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Don’t Budget To the Penny

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This is a Devil's Advocate post.

Budgets are great, they keep you in line and they help you reach the goals that you’ve set for yourself and your family. The thing is, there’s a point when the budget stops being a means to an end and they start dominating your life… and that’s when you start tracking things to the penny. Listen, if you’re going to budget, experts advise that you track everything but I’m going to give you a few reasons why you should track to the dollar and not down to every last cent.

This particular DA is a little weak in the sense that the “conventional wisdom” aspect, budgeting to the penny, isn’t something that everyone thinks you should do but merely the default approach towards budgeting. Personally I do not budget (anymore), but when I did I budgeted to the penny and felt that technique was a little restrictive. I eventually stopped in part because of reason one. So, in this respect, I am truly the Devil’s Advocate and not merely playing the role for grins and giggles.

If It’s Hard, You’re Less Likely To Keep It Up

Let’s be honest, no one likes to budget in the first place because no one wants to feel like they have to track every single thing that they do because it takes the actual fun out of doing it. Going to the movies becomes “watch a movie, oh yeah I have to put $9.50 in my budget,” and you get a little bit away from the enjoyment of the movie. Also, if you have to track every last penny every single time, you’re probably going to put it off… and put it off… and then maybe not even track it at all! You want to put as few roadblocks in the way of you and your goal, of saving money to do X or pay for Y, and tracking to the penny is a headache that is a potential roadblock.

That Level of Visibility Not Necessary or Useful

$1.05 or $1? $50.87 or $51? Let’s be honest, when it comes to your budget, tracking to the penny really doesn’t get you all that much. Depending on how you opt to do the rounding, at the absolute maximum your budget will be off by the number of transactions you have; on average, you’ll be pretty close to your actual budget. If you always round up, you’ll be off but never short, which isn’t that bad when it comes to budgeting because you’ll “find” money at the end of the month. Unless you enjoy tracking down to the penny (and there are certainly folks who do and there’s absolutely nothing wrong with that), you can see how it doesn’t get you all that much more given the added effort.

That’s Not The Point

The purpose of budgeting is to track your expenses so you know how much you’re spending and what you’re spending it on. If you’re the type of person who blows their whole paycheck and has no idea where it went, budgeting is for you. If you’re trying to find places in your spending to trim the fat in order to pay off debt or save for something, then budgeting is for you. If you just want to keep an accurate picture of where you are, then budgeting is for you. In all three scenarios, tracking down to the penny is absolutely irrelevant and likely to derail your attempts to budget. Getting “close enough,” that is within fifty cents for each transaction or any of the other rounding tricks, is good enough and likely to keep you at budgeting a while longer.

I know there are a lot of readers who budget, so please share your strategies (down to the penny? round up? round down? keep a notebook? anything you want to share!) so we can all learn!

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20 Responses to “Don’t Budget To the Penny”

  1. How about not budgeting? Just spending what money you have because you automatically deposit all savings first then are allowed to live on what you have?

    I have been tracking my spending, not budgeting because I’m pretty sure I have a good handle on what we spend our money on. Personally it’s easy because we use CC so I track to the penny. What I hate is trying to use cash and track that to the penny.

  2. LAMoneyGuy says:

    I have a friend who worked on a cash basis. He ignored coins. If he spent $6.83, gave the cashier a Ten, and got back $3.17, he would record it as a $7.00 expense. However, if the next day he bought a cup of coffee for $1.10, and used the dime from yesterday, the coffee would go down as $1.00.

    Made sense, and worked for him. That’s really for cash budgeting. I don’t want to sit there counting coins every time I do a balance sheet.

  3. Jesse says:

    “If It’s Hard, You’re Less Likely To Keep It Up”

    Just taking that heading on, that’s hardly a good argument not to do something, “because if it’s hard you’ll just give up.” But if you get wrapped up in the details so much that you burn a lot of unnecessary time, then yeah, this could be a problem.

    Why do you say fifty cents is okay (because of rounding)? I think it’s more of a materiality threshold for individuals based on how much they have to “work with” as a whole. To some, even fifty cents is a big deal. To others, $50 hardly has them batting an eye.

    Nice post.

  4. Dustin says:

    I like the round up mentality.

  5. Kenya Frappier says:

    Personally, I am big on budgeting, but to prevent feeling as though I need to budget in every little extra expense, I budget a weekly amount of ‘Fun money’ usually around 40$ that is for things like going to the movies etc. I take this money out in cash, and if I use it all up on tuesday, too bad for me lol, if I have some left, it gets added to the following week’s fun money. I find that this way I am still controlling the small, often missed spending (pack of gum etc) but I am not going crazy with the budget.

    This has also helped me eat better, I no longer buy any junk food when I do groceries, this forces me to buy that bag of chips with my fun money, which usually makes me think twice.

  6. jim says:

    Jesse: “Why do you say fifty cents is okay (because of rounding)? I think it’s more of a materiality threshold for individuals based on how much they have to “work with” as a whole. To some, even fifty cents is a big deal. To others, $50 hardly has them batting an eye.”

    If fifty cents is a big deal in your budget, always round up and you’re guaranteed you won’t ever be off. Clearly this cannot be taken in a vacuum and if you’re going to be strategizing your budget, you would take that into account.

    Incidentally, if your budget can’t handle being off by 50 cents, you need to add more buffer in your budget.

  7. limeade says:

    I’m not a big fan of budgets. They seem to have the same lifespan as the last diet you went on and the gym membership you swore you’d use.

    The whole point of a budget is to ensure that you’re spending less than you’re earning. Put a little differently, the budget is to ensure that you have free cash flow left over.

