Helaine Olen, author of Pound Foolish: The Dark Side of Personal Finance, says in an article for Slate that budgets don’t work because hardly anyone’s income is predictable and somehow the government is to blame. That budgets- in fact – “offer the illusion, not the reality, of financial control. If you don’t have enough money coming in, they won’t make it better. Things like salary increases, more predictable income, and further health insurance reform—or even legislation putting a cap on balance billing—will help us with our finances more than any budgeting app or formal plan.”

True enough, I suppose. Budgets don’t create money, and they certainly don’t stop the unexpected from happening. Does that mean they ought to be tossed? Olen’s reasoning, drawn from her own recent spending, looks like this:

My income is irregular and my dog got sick and my kid had to go to camp and I had a deadline so I wasn’t going to cook at home and I had some unexpected bills to pay all at once, therefore budgeting doesn’t work.

Her month doesn’t sound to different from some of my own months. My issue with Olen’s diagnosis  is the same as my issue with her diagnosis of the world of  personal finance advice: rather than suggest what people who need to control the direction and magnitude of their spending or get financial advice should do with the resources currently available to them, she advocates throwing up our hands and waiting for the government to fix things.

The story I want to read is what she did next

The truth is that she either paid these bills or didn’t. If she didn’t pay her bills it was because she either didn’t feel like it or she didn’t have enough money. If she did pay them, it was out of money she accidentally had lying around or money she set aside from her irregular income for just this occasion (erm, that’s budgeting).

Starting to budget in the middle of a crisis feels an awful lot like spitting into the wind, but so does appealing to public policy. If there’s not enough money to pay bills, you make hard choices and then start planning realistic ways to avoid those hard choices in the future. That’s budgeting.

Here’s the real reason budgets don’t work:  when Olen (and many, many others) talk about “budgets”, what they mean is “a set amount of money set aside for the various categories in which we’ll predict we’ll spend over a particular period of time”. When Olen says “budgets don’t work”, what she’s really saying is “trying to predict precisely how much you will earn and spend in any given category doesn’t work.”

A list of categories and an amount we’re allowed to spend on each of them in any given month doesn’t help much when a $380 vet bill arrives if the number beside “pets” is $75 . Relying on a list of categories and amounts to address the kind of problem Olen’s describing would probably make me write an angsty article in Slate too.

But of course it doesn’t work, because that’s not budgeting.

I suspect that maybe we’re using the same word to describe two very different things. If it helps, let’s forget about the word “budget” entirely and drill right down to its purpose for real people like us (and Olen) with real, limited money that we want to spend in ways that are necessary, useful, or meaningful without borrowing in an endless cycle or coming up short.

What we really need from budgets:

  • To know how much we have available to spend right now, given the commitments we’ve made for the immediate future (answering questions like “Can I spend this $500 to replace my ageing laptop today and still have enough for the mortgage payment on Friday, the groceries I need to buy on Monday and the summer electrical bill that’s going to come at the end of the month?”)
  • To set aside money we don’t need now for things we know or think we’ll need in the future
  • To base our future spending decisions on a documented (rather than estimated) past
  • To know if a sudden or contemplated change to our income or expenses will be sustainable over the long term, and whether we should adjust our spending before it becomes a crisis (answering questions like “Can we afford the cost of the second car now that I’ve lost my job and don’t know how long I’ll be off work?”)

In short, we need to know our limits so we can stay within them and work to expand them. The simplest budgeting system in the world could tick all four boxes with a few hours of initial set up and maximum one hour a month of maintenance (if that).

There doesn’t have to be a spreadsheet involved (but we could use one if we wanted). We don’t have to sign up for Mint (but we can if we like), or buy YNAB or Quicken (although they might be helpful). We certainly don’t have to have a monthly amount budgeted for every category we can think of – in fact, the more categories we’re tracking the less money I’d bet on our ultimate success. (More on that in another post, I think.)

What we really need is to condition our minds to think about our money as a finite resource that needs to be used wisely. What “wisely” looks like for you might be an awful lot different than what “wisely” looks like for me, and the tools you use to figure “wisely” out and put “wisely” into practice might be cash in jars, a program, or a spreadsheet you built yourself while I follow some other system, it doesn’t really matter.

Life happens

No matter what system you use, or how disciplined you are, unexpected things will happen that you couldn’t have anticipated and didn’t budget for in the traditional sense.

Some people train themselves to believe that money isn’t under their control at all.

Some people discipline themselves to act wisely with whatever their resources happen to be at the time.

Who do you think will recover from the unexpected faster?