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Who Needs a Budget?

This article was written by in Money Management. 13 comments.


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?

Photo: Flickr

Published or updated April 2, 2013. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 13 comments… read them below or add one }

avatar Christian L.

Luke,
I too struggled handling my money right out of college. For most people, their first job out of college causes them to make the most money they’ve ever made. But they likely weren’t taught how to handle it.

Once I earned enough money to start saving, I did. It didn’t take me too long out of college to figure that out, so I’m pretty proud of that.

-Christian L. @ Smart Military Money

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avatar Well Heeled Blog

I’ve never been very good about budgeting down to the dollar, but I do stick to broad guidelines on how much to save & invest. That’s why I like something like the Balanced Money Formula. As long as you take care of the big things, I’d argue you can get by with not knowing how much you spent on coffee every single month.

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avatar Jenny

Sensible budgeting is manageable budgeting! While tracking every penny is very valuable when you’re not in control of your finances just so that you can begin to understand what you’re really spending and on what, once you CREATE your budget, broad categories are the way to go. We don’t actively track fixed expenses–we just make sure they fall within our max–and for discretionary things, we have large categories: groceries, other food, house stuff/clothing/etc., and entertainment. Then we have a yearly budget that varies for major expenses like remodeling. At this point, it’s pretty effortless, and I rarely have to write anything down.

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avatar SteveDH

For me, budgeting began when my marriage began. When two people had the ability to spend from the same accounts, both had better be aware of the totals. We have budgeted ever since we were married and still budget today in retirement. Although the number of spending categories has dwindled to only six, they cover everything that leaves-the-house. It’s the “knowing” that’s most important. From that knowledge you just do the best job you can with the controls you have.

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avatar krantcents

My very first budget was when I entered college. I was 17 years old and needed to live off of my “allowance”. I worked the whole summer to have spending money in college. I took control of my expenses and took an allowance per week. It had to cover laundry, dating, going out and miscellaneous. If I needed more, I would take on paid assignments such as paid experiments. It worked out well because I learned so much from the experience and I think it affected the rest of my life positively.

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avatar Jenny

When we first married, some of my husband’s coworkers actually laughed at the fact that we budgeted everything! They just spent as they left like it, and if there was money left over, then yay, and if not, then they went into debt.

Needless to say that our financial footing is a lot more sound now, ten yours later, than those early critics’! And you won’t be surprised to find out that my husband found work experience at that company frustrating and switched jobs in a few years to a much more results-oriented corporation. Not only does he prefer his current work environment more, but his coworkers are generally much more responsible in their own finances, as well. It seems that the same traits that make a person responsible in their own lives makes them better employees and coworkers, too.

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avatar maria

I did find the notion of ‘having a budget’ hard – to me this always gave the impression of fitting into a tight space (and I don’t like feeling restricted). What got me out of the rut was swapping ‘budget’ for ‘budgeting’ the latter being a dynamic concept that changes with ones life. By budgeting we did pay really obscene amount of debt in three years; and still use it but on the other side :).

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avatar Suzanne

I’ve always been a “stick by the budget” kind of person. More importantly I’ve always saved a good 20-30% of income. I’ve been able to do this by staying in the same home for 15 years rather than trading up when all my friends were buying nicer homes. My home is only 1500 sq ft but it’s close to everything and thanks to my husband’s renovating skills, it’s really cute too.

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avatar Simon Cunningham

Getting a budget going was tough for, but it became a lot easier after signing up with Mint.com. I had no idea of my income and expenses, but after opening an account with Mint I actually had a place to start from.

Good writeup.

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avatar Ceecee ♦53 (Newbie)

I think that only those with incomes that far outweigh their expenses can afford to not make a budget. I have had many periods of fluctuating income, and a budget is absolutely necessary—going several months into the future. I think that some people don’t like to budget because they are in denial about how much they spend.

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avatar DonnaFreedman ♦90 (Newbie)

I don’t keep a budget on paper, or even in my head. I’ve been living below my means for so long that it’s second nature.

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avatar qixx ♦1,895 (Half-Dollar)

Having a budget also gives you something to hide behind. Don’t want to spend money going out for drinks with your friends every night. “Can’t make it tonight, not in my budget”. People asking how on earth can you afford that. “It is in my budget.”

A budget is also for anyone that wants to set financial priorities. Want to spend $500 a month on concerts, fit it into the budget and you can. Money a little tight then you might have to decide between those concerts or eating out.

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avatar Jenn

For me, a budget is like a compass. I could not make any decission without it!

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