Why Your Budget Doesn’t Work and What to Do About It

Budgeting sucks. It’s too much effort and the way we do it doesn’t work. Here’s how to make a better budget that actually does most of the work for you (and how to get one for free)!

I really shouldn’t have been surprised.

When I gave a talk a few months ago, I asked the room of 40 how many thought a budget was important. Everyone raised their hand. Then I asked how many of them had a budget.

Only 4 hands went up.

Budgeting is like eating Brussels sprouts. You know you should do it but pinch your nose. No one actually wants to eat them. Except uppity people. These are the same people who chew their yogurt.

(Full disclosure: I actually really like Brussels sprouts, but most of you don’t. I don’t chew my yogurt though. That’s just taking it too far.)

What if I told you a budget should be like cake? What if I told you that you can eventually reach your goals and only need to budget 15 minutes a year?

I’ll tell you how in a moment, but first let’s dig our teeth into why budgeting is so putrid.

3 Reasons Your Budget Doesn’t Work

1. We Make it Too Hard.

Here’s what most budgets look like:

… yikes.

Just look at this unmade bed of a budget. Who wants to look at that? But they’re either like this or they’re super ornamental and overdone, written in different colored pencils in a trillion categories with a zillion calculations. It’s like you’re making this elaborate craft.

Worse yet, we think we need to make one every month. I’m sure this approach works if you’re super diligent and have all the time in the world.

Who does?

I like simple, but powerful. I don’t want to work to make my budget. I want my budget to workand do all the workfor me.

So much so that by this time next year you probably only need 15 minutes. I’m going to show you how to make a simple but powerful budget, stick to it, and almost never have to look at it again.


Because it’s really not about the budget. It’s about your system.

(The FREE JMC Financial Boot Camp will show you how to build a system that will help you getand stayon track to meet your financial goals. Learn how and get this amazingly simple but powerful budget as part of the Boot Camp! Enroll for FREE for a limited time at the bottom of this post!)

2. We Ask the Wrong Questions.

We think of a budget like a list. After we’ve listed out all of our expenses, we start figuring out how to reduce the numbers so that we can have more savings. That’s basically our idea of budgeting.

It’s a start, but cutting an expense by $20 to improve my savings by $20 is… meh.

See, the underlying assumption everyone has with budgeting is, “what’s the most I can spend on eating out? On clothes? On a car?”

Is that what life is all about? Do you want to spend your life counting every little expense until you hit your limit? Let’s ask a different question instead. Let’s ask the bigger, important questions like, “What do I love to do? What don’t I care about?”

With the stuff you love… spend! If you love to travel – if it enriches your life, then do it! Several thousand dollars for 10 days in Italy? Let’s do it. I spend so little on everything else that there’s room to do what I love.

With the stuff you don’t care about, put on this mindset:

When you attach a number to your budget category, like eating out, you’re basically laying down a rope that says, “do not swim into the deep end.” But if you don’t love it, if it adds nothing to your life, then instead of asking how much can I spend? try asking yourself, how little can I spend?

What does it matter where the rope is if you’re always going to stay at the shallow end of the pool? For example, if you don’t care about clothes, why spend any time walking around a mall or browsing online clothing stores?

I spend less than $5 a month on clothes (if that—I don’t really track it closely because I don’t need to). Another small thing is that I don’t care for receiving birthday gifts that my wife would otherwise spend our money to buy for me. Instead, she makes me my favorite meal.That makes me happy.

A good budget helps us figure out how to live the life we want, NOT how we can save a few bucks here and there. Your budget should be your advisor that you chat with only occasionally about your financial life.

3. It Focuses on the Wrong Things.

You’ve been looking at the wrong number.

You look at your income. Then you subtract your expenses. What’s left over is your savings or lack of. That’s what everyone says you should be looking at.


Wrong number. Wrong statement.

Everyone makes a budget about your income statement (which is your income minus your expenses) when you should really be looking at your balance sheet (a balance sheet is basically what you have and what you owe). Specifically, you should be looking at your liquid assets.

Your liquid assets are basically all your stuff you can sell. I personally like to limit it to cash and investment accounts. I don’t count my house because I don’t plan to sell it, and if I do, I’d have spend a lot of money to replace it anyway unless I rent.

Why are liquid assets so important?

Because cash flow is king. Your income statement is your current cash flow. Your liquid assets today are tomorrow’s cash flow. It’s what’s going to fund your financial goals.

The decisions you make today will affect your future, yet most budgets aren’t smart enough to tell us where we’re going.

This budget will.

So…let’s do it differently, shall we?

We’re going to start from the bottom up and build it based on who you are. To do that, let’s build our budget in 3 layers, like a cake.

Bake a 3-Layer Budget Cake

  1. The first layer is your needs. Roof. Belly. Body. Wheels. If you have somewhere to live, a way to get to work, and groceries to cook, you have everything you need to live. You’ll also need health insurance in case there’s an unexpected but expensive health issue. Also in this category are your taxes and your 401k. This bottom layer of your budget cake should be the biggest.
  2. The second layer is what you love. This should be your second biggest layer. It’s different for everyone. In general though:
    • Most Happy: Spending on helping others makes you the most happy.
    • Longer-Term Happy: Spending on experiences and tools that help you do things you love (like a guitar) makes your happiness dollars last a lot longer.
    • Short-Term Happy: Buying stuff you don’t need. But I’m not going to be dogmatic about it. If you truly feel like you’re at your highest happiness by buying stuff…by all means do it.
  3. The third layer is everything else. This layer is like frosting: tasty, but not filling. Spend as little as you can on this level. This layer has all of your stinky expenses. Every dollar you cut here is an extra dollar to spend on what you love or to invest.

