3 Dangers Of Conventional Budgeting

If you really want to save more than you earn, conventional wisdom says you’re going to need to start a budget. It’s only by seeing where your money goes and figuring out where you can cut back that you’ll be able to get your financial act together. But conventional budgeting is fraught with danger. Here are the three main things you should avoid.

budgeting danger no. 1

Relentless focus on minor expenses

Bring your lunch to work. Cut back on your lattes. Don’t order dessert. Rent videos from your library.

All of those over-hyped strategies are sure to cut expenses, but will they make a big difference? Will such small changes enable someone currently living from monthly wage to monthly wage to move comfortably beyond? Usually, it will not.

Lattes, video rentals and the like are all real expenses that indisputably leave you with less money for everything else. And, if you cut out £3 of spending every day of every week of every month of every year for several decades, yes indeed your savings will add up to a ton of money. Such are the benefits of the miracle of compounding interest.

However, do those minor expenses represent your biggest opportunities to save? Unlikely. Spending an extra few quid on lunch a couple of times a week or meeting a friend at a café every so often is probably not what keeps you in a financial hole or prevents you from achieving your financial goals.

The more likely culprits: the size, timing, and frequency of big-ticket expenses like your car and home. Focus your energies there. Can you delay the purchase of a new car for another few months, or even longer? Can you buy a used car instead? Can you buy a house that costs less than the one you’ve been told you can “afford?" Are you willing to do your homework to ensure that when you buy or refinance your home you save a quarter or half of a point on the interest rate you might otherwise pay? Such one-time decisions can have a far greater impact on your financial fitness than nailing the latte choice every day for decades.

budgeting danger no. 2

Reduced spontaneity and flexibility

Are today’s budgeting tools too powerful? You can slice and dice your personal data every which way to Sunday with minimal effort. You can categorise everything. You can create budgets based on your actual historic data and then update the numbers constantly.

But should you?

Certainly not the last part. Not only because constant updating may indicate some sort of obsession, but also because it’s utterly unnecessary. Worse, it could negatively affect your life. Like all tools, you have to use it properly. Use the budgeting tool to increase the value of the life you live, not to decrease the cost to get through it.

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