For many of us, creating a budget is easy. Sticking to a budget for the long haul is the hard part. Here are three reasons why budgeting doesn’t teach you about money and what you can do instead to improve your financial thinking.
Following a budget can distort the way you think about money.
Budgeting doesn’t teach you about money because, over time, it starts to distort the way you think about money. For example, do you associate budgeting with scrimping, just getting by and going without? Tracking and number crunching your expenses and spending habits down to your very last dime is a time-consuming and mentally draining process. Adhering to a strict budget can lead to a money mindset of negativity, deprivation and scarcity.
When you focus on what you can’t have instead of your potential to create, you limit your ability to produce. Think about it. Wealthy people aren’t wealthy because they budget, wealthy people are wealthy because they have a financial game plan focused on abundance and expanding wealth, not shrinking it.
A budget tends to view ‘spending’ as bad.
Do you see all spending as bad when it comes to following a budget? Unfortunately, budgeting doesn’t teach you how to manage your money effectively because it tends to lump all spending into one giant category. All spending is bad if it doesn’t allow you to save money. However, not all expenses are created equal. There is a substantial difference between destructive expenses and ‘rainmaking’ or productive expenses.
Destructive expenses are things you spend money on that don’t bring value or improve your quality of life for the better such as cigarettes, gambling or paying high-interest rates on credit cards. Productive expenses are things you spend money on that add value and enhance your life for the better such as a gym membership or a professional development course. Productive expenses are expenses that increase your productivity and encourage optimal functioning so you can be at your best.
As a money management strategy, budgeting is often unrealistic to maintain and can be damaging to your ability to be productive, add value and increase your earning power. Sometimes you need to spend money to make money, even when you don’t have it.
Conscious spending is hard to master through budgeting.
Budgeting allows you to monitor and track your expenses but how empowered do you feel when it comes to using budgeting as a tool to manage your money? Does budgeting make you more aware of why you are spending the way you do? Not really.
When it comes to having a financial game plan and developing money management skills, value-based spending is preferable to budgeting. Value-based spending adopts a holistic approach based on the economic concept called the Subjective Theory of Value which states value is derived on the importance a person places on a good or service.
For example, you might like to spend money on expensive luxury items because you attach a certain value to such items, while someone else might think purchasing luxury items are a waste of money. Since what is important varies from person to person, ‘value’ is subjective. Where budgeting sees spending as black and white, value-based spending uses ‘value’ as a financial measuring stick; the value you place on a service or good is greater than the cost you pay.
Value-based spending forces you to be conscious of your spending by asking tough questions. How does this purchase make me feel? How will this purchase benefit me in the future? How does this purchase enhance my life now and contribute to my well-being? Contrary to a budget, value-based spending focuses on making conscious purchasing decisions aligned with your goals, personal values and the things you enjoy most.
If you want to learn more about developing a comprehensive financial strategy, make sure to check out our Financial Scorecards and other tools.
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