David Bach argues in his book The Automatic Millionaire that budgets are not generally such a hot idea. I don’t agree. But I do very much like the argument that Bach puts forward to support his case.
Personal finance advisors have been telling people for a long time that they need to set up budgets so that they know where the money is going and so that they can plan effectively. It’s advice that makes perfect sense, of course. Have you ever heard of a business that failed to set up a budget? If the budget concept is so critical for businesses, it follows that it could do a lot of good for individuals and families too, does it not?
Yes and no. The problem with the conventional advice is that it ignores the reality that individuals and families are in a fundamental way differentfrom businesses. In a business, there is an accountant who is paid to set up and maintain the budget. There is no such person in the individual or family household.
This is a difference of great consequence. Since no one gets paid to set up and maintain the familty budget, the job does not get done unless there is someone in the family who finds the task pleasurable in some way. The motivation for the accountant keeping the business budget is the paycheck he or she receives for doing so. The motivation for the person keeping the individual or family budget is–What exactly?
The motivation is to be able to retire at age 65, or to be “responsible,” or just to know that one is getting ahead financially over time. Those are all good strong reasons for keeping a budget. Still, they don’t cut the mustard for most. David Bach is right to point that out in The Automatic Millionaire. Most of us have lots of things going on in our lives and, as good as these motivators sound in theory, in the real world they don’t often pull us away from the other things that need our attention and get our backsides down at our kitchen tables filling in the rows and columns of spending categories and spending allocations that comprise a personal budget.
Budgeting is a good idea. But it’s a good idea that doesn’t work for most. David Bach is on the right track in acknowledging that reality.
What I like about The Automatic Millionaire is that it is upfront about this reality. Bach says that it makes sense to acknowledge that you are probably not going to maintain a budget and thus argues that it is best to find some other means of making the saving happen. I like it that Bach’s book puts the practical reality above the theoretical appeal of the budget concept.
That said, I think personal budgets are too powerful a money management tool for middle-class workers seeking financial freedom early in life to give up on them. You need a personal budget. You need to take account of the practical realities noted by David Bach. But you don’t want to accept those realities as applicable to You, Inc. You need to overcomethose realities.
The trick to budgeting in the real world is directing the personal budget to some savings goal that matters a lot to you and that you expect to realize within five years time or less. Write a personal budget for your age-65 retirement when you are 30, and David Bach is right–it ain’t likely to produce much in the way of results. But writing a personal budget so that you can make that career change you have been dreaming about for several years now, that just might work!
It worked for me. And it has worked for lots of other middle-class workers saving for more immediate saving goals than the financing of an old-age retirement. Businesses don’t write budgets to achieve goals 10 or 20 or 30 years in the future. They write budgets to guide them toward realization of goals that will make them more successful in the near-term future. That’s what you should be doing too.
David Bach is right to be skeptical of the merits of the conventional budget. Too many have failed for personal finance advisors seeking to provide genuine help to middle-class workers not to take note of the reality. I think he is wrong to give up on the budget concept altogether, however. What we need are personal budgets crafted to achieve saving goals of intense personal significance. We need turned-on budgets helping us achieve our most important life goals, our life’s passions.