Most people, when they think of a personal budget, think of what I would describe as a “microbudget.” It’s the traditional kind, where you divide your spending up into a whole bunch of different categories – $500 for food, $700 for rent, $125 for electricity, and so on. You then make it your goal to achieve that target in each category by being frugal. You make sure the lights are turned off and keep the heat running low in order to reach your monthly electricity spending target. You eat more meals at home in order to make sure you hit your monthly food spending target. And so on and so forth.
Another approach is what I call “macrobudgeting.” Macrobudgeting basically splits your spending into just a couple of groups – “needs” and “wants,” generally. Your energy bill, your grocery bill, your phone bill, your Roth IRA contributions all qualify as “needs.” The money left over can be spent on “wants” – things like hobbies, entertainment, eating out, and so on.
In general, people who struggle with their finances use a “macrobudgeting” model. They don’t have a strong sense of where their money goes and thus they’re left wondering why they have nothing left over at the end of the month. Often, they don’t include genuine long-term needs in their “needs” portion of their budgeting, meaning that they don’t contribute to things like retirement right off the bat and treat it as a need, and they intermingle their wants with their needs.
Almost always, the suggestion for people who start their financial turnaround is to jump to a “microbudgeting” model. That’s why you see it pop up again and again in personal finance books. People are encouraged to break down their spending into narrow categories, see where that money is going, set targets for each category, and work to achieve that number. Microbudgets tend to be what people think of when they think of budgets.
Microbudgets are a great tool, don’t get me wrong, but there are some flaws with them.
For one, it takes time to do this. In order to build a decent microbudget, you have to spend some time looking carefully at your spending, dividing it into smart categories, and coming up with realistic targets. Then you have to do it again at the end of the month, and the next month, and the next month. That adds up to quite a lot of time invested.
For another, it can be pretty inflexible. An unexpected expense in a particular category can really wreck a microbudget and leave you feeling like a failure at the end of the month. There are life events you simply cannot control, and microbudgets rarely “flex” enough to handle those unexpected events.
Macrobudgeting is obviously easier and a lot more flexible. So why would anyone ever microbudget?
It’s simple. The purpose of microbudgeting is to teach practical frugality. The entire purpose of a microbudget is to force you to look deeply at how you’re spending money, identify ways in which you could spend less, and then actually put those methods into practice. You can then figure out which frugal tactics really work in your life and which ones do not.
When you budget, say, $500 for food for the month when you normally spend, say, $800, that means you’re going to have to make some smart choices about the food that you buy. You’ll have to prepare more meals at home from scratch. You’ll have to look more carefully at the items you put in your shopping cart. You might try using a grocery list in order to trim your grocery spending. Maybe you switch from using an expensive grocer, like Whole Foods, to a discount grocer like Fareway for many of your foods (I’m a Fareway fan – substitute your favorite discount grocer, like ALDI, into that sentence if you prefer).
You’ll find over a few months of microbudgeting that some of those tactics really work for you and some of them are a struggle. Maybe you find that shopping at Fareway instead of Target and Whole Foods is a great switch for you and a grocery list is great, but it’s hard to cook lots of meals at home so you still rely on prepackaged meals. Or maybe you find that using a grocery list and making slow cooker meals both click with you, but you’re very particular about your vegetables and want a huge selection of them, so you keep shopping at Whole Foods. Or maybe everything clicks. No matter which story is true for you, your food spending goes down and, ideally, comes in under budget.
During the times when you’re actively microbudgeting, you’re picking up many different frugal strategies and integrating them permanently into your life. For example, once you’ve switched to a routine of using a grocery list every week for grocery shopping and you do it over and over and over again, it starts to become the new normal. When you buy LED bulbs instead of incandescents, it becomes the new normal. When you make most of your meals at home, it becomes the new normal. When you shop around for cell phone deals between contracts, it becomes the new normal. When you automatically contribute to your Roth IRA through automated deductions, it becomes the new normal.
The point is that microbudgeting makes a lot of frugal strategies into the new “normal” for you. It forces you to keep trying a new thing until it either becomes frustrating enough that you reject it or it seamlessly integrates into your life.
That’s why, after several months of microbudgeting, many people can step back to macrobudgeting for a while. Since microbudgeting has taught you a lot of tactics that reduce your spending and repeated microbudgeting integrates those tactics so firmly into your life that they become the new normal, microbudgeting no longer remains as useful as it once was, so the drawbacks of it start to really push to the forefront. If you’re spending hours each month on a budget after doing it for several months and you’re finding that the benefits are getting smaller and smaller, it’s probably time to take a break from it.
At that point, you can just keep rolling forward with the frugal strategies you’ve learned while macrobudgeting instead. It’s a lower time investment and it keeps saving you money as long as you stick with the frugal strategies you’ve already integrated into your life.
Once you’ve reached that point, the only time when it makes sense to switch back to microbudgeting is during times of change when the routines of your life are shifting. For example, if you start noticing that you’re not having as much money left over at the end of the month as you once did, it’s time to consider a switch back to microbudgeting for a while. If you find yourself going through a significant change in life, such as a job loss, a switch to a new employer, a move to a new city, a separation, or something similar, it’s usually a good idea to jump back to microbudgeting for a few months.
The way I like to think of microbudgets is that they’re training wheels for financially responsible living. When you’re first learning how to ride a bicycle, training wheels are invaluable when it comes to teaching you how to balance yourself, but there comes a time when the training wheels aren’t needed any more. You remove them and you’re biking without those wheels holding you back at all.
However, let’s say that your bicycle broke and now you’re riding a pennyfarthing bicycle or a unicycle. Your ride has completely changed, though parts of it might seem familiar. Throwing the training wheels back on for at least a little while can be a good idea until you’re used to the differences.
The same thing is true with life changes. Your routines have changed, so it can be a good idea to switch back to microbudgeting for a while so that you can figure out the best frugal routines in your life after the changes. You can always take off the microbudgeting “training wheels” later on.
At the end of the day, the key thing to remember is that any budget is intended to help you make better decisions about where and how to spend your money. That’s the entire purpose of a budget: it allows you to see where your money is going and think about where you’d like it to go in the future. Microbudgeting just means that you’re putting a tighter grip on things for a while as you learn better frugal routines.
What do I do? I mostly macrobudget at this point, although I switch back to microbudgeting twice a year or so for a few months. I usually use to figure out what’s going on with my finances, figure out which areas I’m struggling with (usually hobby spending, to be honest), and figure out ways to correct them.
My advice to you: If you’re struggling to figure out where your money is going, try microbudgeting for a few months and see what you discover. If you find that your normal routines are causing you to spend a lot less than you earn, switch to macrobudgeting and use the saved time wisely in your life. You can always switch between the two, as needed.