Why categorized budgets fail… and what to do instead {+ free guide!}

Last updated Aug 9, 2021

Spoiler alert: The problem isn’t you. It’s your budget!

I have been saving money and paying off debt for the past 10+ years. 

Now I have no debt except mortgages (one for an investment property, one for our home). Both mortgages have $100,000 in equity each. And I have enough cash in the bank to allow me to retire from a traditional career at age 37 and pursue my own business ideas and passion projects. 

Do you know what was key to get me there? 

The #1 key- A budgeting philosophy that is sustainable and flexible for all seasons of life (the topic of this post!). This budgeting method worked for me as a broke student, newlywed, having kids, every situation. The big difference is that my simple approach to budgeting focuses on your spending “burn rate.” This means budgeting spending money by time and not by categories. This is a universally effective way to control spending.

Here are four key takeaways from this post:

1. Learn why typical budgeting methods are too generic and why there is no “usual” month when it comes to spending.
2. Learn the one number you need to know when it comes to budgeting your spending money & how to calculate it most strategically. The monthly bills are what they are & are dealt with in other ways.
3. Learn to monitor your spending “burn rate” to stay below your monthly spending cap.
4. Learn the spending methods that will help you stick to your budget & be successful honoring your monthly spending cap.

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Common budget advice

Relatively well known budgeting methods include the cash envelope system. The cash envelope system involves dividing your expenses into categories. You put cold hard cash into an envelope for each of those categories each month. And when an envelope is empty, no more spending in that category! Electronic forms of this categorized budgeting can be found too. A popular electronic approach is the You Need A Budget app, or YNAB. You assign money to categories and when it’s out it’s out. However, YNAB encourages you to transfer money across categories during the month if you choose.

Another approach I’ve seen popping up more is the 50/30/20 method (get a great run-down of 50/30/20 here). Plenty of sites also recommend various numbers for the “ideal” % allocation of spending. Even though these are still relatively ‘high level’ budgets, they lose my vote because the ‘idealness’ of their % recommendations just don’t apply well to everyone, and especially young families. Perhaps it is a place to start, but I recommend figuring out your own current % allocation of spending and then drawing out your ideal scenario. That’s a more custom approach. In particular, these recommended proportion methods completely leave out childcare costs and that’s a super important category for financial planning for young families.

1. Why I don’t use a categorized budget and what I do instead

The approach I liken my system to most is the anti-budget, something gaining some traction among other highly reputed personal finance bloggers anti-budgeting. In effect, fixed costs are fixed. They don’t really need a ‘budget’ created to fit them in. Savings and debt repayment amounts are part of broader strategies to be determined and effectively become fixed costs themselves. In zero-based budgeting (i.e. no more debt!), after those fixed commitments, you’re left with your discretionary spending. And this is where budgets usually come in.

Monthly spending cap

I advocate developing a monthly cap (i.e. max) for your discretionary spending as you are developing your debt and savings targets. Once you have your key monthly numbers, you have a real plan that gets the ball rolling towards your smart financial goals. And those financial goals support your short and long term vision for your family. To figure this out most accurately, work through the Magic Monthly Number Workbook, which you can grab FREE below.👇

Budget across time, not by categories

So, you have a monthly spending cap determined. How are you going to control how you spend that money? The big difference between typical budgeting and my method is that I allocate money by time, not by category. In reality, we receive income usually by time (e.g. biweekly paychecks) and we spend money by time (e.g. monthly mortgage, monthly utilities, weekly grocery trip, annual Christmas party, etc). When we allocate money by time, instead of by category of purchases, we control our spending rate instead of the particular items and services we spend on. This is a universally effective way to control spending.

Why categorized monthly budgets fail

Spending categories (e.g. food, entertainment, clothing, home needs) come into play at wildly different rates, making developing a monthly budget across all the possible spending categories of life painful. It leaves you thinking, well, this month didn’t quite fit because we had a kid’s birthday, or we decided to fix up the living room, etc etc. The problem is that happens every month! In fact, no month is typical when it comes to discretionary spending.

Another of the pitfalls of budgeting with categories is that you make the budget categories so general to avoid the tedium and recurrent feeling of failure. Then, you essentially no longer have a budget and aren’t really sure what to be paying attention to in order to control your spending.

For example, let’s look at what spending for a family really looks like. This infographic lays out a number of potential budget categories by how frequently they actually occur. Some things are pretty expensive, though not quite ’emergency expense’ expensive, but also don’t make it into your monthly budget categories because they’re so infrequent. These types of things can really throw your financial plan for a loop. But even though, for example, a trip to the vet doesn’t happen every month, it will fall into one month of the year for sure. Same goes for back-to-school shopping, a minor home repair/improvement, and your anniversary. Indeed, one or two of these infrequent (but often potentially spendy!) things is going to land in every. single. month. Ah!

