The One-Number Budget (eBook)

Chapter 2 
Why Traditional Budgeting Methods Don’t Always Work

If you’ve picked up this book, it’s probably because you already know deep down that traditional budgets don’t really work. If they haven’t worked in the past for you, you’re not alone. And it’s not even your fault. The problem lies with the budgeting process itself.

To better understand the problem, imagine yourself behind the wheel of your car. You’re driving along, lost in thought, when all of a sudden the dashboard lights up, bells are going off, and you see that your gas light is on. The needle is on E. You’re running on empty.

On this particular trip, you’re nowhere near home. The road stretches out as far as you can see, and you have to hope that you’ll get to a gas station before you run out of fuel. I know just how this feels, because I’ve been there. That creeping feeling of panic starts to move up from your gut into your throat. There’s nothing worse than white-knuckling the steering wheel, hoping you can get to the next gas station.

Hopefully you’ll have just enough gas to get you there, but what do you do in the meantime? Everything you can to conserve gas. You turn off the radio and the air conditioner, and you start paying really close attention to how you’re driving in hopes of maximizing fuel efficiency. If there’s a downhill, you put the car in neutral to coast for as long as you can. Every driver’s ed trick you’ve ever learned is on the table here, because it’s an emergency.

And then, in the distance, you see a sign for a gas station. You pull over, turn off the engine, and let out a big sigh of relief. You made it, and you’re safe. Whew!

So what happens next? You fill up the tank, pull out of the gas station, and blast the air conditioning. Maybe you even roll the windows down at the same time, just because you can. You crank up the radio, put your foot on the gas, and speed down the highway to make up for lost time. You’re feeling great—and you’re burning fuel a whole lot faster than you were when you thought you were going to run out just a few moments earlier.

Here’s the point: when you feel like you have lots of resources, like that tank of gas is full and there are plenty of places to refuel ahead, you operate your car differently. You’re not as concerned about efficiency, because everything is good. It’s only when you’re feeling the pinch that you start to worry about conserving fuel and stretching your resources out to last as long as possible. The unexpected emergency is what drives action, but by then it may be too late—and who wants to leave things up to luck?

Traditional Budgets Are Only a Snapshot

Traditional budgets fail because they only provide a shortsighted, month-by-month look at your finances. They ignore the long-term view of lifetime cash flow, and they often push savings to the bottom of the monthly to-do list.

It’s a lot like that tank of gas, in that a standard budget only gives you a sense of whether your tank is full or empty. Do you have enough to get to the next gas station, or don’t you? But that doesn’t answer the bigger question of whether you’ll have enough fuel to get you through your whole road trip. You feel fine when the tank is full, so you enjoy yourself—right up until the needle hits empty.

Budgets are a lot like that. When you’re in your prime earning years, it’s easy to feel flush with cash. Your bank account, like that gas tank, is full! Why not make yourself comfortable and reward yourself for all your hard work by spending some of that money? After all, you’re working hard, and the paychecks show up every two weeks to replenish your account. It’s as if you’ve been guaranteed a gas station every 20 miles on your road trip.

Of course, not all roads have that many gas stations, and not all periods of your life come with a paycheck. Right now you’ve been trained to rely on that biweekly paycheck and think only about getting through the two weeks between them. But someday the checks will stop coming. At that point, you’ll either have savings to rely on, or you’ll have to white-knuckle your way through while frantically cutting back on everything that made the ride enjoyable in the first place.

When it comes to money, context is everything. If I gave you a million dollars today, would that make you rich?

If you knew you only had another 30 days to live, then yes. You’d be truly wealthy, because you’d be unlikely to spend it all before you died. You could do whatever you wanted to with that money and never have to worry about it running out.

But if your crystal ball said you were going to live for another 30 years? Well, now maybe you’re not so rich after all. That amount may or may not be enough to get you through three more decades, and you’d have a whole list of decisions to make about your lifestyle to decide whether or not it’s enough.

Context is everything.

We’ve all been taught to think about a budget in terms of months. Figure out how much money you’ll earn in a month, make sure you keep your expenses low enough to get to the next month, and you’re all good. But here’s the thing. The short-term snapshot that a monthly budget provides doesn’t show you the big picture of your lifetime, so it’s not the best tool to help you make good decisions about your money.

Yet everywhere you turn, you’re being marketed to in a way that prioritizes a monthly snapshot over your long-term financial health. This happens in advertising and sales all the time, and it’s easy to see why: a monthly payment is a much smaller number than the full cost of a house, car, or other major purchase. A $450 payment every month for five years will always be an easier sell than a lump sum of $25,000.

When costs are presented in terms of a monthly payment, you’re much more likely to say, “Sure, I can do that. It’s just a little bit more each month.” You’re only human, and it’s much easier to deal with small numbers and a shorter time frame than it is to think about how your cash flow today needs to last for decades. Remember, the whole idea of providing for rather than stealing from your future self is a new one, and it’s not natural for most people to think so far ahead.

But here’s the truth about your income. One day you will stop working, whether you choose to or not. On that day, the income will permanently stop, and you will have to rely on the wealth you’ve built to carry you through the rest of your life. Traditional monthly budgets often lull people into a false sense of security by making them feel that things are balanced right now, but they don’t help project into the future to see just how much is being stolen from our future selves when we decide to spend that $450 extra each month instead of saving and investing it.

Traditional Budgets Make You Feel Like a Failure

That false sense of security feels good for a while, but it only lasts as long as your monthly budget is in balance. Anyone who has tried to keep up with a household budget for more than a few months knows that the balancing act doesn’t last for long.

Most people start the budgeting process with excellent intentions. They want to get organized and take charge of their finances, so they hit the internet and print out a general household budget. There are hundreds of them out there, and they ask you to list out everything you could ever imagine spending money on: the mortgage, utilities, cable TV, food, car payments, childcare.

The list goes on. And on and on and on, breaking categories down into subcategories until your head is spinning as you try to figure out exactly how much you spend on lattes each month. You do your best and assign numbers to all 20 or 30 categories of expenditures, and it looks great. You did your homework by figuring out the average of what you spent on each item for the last six months, and your new household budget is a work of art. You may even sit there admiring it when you think no one is watching.

Then all of a sudden, from somewhere behind you, you hear a sound. Is it raining? There’s a drip, drip, drip coming from somewhere, but it turns out it’s inside the house. Your ceiling is leaking, and you realize that there’s a leak in the upstairs bathroom. Water is flowing from the second floor onto the first, and you glance back at the budget you felt so good about only a moment ago. The line for household repairs has $50 budgeted, because things don’t usually break.

Three days and countless full buckets of water later, the plumber hands you a bill for $750 for the repair. That beautiful budget is blown not just for the month, but for the next year and a half. Now you need to start all over, adjusting every line item to accommodate the new reality. And you’ll have to do it again and again.

The problem with snapshots is that they only mark one moment in time, and there’s always an outlier expense that throws the whole thing for a loop. This isn’t your fault. It’s just how life works. Get hit with enough curveballs in your budget, though, and it’s pretty easy to end up feeling like a failure—and even easier to want to give up on the whole thing.

But I’m here to tell you that you are not a failure. Traditional budgets are failing you.

Traditional Budgets Are Too Time-Consuming

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