Blog Feed

Do I Really Need a Budget? Really?

For many people, one of the first steps towards financial security is creating a budget. The budget includes how much income they bring in and then lists all their expenses and payments. A successful budget will allow enough leftover to pay down debt or save, allowing people to get ahead.

But creating and maintaining a detailed budget takes time and energy. For most people, it’s well worth the effort. But does everybody need to do this exercise? Is the budget a useful, a necessary tool for everyone?

For many people, one of the first steps towards financial security is creating a budget. The budget includes how much income they bring in and then lists all their expenses and payments. A successful budget will allow enough leftover to pay down debt or save, allowing people to get ahead.

But creating and maintaining a detailed budget takes time and energy. For most people, it’s well worth the effort. But does everybody need to do this exercise? Is the budget a useful, a necessary tool for everyone?

The Case for Not Budgeting

Let’s say you get paid twice a month, directly into your bank account. You have automatic withdrawals set up that cover your housing costs, utilities and other required payments. These withdrawals come out on the same day your paycheque gets deposited. Your debt payments come out automatically and your contribution to your savings plan is also automated. Whatever is left over in your account after these automated payments are made is yours to spend. You live on that until your next paycheque. Do you really need a budget? Maybe not.

It doesn’t matter if you choose to spend on groceries or restaurants, as long as you get fed. It doesn’t matter if you spend some of the cash on clothes, designer shoes or concert tickets, as long as you are taking care of your needs. You don’t need a schedule that breaks out all these costs into different categories or to track how much you’ve spent in each category.

Keep in mind, this only works if your income exceeds your spending. Put another way, you live well within your means. You don’t use your credit card to make up any shortfalls, you have to live on the money in your account. No more.

Big Items

What about big payments that come up once or twice a year such as property taxes or tuition? You don’t want to have to spend all your available money to make one of these payments.

One possible approach is to take advantage of opportunities to pay these costs monthly. The city I live in allows property taxes to be split into monthly payments which they will automatically withdraw from my bank account. If no such opportunity exists, you could set this up yourself. Split the total cost for the year into 12 monthly amounts and set up an automatic monthly savings account transfer for this amount. If your bank offers free (no fee) online savings accounts, set up an account for each payment. You could have one account for property taxes, one for tuition, and any other infrequent, big payments. When the payment comes due, the amount is already sitting in the savings account.

Monitoring Required

Now when I say this doesn’t require a budget, I don’t mean it doesn’t require planning and monitoring. You should review your savings and debt repayment progress regularly to make sure you’re on track to meet your goals.

Last Word

This method of financial management is not for everyone. I personally track every dollar I spend and compare it to my budget. It’s just the way I like to operate. I like to know where all my money has gone because I feel it gives me more control. It allows me to plan for the future. If you’re like me and you’re looking for a good, low tech budgeting tool, check out the printable My Budget Workbook in the Resources section of my website. It’s totally free so please go ahead and print copies for all your friends and family members too!

You don’t have to keep a budget if you live within your means and still manage to pay down your debt and save. Target 10% – 15% of your pre-tax income for savings. Pay this first, before you start going out to restaurants or spending on non-essentials. Even better, automate the transfer to go to a savings account on the days you get paid. If you don’t save or pay down your debts, you’re simply living paycheque to paycheque and you don’t get ahead.

If you’re living within your means, your debts are getting lower every month and your savings account is getting fatter, you might not need a budget.

The Surprising Emotions of Money

Money is much more than numbers for many people. How much you earn and therefore how much you can spend and save can be connected with feelings of success and failure. We often admire people who achieve financial success and consider them smart, savvy and skilled. People who do not achieve financial success, who need to rely on others, such as the government, for assistance, are often pitied and sometimes judged as failures.

Negative Money Emotions
It should come as no surprise that we often judge ourselves by these same standards. If you are struggling with money, you might be tempted to judge yourself harshly. Here are some common emotional reactions around money that I have observed. See if any of them resonate with you.

