There are a number of excuses for ignoring the concept of budgeting for one’s own personal finances. Budgeting has a poor reputation. It’s not fun, it’s time-consuming, it’s depressing.
While budgeting can be one of the most important steps for beginning a journey towards financial independence, there’s a tendency to ignore this in favor of jumping into the stock market, saving for retirement, paying off debt, or even prescribing to the belief that owning a house is big positive step. These are certainly all good things to do, but understanding how much money you have coming in and where that money needs to go is basic knowledge that can help you better determine how you can invest, save, and pay off debt.
There is no way you can take on the responsibility of owning a home without a working knowledge of your income and expenses.
The ideas preventing people from starting a budgets are generally psychological or emotional, and not based on a lack of knowledge. Adults generally grasp the concept that you can only spend more than you have and that breaking this rule will have damaging long-term consequences. In shorter time frames, it’s harder to see these consequences. After all, you can sustain living on credit cards for some time, but eventually, you’ll have to pay the money back or face dire financial problems setting you back years. And just because someone can grasp the concept of additional and subtraction — the only necessary mathematics for budgeting — doesn’t mean they’re ready to consciously apply it to their own finances.
Getting over these psychological barriers is the first step, and that’s not going to come with more knowledge about a topic. There are some tricks to overcoming psychological barriers that I’ll write about in the future.
I often see budgets missing certain important categories, which indicates that even once people begin the process of tracking, predicting, and controlling their income and expenses, there are some holes in the plan that could end up damaging financial progress as much as neglecting the process of budgeting.
When is budgeting most important?
Budgeting is always important, but the benefits you gain from budgeting have more of an effect on your finances in certain situations.
- If you’ve never created a budget before, budgeting has a high chance of being able to improve your finances. You will see things you never saw before regarding your spending. The little expenditures you may not notice on a day-to-day basis show up when you start to look at your spending in detail, and budgeting allows you to better control those money leaks.
- If you don’t know if you’re getting richer each month, you have a budgeting problem. If you don’t know if your net worth is increasing each month, you need to start tracking your finances. That’s the purpose of the Naked With Cash series on Consumerism Commentary.
- If you know you’re not getting richer each month, you are spending more than you’re earning. You’ll need to find a way to increase your income, decrease your expenses, or a mixture of both, and budgeting helps you figure that out. Keep in mind that growing your bank accounts is not the only goal in life. In fact, it’s not a real goal at all. But we are talking about growing your wealth, which should fit into a broader long-term strategy for your life.
- If you are underpaid, you may be facing pressure to live a certain way that seems to be required within your community of peers, but you may not be able to afford that life as well as it appears others are affording it. If you work in an industry where image is important, you’re going to need to make sacrifices, and budgeting is the only way you can get started.
- If your income is unpredictable, you should assume a very conservative starting point for your budget. If you work on commission or if your job is tied tightly to the state of the market of your industry or the economy as a whole, your income may be more at risk than someone with a steady salary in a recession-proof (or recession-resistant) job. Budgeting will make sure you’re setting aside money during the booms to help cover the lean times during the busts.
- If you are going through a career change, you may be faced with a different income scenario. When I first started working out of college, I faced the problem of earning a salary for the first time. I didn’t really know what to do with it, and I didn’t really know how much I had for myself after taxes and required expenses. After I sold a business and could no longer count on the revenue, I faced a sharp reduction in my monthly cash flow. Both situations forced me to eventually evaluate or reevaluate my spending situations.
- If you are going through a life change, you may have new concerns that require placement within your budget. If you’re getting married, getting divorced, having children, or sending your children off to college, you’ll be faced with new spending realities. You’ll have more or fewer mouths to feed, and more or less income to help meet your obligations.
The above situations make budgeting a priority, but budgeting is important for anyone in any situation. Whether you use a software program, mobile application, or a pen and paper, the visualization that’s possible once you start budgeting provides a fresh look at your finances, helps you plan your spending so you can smooth out any bumps in the path towards financial independence, and gives you greater control over an important part of your life.
What inspired you to start budgeting? Or if you don’t use a budget, why not?