’ve felt more in control of our finances. Better yet, we haven’t denied ourselves the pleasures of spending on what we like to do.

Our trick: We replaced our budget with a so-called spending plan. In truth, they’re similar. Yet they function differently and they’re based on two distinct philosophies. Before I detail how a spending plan works, let me first explain why I think budgets don’t.

Amy and I live within our means, yet we blow our budget every month. That’s odd, but it’s true. We know, because our budget shows that after paying fixed costs, and after accounting vaguely for variable costs like food, restaurants and personal spending, we should be able to stuff into our savings account at least 20% of our take-home pay.

Oddly, enough, we always manage to waste precisely 20% during the month. We know it’s there, a cushion we can push into without overshooting our income.

Yes, if you’re thinking we have a problem with spending discipline, you’re absolutely correct. But we’re not so different than most everyone we know. Not many adults thrive on denial, and that’s exactly what a budget demands: You must deny yourself the privilege of what you know you can afford.

You have to learn to deny yourself over and over, every day of every month. It’s like being on a diet: It’s all about doing without.

But just as with food, the more you deprive yourself, the more you crave the object of your deprivation. And just as with diets, once you feel deprived of what you can afford, it won’t be long before you chuck your budget completely to reclaim your money.

“Keeping a budget,” says Andrea, a New York friend who refuses to follow one, “is just another set of rules that are no fun and that we’d really just prefer to ignore. People just don’t want to feel constrained in any way.”

Thus, to me budgets are useless.

This is not a call for unlimited spending. We all have to live within our means. And to build the financial life you want, you do need to live within the framework of something like a budget. Otherwise you lose track of your spending—never a good thing. The spending plan is my answer.

The difference between a spending plan and a budget? A budget generally looks over your shoulder to base future spending on historic patterns—$388 a month on average for groceries in the past year, for instance. A spending plan, meanwhile, looks ahead to estimate spending on what you want to achieve—say, no more than $400 on groceries.

Yes, it’s the same concept, but “words have a dramatic impact on how we react to things,” says Denise, my financial-counselor friend in California.

Where a budget tells you how you’re going to live your life, a spending plan lets you diagram the life you want to live. Essentially you’re in control, not the budget. So, say you might really want a $3 Starbucks jolt every morning, and you’re more than willing to cut $15 from your spending elsewhere just to begin every day well-caffeinated. The result: You’re more likely to stick by your plan because you’re feeling no hardship.

But to get to this point, you have to plan your spending and see the costs of everything you want to pay for during the month. Then you can make sense of your income and how that money flows through your life.

At the start of each month, Amy and I sit at the kitchen table and zip through a prepared list of potential expenses—everything from the mortgage to our son’s allowance—filling in what our costs will be. We then match the total against our income. If the costs are higher, we can systematically pare expenditures we don’t need to make; if the income is higher, we have a savings target to aim for.

One month, for instance, that meant we could plan for $900 in airlines tickets we needed to buy. That seems trivial, but planning that expense actually made it easier to meet our goals because we consciously cut out extraneous costs elsewhere before the fact.

Previously we would have just gone about our life, quasi-following our quasi-budget, and bought the tickets along the way, only to realize at month’s end that not only had we spent what we normally spend, but we also spend an additional $900—blowing our budget yet again. With the spending plan, not only did we not blow the budget, but we were able to save money, as well as afford the trip.

My friends in Seattle, Jack and Colleen, have been following something similar to a spending plan for a couple years. “It’s not so much the month-to-month control that’s the big deal,” Jack Says. “It’s that with a spending plan you have a much better budget for long-term savings because you plan for each month.”

Basically, Jack says, “budgets impose limits, and no one like limits. Spending plans give you boundaries. They don’t tell you what you can’t buy, they just allow you to see the ramifications so you can make a better choice or make cuts elsewhere to get what you want.”