For each level, create 3 columns: Your “Actual” spending, your “Ideal” spending, and the difference.

So by the time you’re done with these 3 layers, it should look something like this (the white parts are what you manually fill into our Boot Camp budget):

Your goal is to migrate your Actual expenses to your Ideal expenses. See how the Ideal is to spend less on stuff that doesn’t really matter to you and more on stuff that does?

Here’s another way of looking at it: cutting down your “All Else” expenses pays for the things you love to do—or helps you pay down debt, or contribute to your retirement.

How many budgets do you see encouraging you to spend more on what you love? Sure, you can hit your retirement goal super early eating nothing but stale bread for the rest of your life, but is that really what it’s all about?

You don’t want to migrate all your expenses at once – otherwise it will burn you out and you’ll soon quit. Crash dieting and binging doesn’t work for physical or financial fitness.

Instead, choose 1 expense from your “All Else” layer to make more like your ideal for the first month, then another for the next. Typically you’ll notice only several items are really the difference between how you live now and living your Ideal life. If you just focus on one a month (or every 2-3 months), you give yourself time to get used to living without this expense before turning your attention to the next.

Update your “Actuals” every month until you’ve pretty much gotten to your “Ideal.” By that point, you should be in your groove and forming the spending habits you need to not only lead your Ideal life but check your budget less and less. Then one day, you’ll realize you don’t really have to update or look at this budget anymore unless there’s some big change.

But should we just stop there?

Well, wouldn’t you rather know if you can still reach your retirement goal if you take that dream trip to Italy? Shouldn’t your budget tell you that?

Yes, and let me show you how by going next to your balance sheet.

Create a Balance Sheet

Let’s go back to the balance sheet. This may be totally new to you or you may remember it from an accounting course. Don’t worry – it’s just basically a list of what you own and what you owe.

I do it a little differently – I only include cash and investments. Don’t include your house, cars, or jewelry because those things won’t be funding your retirement. (In financial parlance, these parts of your balance sheet are called your “working capital.”)

There are 2 phases of your financial life.

  • Debt Reduction Phase: If you are in a phase of life where you have trouble paying off your debt each month, especially if it’s credit card debt, then you should focus on your liabilities (your “I Owe”) part of your balance sheet. Just go back to your income statement and reduce your “All Else” expenses to make room for making extra payments on your credit cards.
  • Asset Building Phase: If you are in the phase of life where you can pay off more than your minimums and still have money left-over to invest, your focus should be on building your liquid assets (your “I Own”). The faster you can build this up, the sooner you will hit your financial goals.

So… how do you know when you’ll hit your financial goals?

Calculate Your Financial Goals

Once you’ve got your 3-Layer Budget Cake and Balance Sheet done, it should be enough to tell you your financial goals. But how do you do it?

This is what separates the good from the great budgets. A great budget will let you know if you’re on track to meet your retirement goal. And unfortunately, it’s a lot of calculations that will make your head spin. So let me just break it down this way:

  • Retirement Number: Research by the Trinity Study has shown your “safe” retirement drawdown of assets is 4% a year. So applying some mathematical jujitsu, that comes out to 300 times your monthly expense. If you’re creating your budget, just multiply your actual monthly expense by 300 (or, if you want to be more conservative and only draw 3%, multiply your monthly expense by 400).
  • Years to Reach Retirement: This should factor in the amount you invest and the rate your investments earn you. Take your liquid assets, increase it by your rate of return per year (I’d assume between 5-7% if you’re primarily investing in large stock index funds) and the amount you’re actually saving a year increased by half the investment rate.

If you increase your savings by the full investment rate, that assumes you saved all your money on the first day of the year and invested it. If you don’t increase your savings at all, it’s as if you didn’t get any savings money until the last day of the year. So half of the investment rate smooths it out.

Is it precise? No, because you’re dealing with future investment returns which are unknowable. You’re also dealing with questions of inflation, health, and how long you can work. A recession could set you back years. This is why I personally go with a more conservative 5% investment return rate, which is lower than inflation adjusted returns of 7% for the S&P 500.

Don’t worry about being exact. Having a simple yet pretty-close budget that you’ll keep using is significantly better than a to-the-penny / to-the-day budget that exhausts you and that you’ll use only once.

Sound Like Too Much Work?

I don’t blame you. It was a lot of work for me to create. Lucky for me, I had a lot of fun making it.

Lucky for you, I’d love nothing more than to give it to you for free when you enroll in the JMC Financial Boot Camp. You’ll also learn how to get and stay financially fit, how to build a Money Machine, get out of debt, and hit your retirement goals!

Why can’t I just send it to you without the Boot Camp? Because I want to make sure you have the system in place to use the budget effectively. Otherwise you won’t get the full benefit.

Stop wasting your time on budgets that either don’t work or aren’t powerful enough to tell you where you’re going.

How do you know you’ve budgeted successfully? When you don’t really need it anymore. Once you fill in this budget, you only need to occasionally update it to track your goals or if anything out of the ordinary happens. Then, once you’ve got your system in place in a sustainable way, you really don’t use it all that much.

Again, I only check mine once a year for 15 minutes each time because I’ve got my system down. No more ugly, ineffective budgets. No more color pencils. No more clearing out an entire afternoon every month to work on it.

Stop spending so much time budgeting and let your budget do the work for you so that you can focus on doing what you really want to do! Better yet, get it free.

Taking control of your financial life is a piece of cake!

Get financially fit - and stay that way. Crush your debt. Build your own money machine. Retire early. All while living a life you love. FREE!

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