Don't Budget! Record!

Why Budgeting Doesn't Work

I have a big problem with Financial advisors, Personal Finance Blogs and Gurus advising those who struggle with money to budget! It's irritating to someone who is poor at handling their finances to be told that the solution is simply to allocate their income in advance to various pools of spending. If budgeting was that easy then we would all be doing it. The truth is that most of us don't know what we're going to be spending in the next months or two let, nor are we disciplined enough to stick to our estimates.

I must admit that I am guilty of telling people to budget, having written two articles on the subject and mentioning it as part of the Multimillionaireroad Plan. On reviewing those previous articles it has become clear that the titles are misleading. What I advocate is a type of transaction recording system and not a budgeting system, with which to control personal spending habits.

Why you should record your transactions instead of budgeting

I think that the main problem with telling people to budget is that those who don't know how to handle their money are not fully aware of their spending habits. As a result their estimates for budgeting purposes are wholly inaccurate and based on false assumptions of ones own spending habits. As a result actual spending in the following month is not in line with amounts budgeted for at the beginning if the month.

I believe that for every transaction that you make you should record it somewhere. I advocate writing a note (either on paper or on your phone) of the amount spent along with one word   description if the item such as "food" or "restaurant". Every so often you should spend a couple of minutes a week updating an excel spreadsheet with these amounts.

What are the benefits of recording transactions instead of budgeting?

The reason why actively recording every transaction works is because the action forces you to be conscious of your spending habits. You need to mentally recognise every transaction and write it down, drawing your attention to it. Furthermore, every week or so you can open your spreadsheet and analyse the areas in which you are overspending. The longer you record your transactions the clearer your spending patterns will become. This can help identify where you are overspending - are you spending too much on eating out, for example? Additionally, any unusual spending will be recognisable as it will not be in line with your regular spending month to month. You can then adjust accordingly in the future.

Budget conclusion

Don't Budget! Record!

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