If you’re interested in personal finance, you’ve probably heard the tried-and-true advice that budgeting is essential to achieving financial independence. We’re often told that if we don’t diligently track our income, expenses and debt each month we won’t ever get our finances in order.
It’s easy to understand why so many personal finance experts recommend budgeting: It’s a simple solution to a complex issue. By understanding your monthly inflows and outflows of cash, you can identify where you’re spending too much and cut down on those expenses, or you may decide to supplement your income with a side hustle. Budgeting is meant to force us to confront what we might not want to know, whether it’s that we should have opted for a studio apartment instead of a one-bedroom, or that we really just need a new job with higher pay.
If you’re hesitant to create a budget or if the thought of making one scares you, you’re not alone. A 2020 Intuit Survey of at least 1,500 people found that more than 60% didn’t know how much money they spent the previous month. If you’ve tried making a budget and you’re unable to adhere to it, it might not be your fault. Select spoke to a policy expert and a personal finance expert about why so many people fail at budgeting and what they can do instead.
Budgeting can encourage a restrictive mindset around money
For many people, budgeting can be similar to dieting. You might eagerly create a new budget or start a diet in the hopes of saving enough to go on vacation or shedding a few pounds, respectively. However, after you’ve slipped up by eating a slice of cake or by spending too much on a new winter coat, you might be tempted to tear up the budget or say ‘screw the diet’.
The language around budgeting and dieting often have moral connotations: You’re sinful and gluttonous when you indulge by breaking the diet or overspending, and you’re self-disciplined when you can adhere to strict spending limits or calorie counts. If you fail to stick to your budget or diet, it can often feel like a reflection of your character.
“Budgets don’t work for many people in the same way diets or one-size-fits-all eating approaches don’t work long term. Instead, I believe that finances are personal. In the same way that it’s not about dieting but rather eating well, I don’t believe it’s about budgeting but rather spending and investing well,” says Melissa Browne, author of Budgets Don’t Work (But This Does).
When budgeting doesn’t work for people, it can leave many feeling worse about themselves. And there are a variety of reasons why budgeting might not be compatible with people’s lifestyles.
Budgeting is difficult when your income or spending is inconsistent
Like many people, my spending and income may vary month to month. Sometimes I’ll have greater expenses due to doctor’s appointments or weekend trips I’m taking. Budgeting requires that people set limits on their spending, so when you have income or spending that varies on a monthly basis, it can be especially hard to stick to a budget.
Theoretically budgets can be used to smooth consumption and spending over time: Families can save more when they experience income spikes and then use those savings to tide them over when they experience a decrease in their income.
According to a 2019 JP Morgan Chase Study, families needed just six weeks of expenses in order to sustain themselves if their expenses increased (such as an unexpected car repair) and their income decreased (such as unemployment) temporarily. 65% of families, however, did not have enough money to cover six weeks worth of expenses. So if budgeting works when people plan ahead and save for hard times, why does it still fall short for so many?
Well, the answer is complicated. Sheida Isabel Elmi, a research program manager at the Aspen Institute Financial Security Program, notes that many of the families who experience income volatility, or annual income gains or losses of more than 25%, are more likely to have inconsistent hours, lower wages and lack employee benefits like paid parental or sick leave.
“I worked with this group of nonprofits that works directly with low and moderate income households, called the Consumer Insights Collaborative,” Elmi says. “So one of the things that came out of that research was that really only one type of worker — higher income full-time employees receiving workplace benefits, really stands a reasonable shot at financial security.”
And there are a significant number of families who struggle with income volatility. According to a 2015 Pew Study, 34% of families reported experiencing income volatility.
Elmi suggests that the many of the financial hardships that low and middle income families are struggling with can’t simply be addressed with a budget. She points to policy and employer-led solutions like the expanded child tax credit, paid family, medical and sick leave, higher wages and consistent hours to help families weather financial hardships.
There’s also a role that financial technology can play in helping build-up short-term savings. For families and individuals who experience income volatility, automating a set amount of savings each month may not be feasible. Instead, Elmi recommends tailored automation, which sets aside different amounts of money based on your spending habits. For example, a smaller amount is saved the month you have a pricy medical bill to pay off and a larger amount is saved when you receive a bonus at work.
While many experts recommend saving three to six months of living expenses in an emergency fund, the JP Morgan Chase Study found that most families would need around six weeks worth of expenses saved up to deal with an income dip and an increase in expenses.
The money that individuals save in an emergency fund should be liquid so they can easily dip into it if need be. You don’t want to invest your emergency savings in the stock market because you may have to pay short-term capital gains tax and/or you also risk losing money if you have to sell your investments during a market downturn. Consider opening a high-yield savings account for your emergency fund — you’ll earn a higher interest rate with this account than you would with a traditional one.
Some employers, like UPS, are helping workers build-up their emergency fund by providing a short-term savings account where workers can set aside after-tax money.
“Employer facilitated direct deposit is a great way to do this but the key again, is making sure that it fits within a person’s life and their circumstances,” says Elmi.
Apps like Digit or Douugh work by automatically sweeping aside money towards your different savings goals, whether that be an emergency or vacation fund. With these apps, the amount you save fluctuates based on your income and spending, making it a good choice for people who experience constant changes in their finances.
Even if budgeting doesn’t work for you, having an idea of how much you’re spending can be a useful tool to make sure you’re meeting your financial goals, like paying off credit card debt or saving for retirement. Budgeting apps like Mint and YNAB can help understand how all of your money is being used. And of course, don’t be too hard on yourself if you have periods of higher spending.
Bottom line
If you’ve been wondering why it’s so difficult to follow a budget, you’re not alone, and it’s not your fault. Budgets are often pushed as a one-size-fits all solution to the complicated financial situations that many individuals and families face. They can be especially difficult for those who struggle with income volatility and can be unsustainable for many.
If you’re wondering what you can do instead of budgeting, you can start by prioritizing your emergency fund and putting aside any amount of money you can in order to have enough to cover six weeks worth of expenses. However, as Elmi notes, financial independence is not always in the hands of individuals or families. The financial hardships that many people face may require broader policy or employer-led solutions that can’t be fixed with a budget.