    Take out a certain percentage from your income for emergencies and then investments. The rest is for your bills and other living expenses. Keep it simple.

    -limeade
    http://fiscalmusings.blogspot.com

  8. Jon Morrow says:

    I like the idea of making enough money where the amount I spend doesn’t really matter. If, for example, you’re making $300,000 per year and practice relatively sensible money habits, then the question of whether to go to a movie or rent the DVD isn’t really a matter of how much it will cost. You can spend a few extra dollars here and there and still have plenty to invest.

  9. budgets are not for me. i tried them several times and found that i’d be way over budget every month, but i was still doing fine financially. if you are disciplined about saving and investing — say, if a part of your take home pay gets stashed away in an account you don’t touch, you can be a bit looser with your spending, so long as you don’t go into debt along the way. to me, what you have after expenses, saving, and investing is disposable income. which is not to say that you throw it away, but don’t worry about putting every penny, dollar, or even $100 into a specific bucket.

  10. zen says:

    @Dustin:

    I’m with you.

    I’d much prefer to round up (under-budget, I suppose?) and be surprised at the amount of money I have, rather than play the round-up/down game which could cut short.

    I’m still hammering away at a decent budget (new job, new expenses, make that a little difficult) but my wife and I are akin to overestimating expenses for the sake of always having a buffer.

  11. Rob Carlson says:

    Even income taxes get rounded to the nearest dollar. This is an entirely reasonable proposition.

  12. RootAnn says:

    I’m the one who manages the budget/finances/investments in the family. We’ve been on a budget since Jan 2002. I track to the ‘penny’ with things I have a receipt or notation of what we spent. We do have a certain amount of cash that comes out that doesn’t get tracked – kind of like a previous poster’s “fun money” but it isn’t a set amount and it is less than 0.5% of income.

    Because my husband is not on salary (paid hourly) and our expenses vary so much from month to month, we’d be in trouble if we spent everything he made each month. There would be nothing for those months where our expenses exceed his income. The budget helps smooth everything over. My budget varies by month depending on the expenses I know will occur. (We shop for household supplies/food in bulk every 5-8 weeks, professional dues/expenses or insurance costs due once a year, etc.) So, we have saved the money from the larger pay months to pay for those larger expense months due to good budgeting.

  13. I never track expenses to the penny anymore. It was just too frustrating. I have another system…

  14. Aaron says:

    Jesse: I’m not sure why you decided to take issue with the statement “If it’s hard, you’re less likely to keep it up.” It is a true statement for any human activity — when things are more difficult, people are more likely to lose their resolve.

    If a person with poor financial habits decides to change their ways, it is important that they pick an approach that is easy and managable. The easier their budgeting system is, the more likely they are to continue using it and to break their bad habits.

  15. ispf says:

    Great post! I am a little surprised though, that this is in the “Devil’s Advocate” category! I agree with all the arguments you make and personally don’t keep track of my budget to the penny. Hmmm….

  16. mbhunter says:

    John D. Rockefeller was taught to keep track of things down to the penny. I heard someone say that he did all right financially.

    http://www.pocanticohills.org/rockefeller/ledgera.jpg

  17. Ben says:

    mbhunter talked awhile ago about using “The Force” method of budgeting which seems to describe my approach pretty well.

  18. Kim L. says:

    I’m a loose budget type person. I list our income, list our mandatory expenses and fit the rest in. I have a miscellaneous category that is all the stuff I don’t really want to track. This helps me pick a savings number (above and beyond 401k) that is aggressive but not too pinching. That way as long as I follow close to the budget categories I figure I’m good. I use MS Money and I love the feature that lets you know how much you are spending in a category compared to what you budgeted for it.

  19. karla (threadbndr) says:

    I do budget ‘to the penny’. I assign every $ of my base pay to a ‘bucket’, but my overtime is budgeted very loosely – once I have put some aside for vacations, all the rest is my splurge, movie, books, crafts supples, etc money. It’s also deposited into a different checking account than the ‘household’ money.

    On the months where there isn’t a lot of OT, I can still meet all my savings/investing goals and meet all bills. I use a modified version of Mary Hunt’s freedom fund to accrue all the quarterly and yearly bills (taxes, car tages, etc) and save for all the sporadic budget busters (car and house maintain and vet bills mostly). Funding that savings also comes out of the base pay.

    I find that being very careful with my guarenteed income flow and more or less casual with the overtime works for me. When I still had a kid at home, it was that overtime fund that paid for camps, projects, vacations, etc.

  20. Kathy says:

    I have a sister who lives like a queen. She has had three homes in the last 20 years, and she remodels every one of them to the max. This last house she bought, she thought herself very disciplined, when she waited nine years to remodel the entire kitchen.

    I’ve lived in the same distressed house for 32 years. I’ve done the main things like making sure it had a good roof, termite protection, and new water heaters, but I’ve never had the money to do extensive decorating. Not because I don’t want to, but because I only have so much money to go on.

    I keep an attitude of caution because I know that if I bite off more than I can chew, the cavalry is not coming to rescue me. And “that” is my budgeting tool. It is a very effective one. I never let myself get too happy. All bills are settled immediately, or as soon as possible. I only use credit cards in dire emergencies, and pay them off immediately.

    My sister has quite a complex “budget”. And yet, she’s still in debt for her house at 62 years old. She walks on eggshells as a way of life.

    I paid my house off in 1993. It’s a wonderful feeling knowing that no one will throw me out as long as I pay my taxes.

    A budget is not for losers. It’s probably a very good idea, but just not for me. When I start adding up columns of figures, I usually end up with a messy page that no one can read, not even me.


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