Are You Looking at Budgets All Wrong?

There’s a real problem with today’s approach to goal setting. In our way too busy for anything but need to “have it all” culture, we’ve been forced to relegate major life goals into tasks, line items to be crossed off a list.

  • Lose x pounds
  • Save up x amount of dollars
  • Buy a house in x years
  • Get happy

The list goes on and on. And while I strongly believe in goal setting (you can’t accomplish that which you don’t set out to do), viewing goals as something to be achieved once and then crossed off a list forces us into a narrow point of view.

This limited point of view places arbitrary constraints and pressure around our goal. Those constraints (that didn’t need to exist in the first place) then make us feel bad about ourselves when we don’t achieve within them fast enough. And that loss of self worth makes it even harder to continue pushing forward to achieve.

When we relegate major life goals to simple to-do lists, we lose sight of the big picture, we make it arbitrarily harder to reach our goals, and we set ourselves up for failure.

This practice applies to any life goal you can think of, but it has a major impact specifically on how we budget our money and how we set ourselves up for financial goals. Just like we’ve been looking at our goals all wrong, we’ve been looking at budgets all wrong. So let’s talk about what you can do to fix it.

How We’re Looking at Budgets All Wrong

The most common way to write a budget is to line everything up.

We make line items for our income, for our bills, for our extra expenditures, for our goals. Then we add it all up to see if there’s enough incoming money to put towards the outgoing money. If not, we start cutting, shaving, and tweaking until we hit a balance of zero. In a perfect world, there’s an excess amount of money left at the end.

While this is a perfectly fine way to write a budget, it’s a terrible way to live a budget. Life isn’t a series of items on a to-do list. There are goals that we hope to only check off the list once (like paying off debt), but then there are goals that will come up again and again (like saving up money for anything). The problem is, when we view everything as a one-time goal and a one-time achievement, we do nothing to plan for what’s next.

Let’s use emergency funds as an example. Before we have an emergency fund, we sit down and think about how much we want to save. For example, I like to have 3-6 months worth of money saved up. That may seem like a little to some people and a lot to others, but it’s my personal comfort level. So we save up diligently until we hit that X month mark we wanted to save. Success! Now we’re done, right?

Wrong. This is where putting the goal down on paper like a line item hurts us. It makes it easy to reach a singular goal (unless we hit setbacks, in which case the pressure makes it harder to reach the singular goal), but it doesn’t take anything in the future into account.

Once we’ve fully funded our emergency fund in that initial goal, we probably remove it from the list and place the money from that category on another goal. After all, the goal has been reached, no reason to keep it on the list, right?

But what happens if we need to use the emergency fund? Whether we use some or all of it, the fact is we decided we wanted a certain amount saved – and now there’s less than that saved. The goal to get back to that amount will have to be put back on the list. But what if the new list doesn’t have room for that line item?

What happens then?

This is where the line item view on budgeting proves that it’s too inflexible to work in actual life – and it highlights why budgets can be so frustrating. We think it’s because they’re restrictive and hard to follow, but the real frustration lies in the lack of flexibility.

If life could truly be plotted out on paper like a bulleted list, then maybe budgeting wouldn’t be so hard. But life is unpredictable and budgets should be flexible to accommodate for that.

Budgets Should be Viewed as a Circle, Not a List

Life doesn’t move in a straight line. Sometimes we nail every single one of our goals and sometimes we hit a slump that we feel we may never recover from. In order to reach success, the main goal is to make sure the lows are not as low as the ones from before. Through proper planning, we can make sure our slumps are shorter, are lows are higher. We can make sure we bounce back quicker and keep growing.     

Budgeting as a Line

If you want to make sure your financial grows keep growing, then think of your budget like a circle, not a list.

Budgeting as a Circle

In a circle, you can plot things out to reach a hole. You can dedicate X% of your income to bills (including debt payments) and X% to savings. Then, as you reach goals that you hope only come up once, you can move the percentages to other goals, like savings. The key is flexibility – both in action and in name.

