Your bank statement is not a budget


I get pushback from people about budgeting all the time. This is because people mistakenly believe that a budget is something that prevents you from doing things. In actuality, the exact opposite is true: you create it, so determine what you can do! If you allocate $150 for clothes this month, then spend $150! There’s no need to feel bad about it, because you’ve figured it out in advance. Have fun!

(In all seriousness, I know that it’s more complicated. People’s aversion to budgeting arises from many sources, often an intersection of fear, guilt, and shame. I’ll talk about this more in some future posts, but let me be flip for now.)

Here’s one way I hear people explaining why they don’t need to budget:

I use my credit card for everything. This way, I get a statement at the end of the month showing me exactly what I spent.

This isn’t incorrect, but can anyone spot the strategic error here?

Description vs. prescription

The big problem with the statement-as-budget is that it is descriptive and not prescriptive. Let me explain.

The statement comes at the end of the month, and looks back at what you did. It describes what you spent in the past. It makes no prediction or suggestion on what you will spend in the future. If you spent $100 on Starbucks last month and then (somehow) spend $200 this month, the statement will dutifully note this. But what good will this do you to know what you spent? That’s kind of like a dip in the road with a sign after saying “you just hit a dip.” What’s the point?

And even if it led you to adjust your spending, how would you know that you were changing anything? By waiting to the end of the next month and seeing?

The statement-as-budget is appealing to people because it doesn’t force you to plan in advance. It lulls you into a false sense of budgeting because the statement kind of looks like one, being itemized and collected into spending categories.

But the whole purpose of figuring out your budget is that you do it in advance. You make a plan. You act deliberately. You determine what is important to you and act accordingly. You know what you’re going to do, and not wonder what happened at the end of the month.

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Whose categories?

Another problem is with the categories. I always recommend that you divide your expenses into categories, so you can allocate your spending toward specific goals (a certain amount for food, another amount for clothes, a further amount for fun, etc.). The statement you get may indeed divide up your spending into categories, but the categories are more likely to be inflexible ones that don’t match up with your own.

For example, let’s say you have a knitting hobby, and you want to make sure you keep track of your spending on yarn and other supplies like that. I sincerely doubt that the statement will include a Yarn category. (How would a merchant even code that?)

Red herrings

I’m not even convinced that people who like the statement-as-budget method actually use it as such. I guess I find it difficult to imagine people sitting down at the end of the month to review one’s spending. I’d think if someone is going to take the time, then they are more likely to just spend the time before hand and come up with an actual budget.

It’s also suspect to me how the people who support this method are always talking about using their credit card. I can use my debit card and get a statement every month. True, the credit card company may provide a nicer, more detailed statement than your bank, but I think there’s a rationalization at work here.

Do you have 15 minutes?

The first time you make a budget, it won’t be easy. You may not be aware of how much you’re spending on anything, especially things like food or drink. So the first time you do it, it may take an afternoon, and you’re likely to get it wrong and have to revise it a bunch of times. There’s no shame in this; it’s a learning process.

But once you’ve got it down, a budget typically doesn’t change too much from month to month. I make a budget every month, and it takes me about 15 minutes or so. I copy over last month’s info (spreadsheets make this easy, but you can use a simple text file or even a real notebook if you’re old-school) and change anything that needs to be changed. I shuffle around the amounts in each category if necessary, but that’s about it. It’s never identical, but I also never need to start from scratch.

And when I’m done, I know exactly what my plan is for this month. I then follow through, keeping track as the month goes on. Because of this, a statement is unnecessary. Why do I need the bank to tell me what I spent? I already know.

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So don’t be fooled into thinking that receiving a statement is the same as budgeting. Instead, be proactive. Try it my way, figuring it out in advance, and I bet you that it will feel like you got a raise. Now that’s a statement.

But enough about me. How do you use the statements you get?

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