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I remember it like it was yesterday. Once a year, every year, my kind older lady of a boss would come around asking each of us what we needed. Necessary or not, she was looking for expenses because our company’s budgeting process encouraged end-of-year spending. I could tell that she was not a fan of budgets. At first, I thought it was great that at a certain time of the year we could get anything we “needed” in the office, but I soon learned this came at the cost of wasteful spending. I also learned that having a budget means nothing if it doesn’t curb useless spending.
Use it or Lose it Budgets Create Wasteful Spending
The company I worked for at the time was a proponent of the “use it or lose it” budget philosophy. Each department was given a certain dollar amount to base their budgets on for the year. If your department did not spend the amount budgeted, then they would have to forfeit it back to the company. As a result, departments felt obligated to exhaust their budgets and filing cabinets filled up with dusty pens and post it notes. I was working toward my MBA at the time and began to see the waste this budgeting system was causing my company. I went to work looking for ways to become more efficient with our budgets.
Budgets That Carry Over to the Next Year Can Encourage Wise Spending
After thoughtful discussion with my boss we changed our budgeting process. A little investigating revealed the sad reality that many other departments were following the same philosophy with their budgets and it was hurting the entire company. We lacked the money to implement some big changes that needed to occur on an enterprise level and the current budget philosophy was largely to blame. Instead of saving some of the extra money at year end it would either get foolishly spent or would go back to main budget only to be re-allocated for the coming year and spent foolishly then. My probing led to a streamlined budget that rewarded departments for not spending all their money. The new process encouraged wise spending by empowering departments to hold back left over funds for strategic, longer term needs.
Take Your Work Home With You
Can you learn anything about this as an individual? I know that a blog post is not really the forum for asking questions, but I am going to anyway! Speaking from experience, I can say this did impact how I view budgets. I had been budgeting before this, but my work experience helped me see how I could trim the fat from my personal budget. I saw that a budget should not be set and ignored. The experience helped me discover that I love to budget.
Budgets are living, breathing instruments that should be analyzed, interacted with and adjusted. Now, I am not suggesting you analyze them daily, but set some sort of frequency. Be it weekly, monthly or quarterly, find what works for you and go with it. You’ll find ways you can become more efficient and have your money work harder for you. Personally, my wife and I learned several years ago that we don’t spend anywhere near the full amount we budget on our kids for Christmas gifts. So, we save unspent money and spend it on things they want throughout the year. It saves us from wasteful spending, and allows our budget to work better for us.
Comments: What’s your take on budgets? Do you have a love/hate relationship with them, or do you love to budget?
iHB Thoughts: I need to hit on this point more, but yes, budgets are NOT static. Budgets adjust with the changing needs of your life, and require flexibility to actually work. If you think creating a budget one time ever will have you living in perfect bliss without a care in the world, you will be sorely disappointed about 2 weeks in when something in you “perfect” plan changes.
John is the founder of Frugal Rules, a finance blog that regularly discusses investing, budgeting, and frugal living. John is a father, husband, and veteran of the financial services industry who’s passionate about helping people find freedom through frugality. Visit him at Frugal Rules.
27 thoughts on “Not All Budgets are Created Equal”
Very cool that you were able to help you company. I think a lot of companies probably see it this way which is sad. Wouldn’t hurt if it was paid out in bonuses though 🙂
It was awesome to be able to. The company was stuck in the Dark Ages and I was able to put the MBA they were paying for me to get to good use. Sadly, no bounus though…other then the degree they were paying for.
Great post, John. That really speaks to your character that you tried to help the company. Most people would just do what they were told, maybe think it’s inefficient, but not question it. I also like that you had a solution, not just a complaint. I don’t do well with budgets at home, but I’m working on it.
Thanks Kim! That’s what most people did, and what I did for a while. I saw a problem that I was learning about at the same time in getting my MBA and was able to put some meat on the bones of what I was learning. It was actually quite a learning experience for me. I felt like I got more out of it then the company did. I hate complaining, although I am guilty of it at times, because it generally gets you nowhere.
The “use it or lose it” mentality always bothered me too, especially when it causes people to say, “If we don’t spend this money by the end of the year, next year’s budget will be cut!” Well, if you end up in the same place year after year, maybe the department runs efficiently and doesn’t need as much money!
For our personal budgeting, it’s nice that mint has settings that allow you to start fresh each month or to carry it over. We use different settings on different categories.
It always does me too Mrs. PoP. I think it just creates and fosters a wasteful spending practice. If I see (personally)that we have a bunch of money left over at the end of the year, then I look at how I can adjust our budget or look for other long term things it can be used for more efficiently.
Use it our lose it budgets are the worst. I think that is one major problem with our government spending in this country. In our state, state employees were given bonuses for not spending their entire budget, which seemed to help wasteful spending some.
I completely agree Greg. I think there was an Office episode once that had a similar situation.
We don’t budget, but track our spending. At the end of the year if we’ve underspent our goal I get to put the extra cash in our fun fund. Now when I save $1, it’s $1 more to spend on fun in the future. It motivates me to watch my pennies 🙂
That’s good it motivates you to watch your spending. I would encourage you on a budget though. They’re difficult in the beginning, but are so worth it in the long run.
I have a love hate relationship for sure, to me they’re like a necessary evil. I think maybe when we’re not so dep in debt I’ll love it more but for now it just makes me depressed!
I totally agree Catherine, they are a necessary evil. I can understand that feeling, I used to have it too. It does change once you get closer to being out of debt.
There is little question that I love budgeting. My budget actually helps me see the entire month on paper before it actually happens. It’s fun updating it on a bi-weekly basis and I love “closing it out” (i.e. the time at the end of the month where we decide what to do with our “extra” money).
I couldn’t agree more Jason! I love seeing that we did not spend an entire allotment and then you get the fun of deciding where to put that extra money.
Great job with looking out for the other company. Like Kim said above, speaks a lot about your character.
I personally love budgets, and love tweaking them every month or so. They give me a sense of control of where my money is going and more importantly how it will be dispersed.
Thanks Eddie. A lot of it came down to me seeing the inefficiencies of the operations and wanting to see that fixed. I feel the same way about budgets. I love seeing how our money is working for us and looking for ways to make it more efficient and profitable.
Good parallels John! I think there is a lot we can learn from work, both good and bad, that we can take with us and use towards our own at home finances.
Thanks MMD! I totally agree. I think it requires us to be on the look out for things that we’d do differently, or things we should implement.
Budgets give me a sense of control in life. In the past when I have lived “outside” of a budget, my life felt like everything was out of control. In reality, only my money was out of control, but since this is such an important part of life, it overflowed into other areas.
Now that I live on a budget, I have a lot more peace and security – even with some debt that I am paying off.
Great point Jason! I completely agree. Budgets, when used appropriately can be a great tool to put more control and discipline for your life.
Yes, I agree. Budgets were not really created to be equal. Anyway, an item that you pointed out regarding reviewing budgets on a regular basis is very important. This is a practice that corporate organizations should not miss. It all boils don to efficiency.
I completely agree David. It really does come down to efficiency. That was something sorely lacking at my firm.
I remember watching The Office and there was this exact situation. The whole office was divided on new chairs or a new printer. It makes no sense. But then, on the other hand, there can also be problems with a policy that doesn’t offer a use-it-or-lose-it mentality. People might continuously spend money on things that aren’t necessary.
That’s exactly the episode that was in my mind as I wrote this Daisy. It made a great point of sensationalizing the issue behind a budgeting fiasco.
When I was a teacher, we would have the use it or lose it policy for personal days. You could only roll over one per year. So if you didn’t take one, it was lost.