"When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck."
- James Whitcomb Riley
Another source of budgeting errors is the failure to recognize a quid pro quo in your expenses. I will give simple two examples.
Christmas gift exchanges. I get a chuckle out of a number of financial bloggers who claim that they don't spend any money on clothing. "I receive a number of shirts and pants for Christmas each year," they maintain, "and I just wear those items and never have to purchase any clothes." However, I doubt that is the complete picture.
Kids birthday parties. Sometimes I talk to parents who brag that since they invite 15 or 20 kids to their child's birthday parties, they receive lots of gifts and don't have to spend much on toys. But I have kids, and I know how this works. If you invite 20 kids to your child's birthday party, then your child will usually receive 20 gifts. However, your child will now also receive 20 invitations to other birthday parties throughout the year. Your child will surely want to go to these parties and bring a gift to each one of them. At the end of the year, it will cost you the same as buying 20 toys for your own child.
So do I have a problem with gift exchanges? Not at all. Our immediate and extended family exchange gifts at Christmas and my children go to their fair share of birthday parties. But there are some subtle dangers here for your budget. Let's take the two examples from above.
First, I think it's good to recognize that in fact money is being spent on clothes and toys. Yes, the initial spending is a gift to someone else, but there is a quid pro quo involved. This has implications for how you categorize things in your budget. The spending that you may be calling "Birthday Gifts For Friends" is in a round about way being funnelled to "Toys", and what you classify as "Christmas Gifts" is actually coming back as "Clothing". So do you really need to match up these transactions and classify your $20 Applebees gift card to Uncle Albert as spending on clothing since he gave you a polo shirt in return? I wouldn't. That's way too much work. But if you rely on gifts for a substantial portion of what you would otherwise spend on a given category, I think you should make a mental note of it.
Second, it's possible that the reciprocation arrangement may end at some point and cause budget confusion. Since you will be spending less as well as receiving less, there is no real issue, but only if you recognize both sides of the ledger. In the first example above, suppose your family decided to eliminate the yearly Christmas gift exchange because economic times are tough. Financially, you are no worse that before just because the gift exchange ended. If you spend less on gifts, and receive less gifts, it will equal out. But it's possible that you will look at your budget and think that since you aren't going to be spending $300 on Christmas gifts, then you can spend that $300 on something new and maintain your overall budget. The problem here, of course, is that if you are used to receiving $300 in clothes each year, then spending that $300 on something new will actually change your overall spending.
Lastly, it is human nature to think more highly of ourselves than we ought, and perhaps nowhere is this more pronounced than our ability to overestimate our generosity toward others. It's easy to categorize all these sorts of arrangements as "gifts" and then feel very smug about how generous we are when we see how much we spend on such "gifts". So it's good to remember that soft dollar agreements are not a substitute for charity.