On a recent episode of The Truth about Money, Ric Edelman mentioned that one of the key principles of their financial advising practice is that “budgeting is a waste of time.” I really respect the financial advice I’ve heard on his radio show and read in his books, particularly their argument to keep your mortgage forever. Therefore, it was a little surprising to me to hear them say that such a bedrock principle of my money management system is a waste of time.
Ric and his co-hosts didn’t expound on that comment at that time, but based on what I’ve heard on his program at other times, I think I can guess at the reasoning behind saying that budgeting is a waste of time. If you pay yourself first by making sure that you are saving at an adequate rate, it doesn’t really matter how you spend the rest of your money, assuming that you aren’t overspending. You should put in the effort to determine your necessary long-term saving rate and where to invest it, and then after that don’t put time or emotional effort into the details of your finances.
Paying yourself first and then not budgeting vs. budgeting all your income is related to the clash between top-down and bottom-up budgeting. If there is a comfortable margin between your desired saving rate and what need/want to live on and you have a ‘saver’ or conservative spender mentality, then budgeting doesn’t really seem necessary. In fact, I spoke with a local friend recently who is single, earns quite a bit of money, and naturally lives far below his means. He told me that he hasn’t budgeted since he started trying to earn more and his income far exceeded his expenses. And I agree that for people like him, budgeting may well be a waste of time since he is meeting and exceeding his savings goals. (I would still advocate tracking where your money goes even if you don’t budget, because in the future you may have use for the data.)
I don’t think budgeting is a waste of time for people who:
- spend nearly as much as they earn
- have aggressive savings goals for their income levels
- are natural ‘spenders’
- are new to actively working on their finances
Depending on the situation, the budget doesn’t need to be highly detailed. You can just add up your fixed expenses, an average of your variable non-discretionary expenses (e.g. utilities), and estimate your variable discretionary expenses. For instance, you may have a set amount of money that you spend on groceries, eating out, drugstore items, clothing, and entertainment each month. It doesn’t really matter how exactly that money was allocated as long as you didn’t overspend your limit. So a budget doesn’t have to be very detailed and broken down to the finest level to be helpful in letting you know how you match up with something like the balanced money formula or another percentage-based way of determining where you income should go.
I don’t think that budgeting is a waste of time for us. We could easily spend everything we make between having a low income and each of our areas of preferred spending (Kyle on electronics, me on food and clothes). We also have rather aggressive savings goals for retirement and into our targeted savings accounts. Our budget absolutely helps us live out our priorities by showing us the balance we have to strike between day-to-day indulgences like eating out and couple-times-per-year indulgences like travel so that we can meet our long-term savings goals.
Do you budget? For whom do you think budgeting is a waste of time? Has your budgeting style changed over the years?
photo from Free Digital Photos