Learn to monitor your spending “burn rate”

When you pay attention to time, instead of categories, you focus on your burn rate plus space for the non-monthly stuff, instead of exactly what items or categories you’re spending money on. Of course, you are wise enough that you’re not going to spend your weekly allowance on bubble gum when you still need to put real food on the table for your children. And some detailed spending analysis can still be useful, but is pretty easily accomplished with online credit card and bank tools that track your spending by merchant, category, and more. In short, given the wide array of things that come up requiring spending, categories may fail you while dollars per week and per month will not.

Related reading:

• The simple (& free) money management spreadsheet you need now
• Organizing personal finances: where to start?
• Tracking Savings: Your Key For Turning Dreams Into Reality
• Which payment type can help you stick to a budget? Find your answer.
• What is the purpose of a budget? 7 goals a budget can conquer

2. How to implement the burn rate budget

Let’s see how to put this into action. Your spending cap is a monthly dollar amount (check out my other post about the optimal way to calculate your monthly spending cap). Take about 2/3 of this cap and use that to calculate your weekly burn rate. The reason you don’t determine your weekly ‘allowance’ or burn rate based on the whole total is because of all those bigger cost occasional things discussed above, one or two of which will always happen any given month. You need to set aside space for those, so your regular, recurrent spending eats up about 2/3 of your cap, not all of it. Get started smoothly by downloading the Guide below.

Determine limits for regular spending vs. those (sneaky!) occasional items

Let’s say your monthly spending cap is $1200. From $1200, 2/3 is $800. So $800 is your approximate target for regular spending on groceries, gas, household essentials, lattes, etc… all that regular stuff you’re buying quite frequently. The $400 is set aside for those occasional expensive needs that aren’t your usual day to day spending (monthly, quarterly, annual type stuff in the above infographic).

For the regular daily spending amount of $800, your weekly burn rate should be about $185 per week. Remember a month is more like 4.33 weeks, not 4 weeks. So, divide $800 by 4.33 and you get about $185. That is your approximate limit on spending each week. So when you check where you are at the end of week 2, you should be at or below $370 spent, and so on.

Which payment type can help you stick to a budget, or rather a burn rate budget?

A lot of personal finance articles stop here: aim to spend $185 per week, have another $400 per month available for the oddball stuff that comes up in a given month, and you’re on your way to financial freedom. But how? What’s the best way to implement this kind of plan? Which payment type can help you stick to a budget (or, in this case, a burn rate budget)?

Personally I use credit cards and use the online account dashboard or app to monitor where I’m at with my spending rate. But you can implement this spending management any number of ways. Choose which approach will work best for you to control spending most effectively and conveniently. You could use cash, your bank debit card, reloadable prepaid debit cards, a single credit card, rotating credit cards, whatever suits you best.

If you struggle to control yourself spending too much, it may be best to use cash separated out by week or a reloadable prepaid debit card with your weekly amount loaded onto it. You’re essentially giving yourself an allowance once a week with that additional ‘expensive occasional’ allocation set aside in a separate cash stash (that does not live in your wallet!) or a separate prepaid debit card.

If you’ve developed good spending control (i.e. you can resist impulse purchasing and consistently respect your spending cap), using a single credit card works well. You can log in to check how your spending rate looks as each week goes by to ensure you’re on track. You could also rotate back and forth between two cards so that the previous month’s balance (that isn’t due to be paid until the next month) isn’t interfering with being able to quickly see your current month’s spending total. I am an advocate of capitalizing on all the features and benefits of using credit cards, but pick what you know will jive with your spending habits!

How to always stay below your spending cap

After you decide what mode of spending you will use to implement your monthly spending cap, you can then employ spending fasts and freezes to slow or stop your spending to keep in line with your weekly burn rate and overall monthly spending cap. If you’re ‘burning’ money at too quick a rate part way through the month, choose to ‘fast’ on a particular common expenditure, like take-out, coffees, or anything from Amazon. If you’re getting too close to your cap and still have a week to go until the end of the month, then it’s time for a freeze. A spending freeze means you can only purchase items essential for survival until the new month- basic groceries, gas to get to work, bare minimum stuff.

Start fresh again next month, rinse, repeat.

Please share your experiences and questions in the comments. And reach out anytime – familymoneymentor@gmail.com and @FamMoneyMentor on Twitter. If you liked this article, please share it!