When I’m talking to people about budgeting, almost without fail, the topic of Mint or Quicken come up. There are a lot of these “Budget Systems” popping up, so it’s becoming more of an issue.
Here is why most Budgeting Systems work against people who want to control their finances.
There is a story in the book “Smarter, Faster, Better” by Charles Duhigg about a school in Cincinnati that adopted all kinds of fancy … errr sophisticated data tools to track student performance. But despite having more systems more and creating more data and charts, performance didn’t change. They realized that teacher weren’t using the data. So, they forced the teaches to “interact” with the data. The teachers had to spend two afternoons each month manually transcribing the results of each student from the fancy data system onto little note cards for each student. And as they continued to do that, the teachers started to use the notecards to prioritize certain students or subjects. That, in turn, changed their behavior and who they focused on. And soon enough their results started to rise. Dramatically.
The lesson about the school is a great example of a sophisticated system having not impact until the users had to do some manual work. They had to “rub up against the data” to start to learn it. And only have a hard period of manual, time consuming work did they start to see a benefit.
So, here is why these Budgeting Systems don’t work…
1.) They make it too easy. People want to control their finances, but don’t want to do the work. They want the benefit, but don’t want to put in the effort. And usually that’s a recipe for … you know.
Why is easy a bad thing?
The number one cause of financial issues is simply not paying attention. When people look for a Budget System, they are trying to once again, not pay attention. If people realized that the problem is not paying attention, they would realize that the solution is to find ways to force ourselves to pay attention. Which is hard and people don’t like “hard”.
2.) They don’t allow for real world budgeting. For example, when we budget for groceries, we budget $450. Some months it’s lower, but that means the following month it will probably be higher. So, we need the excess from the low month to carry forward to the following month. Budget both Mint.com and Quicken don’t allow for those carry forward balances. That is a very real scenario that neither addresses in a good way, which tells me that they’re less interested in how they can help real world users and more interested in giving people the impression that they’re budgeting.
3.) They give people a false impression that they’re managing their finances because they provide nice graphs, ratios and automated tracking. Having a fancy system that shows you were you spent your money, doesn’t really help control that spending AND even more importantly, help you set goals and plan for future spending. That false impression is probably the most insidious because it prevents people from really doing what needs to be done to manage their finances.
4.) They stop users from progressing in their financial management. Let’s just pretend that someone becomes a power user of one of those systems. They buck the trend and actively manage their spending with those tools. That usually means they have mastered the expense section of their income statement. But that is only one of the 4 quadrants of financial statements. So, AT MOST, someone can usually only master 25% of their financial picture if they get really good at those tools. I know there are parts of the tools that will track loans and some parts of the balance sheet, but it’s pretty minimal
5.) Do they lead to long term wealth building? How many stories have you heard about wealthy people becoming that way because they found a really awesome automatic budgeting tool? I haven’t. And I think it’s mostly because people who build wealth through good financial management do it by managing all parts of their finances. And by setting goals, building plans to get to those goals and having the discipline to execute those plans over the long run.
Disclaimer: Do I think that these tools are evil or completely bad? No. There might be a small subset of people who really use these tools to turn their finances around. But for most users I think the points above apply.
YNAB disclaimer: The YNAB budget system is the closest I’ve come to seeing a tool that was built to truly help people master their spending and build wealth. I didn’t use it for more than a few months, but it does a lot of things right.