  • anxiety about whether there will be enough money to make required payments
  • regret over past money mistakes that ate up your savings or put you behind
  • fear about the future and whether you can take care of yourself and loved ones who rely on you
  • shame over not being further ahead
  • anger about feeling cheated or taken advantage of

If any of these reactions feel familiar to you, take a few moments to recognize that this is how you are feeling. Becoming aware of these emotions is a great first step. Letting these issues stay in the past and not sabotage your future is the next step. Tell yourself that many people have had negative experiences with money, have made mistakes and bad decisions but have still come back to pay off their debts and become wealthy.

Early in my working life, I had a boss, a hotel owner, who told me that one of his mentors said you have to go bankrupt twice before you can be truly successful. He said he had gone bankrupt only once and hoped to never go through it again. It seemed unlikely he would, given the thriving hotels he owned and managed.

Overspending
Over spending is common and is often encouraged in our society. We’ve all seen ads telling us we deserve new, expensive things. Cars, clothes, home furnishing, recreational vehicles and electronics can all be purchased on credit. The debt, often with high interest rates, can become a real burden that lingers on long after the joy of the purchase is gone.

Bad Investments
Bad investing decisions can decimate the money people have worked so hard to save and leave them feeling like financial failures. They may be left feeling like no matter how hard they save, they will not get ahead.

Am I Greedy?
Then there is the pervasive, subtle feeling across many cultures that wanting to make lots of money and be wealthy is somehow wrong. We are taught not to be greedy, to be satisfied with what we have. People sometimes feel unworthy, like they don’t deserve to have lots of money and financial freedom.

I believe that everyone deserves to feel that they have control over their own money and that they can and will get ahead. No one deserves to be awake at night, worrying over whether they will make payments.

Moving Forward, Getting Past the Past
The good news is that managing your money can be a logical, common sense experience that gives you a realistic perspective and puts you in control of your money. Taking a few simple steps to gain control of where your money is going can feel very freeing.

Bad decisions and mistakes are an opportunity to learn. If you’ve been through this, you can at least congratulate yourself that now you know what not to do. No matter what mistakes you’ve made in the past, know that you deserve to be debt free. You deserve to live a comfortable life without money concerns keeping you awake at night.

Letting go of the emotions surrounding your money may not be easy. When you set up your budget, it may help to try to see it as “just numbers” or you could pretend that you are creating the budget for someone else, it has nothing to do with you personally. Another tactic is to tell yourself that this is a “draft budget”. You’re just putting down some numbers to see how it looks, it’s not the final version.

Let past mistakes be part of the past, not the present. The fact that you are reading this article now demonstrates that you are interested in making positive changes and moving forward. Let’s build off of that. Your first step is to make a budget. Read about how to do that here:

Create Your Personal Budget in 4 Simple Steps

So you’re ready to create a budget and start tracking your spending. Congratulations! The steps you take now will put you in control of your own money and set you on the road to building wealth over the long term.

You can create your budget using a spreadsheet on your computer or good old fashioned paper and pencil. It’s up to – it’s yours! I have added a free downloadable budget workbook to the Resources area of my website. Check there if you want a step by step guide, with pre-made templates you can print out and fill in.

Step 1 – Create Spending Categories
Start by making a list of all the things you spend money on. First, list expenses that you have to pay every month. These are costs you cannot avoid. For example:
– rent or mortgage
– utilities, bank fees, cell phones
– insurance – car, health, home
– groceries
– gas or transportation costs such as public transit passes

Next you’ll look over your past month credit card statements and bank accounts to see other spending. Create categories based on what you bought. For example:

  • restaurants
  • books, magazines and online subscriptions
  • hair cuts and personal health products
  • clothing
  • liquor
  • home maintenance
  • vehicle maintenance
  • birthdays
  • pets
  • courses and/or school fees
  • daycare
  • travel/vacations
  • medical costs such as medications, massage, chiropractor
  • activities/entertainment such as yoga classes or personal trainer, tickets to events such as concerts
  • savings (more on this in Step 2 below)

If you withdrew cash and aren’t sure what you spent it on, create a category called “cash”. You can group similar expenses into one category, it’s up to you. Don’t worry about how much you spent just yet. In this first step, you’re focused on creating the categories. We’ll add some numbers later.

