Written by: Bryan Byrer | Millennial Financial Planning LLC

In the world of personal finance, budgeting must be one of the most begrudged topics. It’s difficult to find someone who won’t admit the importance of personal budgeting for long-term financial success. However, only 42% of Americans report having a budget. So, why does more than half the country operate without a budget? In my experience, most people have terrible experiences with budgeting. As many of them would say, budgeting sucks.

Why Budgeting Sucks

Financial Illiteracy

Consider this: how do most people feel when they don’t know something?

This unease or anxiety usually doesn’t lend itself to positive experiences. And if someone is already stressed about money, do most people really want to devote time out of their busy life to learn about a topic that is inherently stressful to them?

Stress and Anxiety

For many everyday Americans, budgets are created after financial anxiety hits a breaking point—for too many, it’s overspending that has led to credit card debt or some type of ballooning loan(s). Financial stress (among other types of stress) can lead to poor decisions, which then deepens the financial strain that was already felt.

Restrictive Living

Moreover, budgeting is viewed by many as a restrictive act that constrains one’s lifestyle. The typical way that budgets are discussed and created is by taking away parts of “discretionary income”—which we must remember is the financial way of saying a person’s “lifestyle”. People famously bristle at change, even when it’s ultimately beneficial to their life.

Time and Energy

The usual way to budget is by documenting income and expenses and balance categories after-the-fact. Even with budgeting apps, it takes time and effort to set everything up in a way that makes sense for the individual or couple. Once set-up, there is still a minimum amount of maintenance required—not to mention communication between partners (which is another matter entirely). As an example: consumers can get anything from Amazon, but it rarely makes sense to just permit Amazon to default to “shopping”. This requires recategorization or understanding the app well enough to create rules. Again, more time and energy are required.

Pass/Fail

Because of the nature of backward-looking documentation and reviewing against a pre-determined category allotment, budgeting becomes a pass/fail exercise. Because the financial picture is unclear until the month is complete and documented, this exercise becomes a repeated failure. Over time, this becomes demoralizing. So, what do most people do when something is an exercise in futility? They quit—and I can’t say I blame them.

Redesigning Budgeting

Reorganize & Automate Bills

Bills are a nonnegotiable expense. Most are required to live (like housing or utilities), and the others are required to stay away from financial turmoil (like not paying credit card bills or loans). To take this next-level, treating an autosave as a “bill” will do wonders to a savings account. Inertia can be a huge enemy when attempting to change habits, but we can also use it as an ally. Evenly splitting automated bills across paydays does three things:

1) It ensures that all bills are paid

2) It decreases the mental load of a person’s or couple’s finances

3) It provides clarity about where a person is with their money at any given time (this assumes the use of a debit card or paying off actively used credit cards daily so that the checking account balance decreases in real-time).

Check & Adjust

Now that all bills are automatically accounted for, it’s possible to make accurate decisions about lifestyle events by checking bank balances each morning. For instance, if a couple goes out unexpectedly with friends over the weekend and sees that they have less in their bank account than they feel comfortable with, they can communicate in real-time about their upcoming date-night and delay it to another pay period when they can enjoy their night without financial concern. With backward-looking budgeting, this would usually be guesswork or ignored until the month’s end. Additionally, this proactive communication can strengthen relationships.

Experiment & Iterate

Now that there is more clarity, there’s opportunity to explore the active management of a forward-looking cash flow. In my practice, I’ve found that clients often find their own minimum balance that they typically land on the day before their next payday. There are a couple of ways to use this advantageously:

  1. Autosave half that amount

  2. Attempt to increase that number (eventually autosave half of that amount)

You’ll notice that there still isn’t a formal budget, and that’s by design. The work here is behavioral, not goal based. As James Clear says, “You do not rise to the level of your goals. You fall to the level of your systems.” If this is indeed as true as so many thought leaders believe, why do we still operate off old, ineffective systems?

Reframing Budgeting to the Next Level

Add a Budget App or Spreadsheet

I know that I just bemoaned backward-looking budgeting as old and ineffective, but that’s because it alone does not play into how people operate. Using a budget app as a scoring system can be depressing. Instead, reframe it as simply uncovering where money is spent (ideally so you can ask if they’re comfortable with that or if it aligns with what matters to them).

Lifestyle Allocation

Now that spending allocation has been identified, evaluate where money is best spent from the ground up. Don’t start with the current budget and slash categories. Instead, after accounting for the necessities, choose where spending should be allocated without referencing the past. This is an opportunity to choose a lifestyle instead of falling back to a lesser version of what’s always been. In my practice, I’ve worked with clients to reallocate money so that more money is spent in categories they previously felt guilty about (like fitness memberships or travel) while decreasing other categories that they don’t believe fits into their values or desired lifestyle (like alcohol or mindless online shopping).

Moving Forward

Budgeting doesn’t have to suck. It can be an opportunity for empowerment. However, it’s incumbent upon financial professionals to reconsider how we think about and discuss budgeting. More importantly, it’s imperative for us to redesign it with a system that meets people where they are and accounts for human emotion and behavior—something this profession hasn’t historically done well. None of these concepts or actions are novel on their own, but together they can be a framework for something “new” that is inviting and effective for the people who need it most.

Related: Consider This Alternative Way To Invest in the S&P 500