I have a secret, a confession, an opinion so unconventional that it would rock the pillars of normal financial advice and seek to go against the grain of many main stream websites; I hate budgets. It’s not that I’m bad at creating budgets, or that I struggle to stick to and maintain one since implementing. More that I dislike the concept of them and question the real value they can add to someone’s personal finances.

The problem with budgets are that they are effectively a combination of various targets in reverse so that instead of attempting to reach the target, you instead aim to stay below it. One of my first ever university research projects was looking at the motivational effects of setting targets within the workplace.. and the results surprised me. Alot of the research I gathered showed that setting targets had very little impact on employee production and motivation. In some cases, working within a target driven environment actually lead to a reduction in performance!

By setting a target, an employer was effectively setting the standard at which they would be in approval of an employee’s performance. Once this target had been reached there was usually very little further motivation for the employee to continue past it. If a car washer gets paid an hourly rate plus a small bonus for cleaning X number of cars, It makes sense to time the work and effort such that the target requirement is reached just at the end of the shift and by putting in the minimal effort required to do so.

This can then be translated to apply to a set budget. Most typical budgets will have specific pools of funds allocated towards different areas; £500 for rent, £200 for food, £100 for petrol etc etc. At the end of every month, the expenses are totaled and compared to the budget. ‘Spent £197 on food that month? Great! That’s below budget! I can even go out and buy a £2 chocolate bar to celebrate and still be under budget!’ Unless the budget is then continually reviewed and adjusted to reduce the allocated amount it risks encouraging complacency, reduces efficiency and can encourage needless purchases which are justified as still being ‘below budget’.

Another negative result of target setting is that it can lead to a reduction in performance. Take our car washer again: If his employer were to consistently set targets which are unachievable due to external factors or pace of work it is likely to have an impact upon the motivation of the employee. We then have a similar situation as described in the Understanding Retirement Calculators post whereby people become demotivated at being unable to achieve set targets and so either give up or begin working the minimal amount required to not get fired. Applied to a budget this would mean someone consistently overspending in one category while ignoring the greater picture. Better instead to identify why one area of expenses has increased and make adjustments as required. Budgets often frequently allow little room for expenses of opportunity. For example; If a shop is offering a huge discount on bulk purchases of items it may not be covered by a set budget and so such great offers could be missed.

Personally, I prefer to monitor my overall income and expenses and compare these as running totals. This allows optimisation in all areas.. not just those which have gone ‘over budget’ for the set month.

What do you think about budgets? Are they a useful tool for improving your finances? Or do you think they can present more problems than they solve? Let me know in the commends below.