The Economist Vs The Straw Man

Instapundit linked to an article over the weekend originally titled The Envelope Method for Household Budgets is a Bad Idea (now titled “You’re probably doing your household budget all wrong”). Since I’ve been using that method for about 10 years now with great success, I clicked through.

What I found was the most horrible piece of gibberish since the last time I read anything by Gail Kerr of The Tennessean.

Take this example she lays out:

The system works great, as long as nothing ever changes. But the minute that some price changes, you’re in trouble. Here’s an extreme example. Imagine you drive to work, and your “gas money” envelope contains enough money to get you to work for the month, and maybe a little cushion. But then gas gets more expensive. You may first react by switching to a worse grade—say, from premium to regular (research shows many people do this). But if gas prices go up even more you simply will run out of money in the gas envelope. And then you won’t be able to get to work. Strictly following the envelope system here would be much, much worse than “cheating”: It’s certainly bad for your household budget if you miss work.

Well, it’s a good thing Ramsey has never advocated doing that. The point of the envelope system is not that you have to stop buying gas (or food in her next example) if you spend all the money in that category; the point is that you must recognize you have to cover the shortfall from some other category. You can’t just increase the amount you spend on any category because all the money is already spent.

The writer understands this, because she covers it a couple of paragraphs later:

It may very well be that you’d rather keep with your normal grocery purchase and cut back somewhere else—say, two fewer lattes this week.

Yes. This is logical, and precisely what he tells you to do. There’s required category called “blow money” that you would use for things like morning lattes. You would take money from that category and use it to buy things you need to survive.

But because the “coffee” budget is separate from the grocery budget, you end up with the same number of lattes and fewer bananas.

Only if you were an idiot. In which case I want you to starve so you’ll get out of my gene pool.

She then continues with an example of overspending on Christmas purchases…by two thousand dollars. I don’t think I’ve ever spend two grand on Christmas presents. There’s certainly no way I could ever overspend by that amount. And no one who’s following Dave Ramsey would ever overspend by that on a credit card, which is the example she provides.

Bottom line: the article is a piece of crap with no bearing on reality. Dunning Kruger is in full force.

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