Why I Don’t Budget

Right now I’m studying at MIT which is a really great experience.  When we arrived my program provided us with $750 in TechCash.  This currency can be used for food at MIT, at the student store, and a few other places.  For one month, a $750 allowance is quite a lot.  I felt quite rich and was eating many $10 prepackaged sushi boxes.  I was also able to use the money at a coop grocery store.  I went kind of crazy there buying all sorts of groceries and totaled around $100.  I bought packages of nuts, figs, and even Naked Juice (with a coupon).    This put my first week total spend at $150, but at this rate I would still have $150 left over at the end, so I purchased a sweatshirt.

After a week, someone figured out that you can buy gift cards at the student store!  I had seen the rack of gift cards at the student store, but my experience in gift cards had taught me that stores don’t accept gift cards to purchase gift cards.  However, this person went for it and had success.  Furthermore, it was possible to buy a Visa gift card.  As soon as I heard this was possible I went to the student store and bought a $500 gift card and paid $504.95 using my TechCash.  Then an interesting thing happened.  Even though I was better off (having a Visa to spend anywhere) I didn’t feel as rich.  I no longer wanted to spend on luxuries like Turkish figs.

Budgeting

Now, what does this story have to do with budgeting?  Well in some ways the $750 was a budget for the month.  There was a few differences because my money would expire, but some people treat their budget that way as well.  Maybe they allocate $400 for the month for food.  There is only a few days left in the month and still $150 left in the food budget, so that spurs you to go out to eat at a nicer restaurant.  That’s great, but you are robbing yourself the opportunity to save more than your budget.

The government runs on a budget.  This is good because then they can not spend whatever they want, but it has bad consequences as well.  At the end of the fiscal year there will often be wasteful spending because they don’t want seem like they aren’t using all their budget and have it reduced in the future.

Alternatives

Instead of setting up a budget, you could analyze each purchase to see if you need it.  This can be difficult because how can you analyze a vacation?  It will be difficult to determine if you need it or not.  In fact, you could probably rationalize a vacation and just about any purchase.  So you may be saving more, but it could be difficult to make decisions.  Taken to the extreme you may decide all you need is food and shelter and live a super sparse lifestyle.  That is not easy, nor for everyone, so you’ll have to try to be reasonable in deciding what you can afford.  Affording something does not simply you have enough money, but that you can buy it and keep to your financial goals.

Track your spending

There may be a happy medium in simply tracking your spending.  You want to save more than you spend.  Only the government can get away with the opposite and even they can not do so indefinitely.  In the short run you can spend more, say in the month of a vacation or when you are pursuing education, but in the long run you will need to save more in order to buy a house or retire.  In order to know if you are saving you could look at your bank account and see if it is growing or shrinking.  However, with multiple accounts it can get difficult.  You may discover that you are saving $1,000 a year, but would like to save more.  In order to see where to improve you need more granularity.

Mint is a service which tracks your financial accounts for free.  It even categorizes your transactions so it is easy to see how much you are spending on food, education, housing, etc.  Using Mint I can see if I am spending more than normal on a category and also figure out areas where I have opportunities to cut.  You may even find out that you are paying fees you did not know about.  I once saw a $25 late fee for a credit card I thought I had on autopay.  I was able to call and get it reversed, but it was only possible because I could see what was going on rather than missing several payments and paying lots of fees and interest.

Once you have your spending tracked you can see if you are succumbing to lifestyle inflation.  If you have budget $500 a month for food you may think it is fine, but if you track your food spending and it is: $400, $600, $350, $500, then you may realize that $350 is possible and determine that if you would like to save more for a vacation that many months at $350 would be enough.  There are many ways to use data, but the first step is collect it.

Conclusion

I’m not against budgeting and I think it is valuable if you need help controlling your spending.  I strongly recommend that everyone tracks their spending so they can find ways to save more.  As for me, I have continued to have some sushi lunches, but I have also brought some lunches.  I challenge all of you to write down how much you think you spend on food, housing, and transportation a month.  Over the next month track those amount (by hand or with Mint) and see how close you were.  Good luck everyone and keep on saving!

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