Why budgeting isn’t just about ‘cutting back’

Budgeting is about spending on what you value in life rather than the act of deprivation, says Vince Scully.

Vince Scully is a veteran financial advisor and author of The Latte Fallacy and Other Money Myths.

Vince regularly tackles several money myths, including the idea that the first question you need to ask when making a budget is ‘what can I cut?’

He told KnowHow founder Bushy Martin on the Get Invested podcast that the best way to get the most out of your money is by understanding your needs and goals, viewing budgeting as an ‘allocation and optimisation problem’, and asking the question ‘what value is this spending adding to my life?’

“All spending fulfils some need, and a budget is about aligning your spending with what matters. It’s not about depravation. It’s not about cutting back. It’s about making sure that you’ve identified the needs,” Vince said.

“Your needs all matter, and you need to understand what needs matter to you right now. The whole need for purpose, fulfilment and aesthetic pleasure are grossly underrated. And that may be less immediate than food, shelter and warmth, but really we’re not living a subsistence farming existence anymore. We all have more then necessary to fill those needs, and so getting to this point around purpose and fulfilment is central to living a full life.”

Vince explained that one of the biggest financial myths that comes from this deprivation mindset with budgeting is the ‘latte fallacy’.

“[People say] give up your morning coffee, because if you don’t spend $3.50 a day, that’s a $1000 a year. That’s a house deposit over 30 years, and that’s why millennials can’t afford a house,” he said.

“But nothing could be further from the truth. But these means are heavily ingrained in both the media and in our psyche, and it takes a bit of a shock to understand the difference.

“It’s not about the numbers. It’s about how you feel. A budget like a diet will only feel restrictive if it isn’t aligned with your values, and that comes back to the latte fallacy. You identify the need and then work it out how to fulfil it. You can’t get rich by cutting out your morning latte. There’s no legal, easy get-rich scheme that actually works.”

So, when approaching the task of setting a budget and planning your spending, Vince suggested that a more effective framework to follow is P.E.A.R.L.

“[Firstly], the idea is to go through everything you send and look for items that you can postpone. Things like deferring or replacing your car,” he said.

“Then E for Eliminate is looking at stuff that’s just not adding value … subscriptions are a big one here, and I’m not suggesting that you avoid them all, but which ones are you actually using?

“Then A for Avoid is about people or circumstances. We all have those friends who make us spend money that we don’t initially want to.

“Reduce is about, rather than cutting something out, can I simply buy less of it?

“And then the final one is Love, and that is focus on the bits that really add value to your life. Does it strike joy? You’re moving spending from a category that isn’t adding value to one that you love and adds a huge amount of value to life.”

Listen to the full interview here.

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