This list will be fluid and you can always add or combine categories later so don’t worry about anticipating future spending. Focus on the most recent month or two.

Step 2 – Savings
When we talk about budgets, we often focus only on how we are spending our money but saving is a key component of a good budget. Be sure to include “savings” as a category in your budget and not as the leftover income after expenses have been paid.

There are different ways to save. You might be in a position to take some of your monthly income and set it aside in an interest-paying savings account. However, if you’re only making the minimum payments on credit cards or other high interest debt, it might make more sense to put that “savings” amount towards the debt. I will be posting an article about whether it makes more sense to save and invest or pay down debt.

Step 3 – Track Your Spending
Now that you have a list of categories, you are ready to track your spending. This is easiest if you do it every day. It will only take a few minutes. Write or enter the amount you spent the day before in your categories. Checking your bank balances and credit card statement on line will help make sure you don’t forget anything. Each day, add a new column and record yesterday’s spending there. At the end of the month, spend a few more minutes to add up the totals in each category.

Step 4 – Record Your Income
Your budget is not complete until you compare your spending and your income. If you have more than one source of income, create categories like you did for your expenses. Track your income and fill in the columns like you’re doing for your expenses.

Summing It Up
At the end of each month, your income minus your spending and savings will sum to zero. You know where every dollar you earned has gone. If you spend just a few minutes each day tracking your spending and income, you will start to feel more in control of your finances and ready to take the next steps towards managing your money as effectively as possible.

For more quick and easy steps on managing your money, subscribe to my website to receive my articles in your inbox as soon as they’re posted.

Win the Game with a Strong Defense – A Personal Budget

How is personal finance like football? In personal finance, winning means having enough money to pay your debts, buy what you need and eventually retire in style. In order to do that, you need to make money, save some money and grow those savings. Growing a large savings balance is like scoring touchdowns and field goals. You keep working at it, driving forward, until you get ahead.

But all that effort is wasted if the Defense lets that lead get squandered. Similarly, you can’t save enough to meet your financial goals if your spending is out of control. A good budget, like a good Defense, protects your lead.

Say you decided you want to save $500 every month. The first month, you did great and made your savings goal. The second month, you needed an extra $300 for car repairs (ouch) but you managed to save $200. Still getting ahead. The third month, one of your closest friends wanted to get away for the weekend and you really wanted to go so you didn’t manage to save anything. The fourth month, you were super busy and didn’t get a chance to track your spending. At the end of the month, you realize that not only did you not save but you have an extra $250 on your credit card that you need to pay off. Now you need to dip into the money you saved in the first two months.

The worst part is, you don’t even know what you over spent on. Your lead has been eroded and you’re in danger of doing it again next month. It doesn’t have to be like that. A good budget will keep you on track and in control.

A budget doesn’t have to be rigid or mean that you can’t go on vacations or treat yourself. Instead, a budget is tool that lets you decide how much you will spend and how much you will save. It’s your key to getting control of your finances. It doesn’t have to be time consuming either. Once you’ve got your budget set up, it will only take about 5 minutes each day to track your spending and up date your budget.

Your budget will give you a realistic view of where your money is going now. That can feel really empowering. For example, I know from my budget that I spend a lot on restaurants and take out food. I also know that if I need to free up some cash, I can eat at home more often which costs less. Using a budget helps you make conscious decisions about how to spend your money – where you want to cut and where you want to splurge.

Just like in football, where a strong defense makes all the difference in winning or losing the game, a good budget will make all the difference in paying for everything you need, paying off debts and creating a healthy savings balance.

I will be posting articles regularly about how to create and maintain your personal budget. To receive these directly to your inbox, please subscribe to my website at the bottom of my Home page.