There is a principle that goes: perspective determines action. Most of us have been living a viewpoint of going to work as the source of our paycheck which is what we use to get things like food, health insurance, rent or mortgage, etc. Also, most of us experience having more months than paycheck left by the end of the calendar and wonder how where that hard-earned money went.
We have often heard that the answer to having money problems is creating a budget or budgeting the use of our money better. Of all those I know doing this, none of them have ever gotten out of the money worries they are experiencing. I believe practicing budgeting is helpful in that it helps you learn the skill of utilizing money, however, if all you ever do with it is focus on a budget then in practice you have turned your attention to the scarcity or lack of money in your life and not on what creates money. It becomes a self-fulfilling prophecy.
I am NOT saying you shouldn’t budget, I AM saying that putting budgeting on a pedestal as an end-all-be-all of fixing your financial situation is short-sighted. Short-sighted in that we focus all our time on the idea of having “enough”, which is yet another scarcity-minded thought, instead of creating value that we become consumed by holding onto the little we have, that we end up having none. Consider using budgeting as a stepping stone only to increase your cash flow, by gaining the basic skills needed to understand a financial statement so that you can start building your castle of cash-flowing investments, whatever those are for you.
A budget is an estimate of income and expenses for a certain period of time. A budget is best described as a statement of an individual or company’s future plans being reduced in terms of dollars. Budgeting can be described as conscious awareness of how much capital one or a group has and directing it to better accomplish goals or obligations.
Budget… where to start?
Is budgeting necessary
Theirs not so much a yes or no answer here depending on the individual, rather it’s more a matter of goals. It depends on what you are trying to accomplish. Why are you thinking about budgeting? What happened in the past that made you consider tracking your finances? If you have trouble throughout the month having money for expenses then a budget will at the very least tell you where your money is going so that you can re-channel it.
That being said, if you already know where your money is going and the real answer is simply “I don’t make enough for even basic expenses”, then it’s probably more beneficial to simply say either increase your income or cut your expenses. Could you move to more affordable housing, get a vehicle that does the job but doesn’t tax your income, move closer to work so you have fewer expenses getting there without increasing other expenses, etc?
If however you have very specific goals and your income is rather tight then you may find a budget to be very helpful when saving towards something you want/need or paying off specific debts faster.
Is budgeting important
When I was young I recall getting paid and thinking “Oh my bills are paid.. I think.. I’m pretty sure.. ya. I can spend this”. Only to find later on that I forgot about a payment or two and then used the overdraft protection.. oops. Budgeting for myself helped me better track my monthly expenses while not overspending my discretionary money. Discretionary money is what’s left over after bills are paid for your entertainment, savings, investing, etc.
Is budgeting hard
There seems to be a new viewpoint going around that goes something like “If it’s meant to be it should be easy”. I think seeking an easy life is a recipe for disaster in all areas of life. I know from personal experience that we often misconstrue unfamiliar things with that being hard.
What I mean here is that when learning a new skill or ability we all must put in a lot of mental energy thinking about all the aspects of it until it becomes routine or habit. Think about driving a car: when you first started driving there seemed like so much to think about.. the gas pedal, brake, holding the steering wheel, putting on the blinker, looking in the side mirrors, rear view mirror, etc. After a couple of weeks maybe months, you look back remembering how you thought it was so hard when in fact it was simply just unfamiliar to you.
Is budgeting easy
Creating a budget is very easy, all you really need to do is follow a worksheet. The FTC has a great budget worksheet you can get here in fact. What’s not as easy is getting out of the routine of randomly spending your money and into a new routine of directing your money to get out of debt, save for that new house, etc.
To make implementing your budget easy you want to put as much of it as you can on autopilot. Having said that, you can simplify it by having one automatic transfer rather than many automatic payments authorized. This requires two bank accounts, the one you get your direct deposit to and the one you make your payments from. This can really simplify your own personal accounting as well. You simply transfer what money you need for your bills and a little extra play money over and leave the rest in the deposit account.
Is budgeting worth it?
Man, this is a really loaded question. Some people say “I hate budgeting” others say “I love budgeting”, and yet others say “am I budgeting correctly” or even “I need budgeting help”. Depending on how long you have been budgeting maybe you have said one or all of these. Whatever brought you here I think that the answer is up to the individual.
