Budgeting – obsolete!

monthly paymentsI can’t write this any better than Michael Kitces, so here’s his quote about the article by Helaine Olen linked to below.

“Toss Your Budget. Why a pillar of personal finance isn’t nearly as essential as we think.”

Quote:

Toss Your Budget (Helaine Olen, Slate) – Despite the ‘conventional wisdom’ of budgets, a recent Gallup poll found that only about 1/3rd of Americans even keep formal tracking of their inflows and outflows (and an Experian Consumer Services study estimated it’s only slightly higher at 39% of us).

As it turns out, the primary issue may simply be that the concept of a steady monthly financial budget does not conform to the realities of most people’s financial lives, which are not nearly so consistent. A recent report from JPMorgan Chase Institute found that more than 80% of the bank’s customers experience a greater-than-5% change in both money coming in and their overall spending on a month-to-month basis; 25% of us see a variation greater than 30%(!) from one year to the next! This perhaps isn’t surprising, given that income itself fluctuates more in our increasingly freelancer-based economy (from outright freelancing gigs, to those who earn money through companies like Uber or Airbnb).

Though notably, the study also found that spending changes don’t necessarily align neatly to income fluctuations; 60% of us vary our spending by more than 30% at least occasionally, even if income hasn’t changed, given all sorts of moderate “spending shocks” that can arise (from outright emergencies to pet emergencies to just the irregularity of paying for kids’ summer camp or gifts during the holiday season).

Ironically, Olen notes that historically, budgets were actually more about spending than saving anyway; early versions were about budgeting to pay the bills for newly created layaway and installment plans offered up by stores like Sears Roebuck!

So what’s the alternative? Perhaps worry less about overt budgeting, and more about just tracking and monitoring spending more effectively in the first place; for instance, one study found that when users installed Personal Capital’s personal finance app (which tracks spending), people reduced their spending by 15% (and their grocery bills by 20%) in the subsequent four months, ostensibly just by reflecting on the feedback of the data alone.

Unquote.

Below are my thoughts on budgeting … and how it also relates to retirement income planning.

 

The focus of the exercise has morphed into the mechanics rather than understanding the larger picture as to purpose. So what might the purpose of getting a sense of your “budget” … or better said, how you spend your money as compared to what you really want to do with your money? A great resource many of my clients have found helpful when it comes to how to visualize and temporarily evaluate what you are doing with your money and to categorize your affairs so you accomplish more with your money.

What comes to my mind is the worry some have about having consistent income and spending needs once retired. In my experience, retirees have similar “spending shocks” that they experienced while working too! Thus, is the “safety first” retirement school of thought really doing retirees a favor by fixing their income? Therefore, guaranteed fixed income may be too rigid a plan for modern realities. Having flexibility within the retirement income plan allows for shocks. In fact, the more one seeks guaranteed income, the more that income is subject to the insidious effect of loss of purchasing power (an unstated long term risk of the approach). In essence, this focus gives you a guaranteed number today, but unstated, is also the guarantee that that dollar number may buy less and less as you age (tomorrow).

Research on the above view may be found discussed in this article and blog post.

Note: I typically write and schedule posts in advance of when they’re scheduled to go live. Thus you may often see a delay between when a topic I’ve linked to is dated and when my post is dated. If you’ve noticed and wondered why – this keeps my queue full about 3 months or so ahead … and educational topics are relevant whenever they’re read and the reader picks up a bit of info that’s useful to them.

 

 

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