Last week, we talked about prescriptive and descriptive budgeting — “I Will” versus “It Is.” I did this because they’re useful concepts, but mostly, because I have a challenge for those I call “100% descriptives”.
First, though: descriptive budgeting can be a wonderful goal to strive for. For many people, financial success is defined as freedom — the ability to spend what they want, without worry. By working to increase discretionary income – in large part by paying off old debt and avoiding new debt — this can become a hard-won dream-come-true. And you’ll know that you got there when all of your nearly spending categories become descriptive — they are what they are, and you don’t need to cut back on them in order to meet your goals.
However, your budget should never be 100% descriptive. I have friends who are pretty much there, and some of them can’t stand the idea of budgeting. They don’t like “putting labels on money”. They have enough, so why bother? Why not just make the choices as the desire arises? I have a few answers for that:
How you budget your each dollar determines where you keep it. If you don’t have a budget to help you make good choices as to how much you keep in checking, savings, CD’s, a retirement account, a 529, or a traditional brokerage account, you end up with:
- money in your checking account that should be in savings, earning better interest
- money in your savings account that should be in a brokerage account, earning better long-term returns (if invested properly)
- money in a retirement account that should be in a 529, allowing you to save for your children’s college education without jeopardizing your retirement
- money in a brokerage account that should be in a retirement account, not getting taxed
- money in your employer’s stock that should be in checking or savings, avoiding unnecessary risk
and so on. I see a new example of misplaced money every day, and in each case, they’re losing money, and lots of it — in terms of taxes, interest or capital gains lost, unnecessary risk taken, etc. How much is it worth not to even bother taking stock of your values, or what you might wish you had saved for in ten years?
Money that doesn’t get budgeted often get spent for you. By this, I mean that it goes towards things you don’t really value. The thought occurs to you to buy something, and you shrug and say, “I’ve got the money; why not?” So you accumulate stuff and experiences as the thought occurs to you, rather than thinking about what you truly value. (Note: this is not to knock spontaneity — just as long as it fits with your values!) You spend money way out of proportion to the value you get out of it, and still end up with a vague feeling of unhappiness…so you spend even more money next time, and the cycle continues.
You leave a huge legacy that you didn’t intend. Maybe you don’t spend your money…so you die sitting on a pile of cash. Now, again, a legacy can be a good thing — if it’s planned. However, I’d take a serious look at “Die Broke“; in it, Stephen Pollan makes some excellent arguments for building your legacy while you’re still alive. Certainly this is the case if you have children or grandchildren; in the former case, why not help them out with their first house, their first child, their new business, rather than waiting until you pass on? In the latter, why do them and the world the disservice of making them spoiled “trust-fund babies”?
Your money gets burned by inappropriate investments. What does everyone say you should do with “leftover” money? Why, invest it, of course! So you play around with the stock market, or you have a friend who has this great investment opportunity, or you accumulate ridiculous numbers of shares in your employer’s company…but you have no plan, so when you actually need the money, it happens to be at a low point in that investment’s cycle. (Or, worst case, that “investment opportunity” goes up in smoke!) So you “sell low”, defeating the whole purpose of investing in the first place! (Unless you just enjoy gambling, in which case there’s this whole city I know that’s pretty much built around exactly that…)
So do you have to budget every penny? No. You don’t have to become a spreadsheet junkie with hundreds of budget categories who meticulously enters their transactions every week. Just keep an eye on your finances. Think about what you value. Don’t be afraid to put labels on your money — and to move those labels around as circumstances and your values change!
Your money — and your future self — will thank you.