For example, line item budgets get super-specific. You write down how much you want to save for retirement, how much you want to save for emergency funds (until it’s funded), and so on. But what if you just said you want to dedicate a certain percentage of your income to savings?

By getting a tiny bit less specific, you can create room for life’s predictable unpredictability.

Let’s go back to the emergency fund example. You had that written down as a line item, then checked it off when it was fully funded. Then you had to use some. Suddenly, you have to go back to your budget and find room to save money to put back into that fund.

But if you wrote your budget like a circle and dedicated a certain percentage to savings, then this is how it would look: First all of that percentage would be to fund an emergency fund. Then you’d dedicate it to other savings goals like retirement (or a house or whatever you want to save for). An emergency happens and you have to use your fund. So you re-dedicate your savings category to the emergency fund until it’s full again, at which point you can go back to your other savings goals. No harm, no foul.

By viewing your budget as a circle instead of a line, then you don’t have to feel the squeeze when a new old line item has to get put back in. Removing the squeeze also removes the pressure from yourself. You don’t have to feel  like you’ve moved backward. Instead, you can feel like you have the ability to handle the situation – which is the whole point of budgeting your money in the first place.

Writing a Circle Budget

So how do you write a circle budget? Ironically, start with a list.

What are the categories unlikely to go anywhere? Usually they come down to bills and savings. Then there are the categories that exist and go away but sometimes come back. That can be debt payoff, emergency fund savings, saving for large purchases like a house or a car, and so on. Once you have your evergreen and temporary categories, the next thing to do is figure out  your priorities.

If you have debt to pay off, then you can include that in your bill category. But if you want to boost your debt payoff, then make yourself owe more than you do. That means you would decide how much extra you can afford to pay every month on your debt, add that to your minimum payments, and make the total your new minimum payment, regardless of what the statement tells you. In this period, you’ll likely dedicate little to nothing to your saving category until the debt is paid off. But once it’s paid off, that category can shrink to the remainder of your bills and the savings category can grow.

There’s another bill that needs to be accounted for that won’t show up on your statement: irregular bills. That could be things like car insurance that only come up once every three months or medical bills. These irregular bills contribute to the fluctuation of your bills category  just like things such as short-term goals contribute to the fluctuation of your savings category. As long as you have room somewhere in your circle, to borrow from you can account for these irregular bills as they come up. If you want to play it super safe, you can save for them monthly and put that in the bills category. (For example, you can set aside the monthly portion of your car insurance each month, even if you’re not going to send in the whole amount until the quarterly due date.)

Once you’ve understood your priorities, you can decide how to appropriate your funds.

Budgeting Pie Chart

Then you have your circle budget complete, but can also revisit it monthly and quarterly to  make sure your newest priorities are being accounted for.

Flexibility Is the Key to Success

What you’re really trying to accomplish through the circle budget is flexibility. In a pie chart, the pieces can always be moved around within the whole. The only time this is nearly impossible to do is when bills take up 100% (or more) of the whole. If that’s the case, then a change needs to be made to grow the circle: most likely finding ways to earn extra money on the side until the bills portion can be shrunk to a more manageable amount (like when debt is paid off).

Doing whatever you can to promote flexibility in your finances is how you’re going to reach your seemingly rigid goals. Remember, if life were as simple as a line-item budget, then no one would have trouble sticking to their budgets. But it’s not. That means looking at the budget differently will enable you to do something that many others can’t: create a budget that you can stick to and that will actually help you reach financial success.

Image Credit: Mike Wilson

Author: Shannon

Shannon McNay is personal finance writer who loves to talk about the emotional side of personal finance. Her work has been published in Business Insider, DailyWorth, Huffington Post, Lifehacker, ReadyForZero, Yahoo! Finance, and more. You can follow her on Twitter @shannonmcnay.

3 thoughts on “Are You Looking at Budgets All Wrong?”

  1. Approaching your budget in a circular format does make sense. There should always be some flexibility and priorities can change month to month. Mindset is key and as long as people realize that their paycheck is not their budget to start with, the rest will fall into place.

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