If you're buying a used car or used house or bidding at an auction, it's probably smart to keep your cards close to your vest and not reveal your budget. That's just good negotiating strategy when dealing with a transactional-style seller.
But that strategy can burn you when you're working with a trusted partner on a big project, such as building a custom home. Sure, you don't want a builder to "get all your money," and you certainly don't want an inflated price just because you have the budget for it.
If you're worried that your builder is trying to rip you off, you either have the wrong builder or you haven't developed the relationship to the extent that you can trust him or her with the most expensive and important purchase of your life.
Here's the downside of hiding your budget: You won't get the home you need, want, and deserve. You'll still spend your whole budget, but you'll do it piecemeal as you compensate for the design compromises you made in order to shoehorn the house into your fictitious budget.
When designing the home to fit your needs, your builder is working to solve the problem you brought him, whatever that is, in the best way possible. Let's say you have six kids and you homeschool. Your current house just can't accommodate all that without serious negative impacts to your family's lifestyle, so you're building a custom home that will.
To build a new home to meet your exact needs, let's say it really needs to be 3,600 square feet. However, because you hid your real budget in fear of your builder taking advantage of you, he ends up designing a house you say you can afford. But it's only 3,200 square feet. It really doesn't meet all your needs, but it's all you're going to get for the falsely lowered budget.
You go back and forth with the builder looking for places to compromise while still holding back the real budget. What you end up with is a house that's 80% of what you really wanted and needed. You have a cobbled together set of plans, specifications, and price that isn't really what you were after.
Now you're faced with a few options, all of which impact the important relationship between client and builder. You can come clean and start over, which means suffering some embarrassment and incurring additional design costs. You can suck it up and spend your full budget on piecemeal fixes and still not solve your problem completely. Or you can ditch your builder and go find another one so you can save yourself the embarrassment.
There's a better option—one that will get you the most value, the most house, and the best solution for your money. That option is to find the right builder, get to know him or her either directly or through reputation, decide you're going to trust that builder, and go all-in by telling them your real budget from the beginning.