Budget is a Four-Letter Word
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One challenging aspect of personal finance is balancing longer-term goals against the realities of today. Many advisors and finance writers prescribe an austere budget as the foundation for success.
That prescription is so common that it has become cliché. Do a quick finance search on-line for Starbucks or pizza or even daily lunch options and you will find dozens of stories explaining how that expense can be transformed into your retirement nest egg. The math is simple: Five dollars a day times 200 workdays per year times 20 years invested in a good growth fund at 8% equals $45,760.13 (!).
Wow, think what you could do with that!
(Except in 20 years, that same five-dollar cup of coffee will probably cost closer to $10. God knows about the price of other stuff.)
It is magic… but also harsh. These types of simplistic finance illustrations do more harm than good. Most people are not going to skip their daily Starbucks or weekly pizza or brown bag it every day for lunch. Behavioral evidence is abundant. At this moment in this culture, that is not the way to achieve financial success. It is a Don Quixote-like railing at cultural windmills.
People are not machines, and they surely aren’t personal finance machines. Some people are frugal, and they can achieve success, but frugality alone is no guarantee for a big retirement account. Sometimes, that same focus on pinching pennies keeps them from investing wisely… or hiring competent help.
Other people score remarkable success without being miserly. My clients range from teachers to doctors to retirees, and many of them drive nice cars and live in nice homes. As far as I know, they dine out occasionally and spurge on a few luxury items when the mood strikes. And I know that many of them enjoy an enviable investment portfolio despite their “normal” spending!
Personal finance needn’t be intolerable. In fact, one reason people fail is because they envision it as boring, and it quite likely has been drudgery most of their lives. A good chunk of personal failure can likely be traced back to some Ben Stein sound-a-like high school teacher droning on about budgets and coffee and pizza.