One way to do it is to allow budgets to change monthly. And have piggybanks (sinking funds) to either save up for future known expenses, or for unexpected expenses.
But yeah, since it’s impossible to forecast all expenses, budgets can’t ever be correct. But individual correctness is IMO not the point. They are valuable even if you just calculate mean values over a certain time period. We use budgets to allow the following:
- Identify blind spots in our spending (“omg we are spending _this much_ on XY??”)
- Ensure sufficient room for error in total (= having enough cash around for “known unknowns”)
- Having to track expenses does really reduce them (that which is measured, improves). I scan every single receipt to iCloud, and the simple act of doing that makes me conscious of not buying unneeded BS. Which leaves more money for things we consciously desire.
- Ensure we can afford new fixed expenses. Just looking at bank reports wouldn’t give us this info because the accounts are not clean: They contain all kinds of buffers, accumulated savings (some of them set aside for certain things) etc.
I tried keeping a fine grained budget for years and I always failed - things would always be off budget. Over the years I made it coarser and coarser until I finally settled on what would work:
1. Budget for saving (retirement, investments, etc). This gets taken out of paycheck immediately.
2. Long term budget for only a few items (house repairs, new car, college fund, that's it).
3. Everything else is just one bucket. No separation between clothes, vacation, food, etc.
This worked, but even juggling 2 and 3 was quite difficult. I had to settle with: Bonuses and RSUs will be used exclusively for 2, and paycheck will be for 3. It's just convenient that this separation works with the numbers I have, but if it didn't, it would become a mess.
I do keep track of all my expenses (entering into finance software), and I needed to have that data to decide on the strategy above. However, my guess is only 10% of the population can reasonably keep track of this - regardless of wealth level. It's very labor intensive, and requires a lot of control over one's time. And in the case of families, requires buy-in from the spouse (he/she needs to either track it or give you all receipts in a timely manner - the majority of spouses won't agree).
I have the time, money and skills to make a budget and try to stick to it. And even then it took years of tweaking before it worked. For the average family, I don't see much hope in their doing it. It's much simpler to simply be in permanent frugal mode, which is far from optimal and cuts off most avenues of increasing your wealth.
Keeping a budget works, but is likely not the easiest, nor the best, strategy. Even for me, having finally figured a budget out - it did not contribute much to increasing my wealth. Changing jobs/getting a promotion did. And this is why when you get to upper middle class, none of my peers keep a budget. I literally no know one amongst my peers who do it. And they all do well financially because they focus on finding ways to make more money than bean counting.
At the end of the day, I do bean counting simply because I like the data, not as a means to manage finances.