Instead, I would ask “Has budgeting been helpful”? If the answer to that is “No” then it’s probably better you focus your energy on other areas financially. Perhaps you would get better results by focusing on trying to create additional streams of income, doing whatever you can for a pay raise, looking for a new position, getting a degree if you want, or studying all the different areas of being an investor and/or business owner.
Why budgeting doesn’t work
There are a couple of factors as to why budgets don’t work for most people that I want to cover and then we will get into how to create your budget.
1) Budgeting takes a lot of time
Tracking every purchase or dollar spent is very time-consuming and tedious. I personally prefer to just use my bank account as a tracker, however, some payments don’t come out right away which has occasionally left me wondering why the balance is lower than anticipated, but then after seeing the last few transactions it makes sense.
I find myself overwhelmed with all the things going on with the work I’m doing, being active, learning this new thing, or to add on top of it tracking my expenses in super detail. The bigger key to staying within your budget is to know your monthly income and then not overburden yourself with contracts and other expenses that make it hard to put aside money for “in case”.
2) Underestimate monthly bills
Aside from the main bills we all have like rent or mortgage, gas, food, cell phone, and insurance, there are other little bills that pop up that we often don’t account for. These can be things like entertainment, going out with friends, or eating out while at work. This is probably the biggest category where a budget can help you best figure out how you are actually spending your money.
To reduce your monthly expenses in this area it may be good for you to instead allocate a certain amount of money each week, or month for these expenses, and then when the money is gone you know you can’t spend more for now. Becoming aware of where you are spending your money may also be a good way for you to realize you need to spend more time prepping food meals or maybe buy more economical items instead of name brands. I’ve been told I have a “Wine appetite on a beer budget” or put another way “The broke to try to appear wealthy while the wealthy often dress like they are broke”. Sometimes just asking yourself if you are buying something to impress another or is it genuinely because you want it or have a use for it will help you to reduce unnecessary purchases.
3) Most budgets are not automated
As stated before, automation is one of the biggest factors in getting your money to work for you better. If you have a retirement plan then you have a monthly or annual payment that is automated and you do so very consistently. As an insurance agent, I can’t tell you how many times I’ve heard people say “That insurance is too expensive, I’d be better off just saving that money each month” and yet you and I both know that people say one thing, and do something else. If you want out of debt, to build retirement, start investing, or save for just about anything then having that automated draft, even if just to one of your own accounts, so that it is “set it and forget it” then you need to put a system in place that makes it so you don’t see that money and think you still have more to spend (out of sight out of mind right).
How to create a simple realistic budget
- Monthly income
This is usually the easiest step for most of us. Calculate your monthly income in a manner that is easy for you to understand. You can look at past paychecks, estimate it with your hourly wage or an annual salary, etc. - Known expenses
The next step is to write down each of your monthly bills and total up what you need to spend to run your household. - What’s left over
The third step would be to subtract your expenses from your income and write that down. Look at that number. That is the monthly discretionary income you have, however, the reason many of us find ourselves without money is that we don’t do the last step and just spend it all willy-nilly. - Do something with it
Here is where automation comes in. After you know what you have extra each month, then you need to determine what you are going to do with it and then actually do that on a regular basis. Are you going to put some of it towards paying debt off quicker, building up your savings or investment accounts, etc?
That is a simple spending plan that you can use to get your budgeting to work on a month-to-month basis. You may want to break down your expenses into categories such as housing, vehicles, food, etc, and then when getting to step four allocate a percentage to each.
If something like that is too complicated to start with then step 4 in your case can simply be saved and free for all. In this case, you may want to put 50% to each or maybe have a number of months’ expenses in savings, and then when you reach that your extra monthly income goes to a play fund.
Summary
For budgets to be effective it has to be something you are actually going to do otherwise it’s a waste of time. We all want more money left over and to do so a budget can be a useful tool. There are many different applications or worksheets you can pick up for free to benefit your spending plan. Don’t get caught up however just on what you are spending though as that can be very depressing in long term. If you are struggling then spend some time learning a new skill, educating yourself on business building, investing, and other activities to produce more value in the world so you can increase your income so that what you spend is less of a concern.