Are We Doing Budgets Wrong?

Americans are endlessly torn between two extremes: saving money for the big things and spending money on the little things. In fact, only 41 percent of Americans have committed to a budget, according to the U.S. Bank Possibility Index. Perhaps even more frightening is the fact that the National Financial Capability Study found that only 46 percent have a rainy-day fund. Nearly 70 percent of Americans don’t even have $1,000 stashed away.

Americans are putting themselves in a precarious position: It’s hard to get ahead when their financial resources are set up to just help them get by. But could part of the problem be the way we approach budgets altogether?

Personal Finance Gone Awry
Americans love diets; 45 million go on a diet each year. A country fond of large portion sizes, we veer between extremes: eating gluttonous portions of comfort foods and then restricting ourselves to “clean” diets of celery and carrots. We apply the same mindset to our budgeting, veering between blowing an entire paycheck on a spontaneous trip to Las Vegas and limiting ourselves to two months’ worth of Ramen at the grocery store.

“At the end of the day, the budget is the answer to the social phenomenon of advertising. Ads are telling you to buy this product, have this experience — you can afford it, and we’ll even help you finance it so you can have it,” says James Lenhoff, CFP and president at Wealthquest, a financial planning and wealth management firm. “A budget is a traditional response to restricting those feelings, avoiding the guilt and shame that accompanies the thought that you should be mature enough to not spend money.”

In other words, ads compel us to acquire things in an effort to keep up with the amazing experiences we feel everyone around us is having, but then we feel punished for having done that very thing. We formulate budgets to prove we can afford something, sacrificing and eliminating to show that spending on what we want isn’t unwise.

Because our budgets are tightened to justify our spending, we can only make other choices by making cuts elsewhere. Making cuts when our budgets are already austere means we can’t be generous, and that’s where things go wrong. Forbes’ Dani Pascarella explains, “A big reason why people feel guilty about spending money is they fear that it could be going towards something better or more important.”

Spending Plans Are Better Than Budgets
A spending plan is different from a budget: It recognizes that life does have costs associated with it; in order to live, we’ll be spending money. Whereas a budget’s goal is to spend as little as possible, a spending plan is about spending as much as we said we would in each area. Budgets tend to influence people to think they shouldn’t, while spending plans give people the confidence to know they should.

Budgets are often not based on what it currently costs to live, but on what we think it should cost. When people are over budget, they feel like failures. In many cases, that was money they were likely to spend; they simply hadn’t accounted for it. In thinking about how they could live, they fail to think about how they do live.

Because of this, spending plans put people in a positive frame of mind, connecting us to generosity when we have more than we need because we’ve broken out of the austerity focus. “Everybody has an emergency fund as part of their traditional budget approach, and everybody should have one. But we don’t have a counterbalance: If things go well, what then?” says Lenhoff. “We usually spend it on ourselves. But an abundance fund allows us to set it aside to make an impact on a cause we care about or to lift someone’s burden.”

Studies have shown that being generous makes us happier. When we’re able to do things for others and support the causes we care about, we’re more optimistic and open to opportunities. In fact, research showed that those who tithe, or give money to their churches, actually had healthier finances than those who didn’t.

An abundance fund earmarks the money left over for others. It allows people to mentally hit the “reset” button on a couple obstacles to giving: 1) overcoming the scarcity mentality and 2) assigning ownership by earmarking it for others. It eliminates the pull to spend on ourselves as we would if we saw the excess sitting in our checking account, shifting the ownership to whomever is next.

Making Abundance Work
Giving to others in need, rather than funneling money into our gaming fund, sounds great in theory. But most people who are used to strict budgets need some help adjusting their frame of mind to push money back out rather than hold it in.

Start small. Lenhoff says many people will accumulate $500 or $600 in their first few months, then write one big check to a cause, instantly putting them back at zero. Small wins with a direct impact — such as paying for someone’s tank of gas or covering a tow truck — offer a better way to both see the payoff of being generous and ease into giving money away. We underestimate the value of those kinds of actions and overestimate what big checks do.

Involve the family. Rather than create a wedge between family members, an abundance fund often draws families together. They can act in the moment as a group, spending their money on others; when they act individually, there’s no tension — it’s already designated. If family members disagree on how the money should be spent, they can split it across different accounts, allowing each person to determine how to spend his or her share. This includes kids: It’s a powerful way to empower them to see it as their resource and get their eyes searching for ways to make an impact.

Remember it’s all trial and error. As people spend their abundance funds, they realize they gravitate toward the excitement of relieving a particular burden — but may not feel the same enthusiasm toward another cause they tried to impact. They can use those experiences to identify which opportunities to go after.

Putting together shoestring budgets may have made restrictive financial plans seem necessary, but a spending plan can allow us to move away from a confined mindset to an overflowing one. By using our funds for lifting burdens, we can do more good — and stop associating our money with guilt and shame.