You do. Your business does. I constantly see young businesses struggling, but when I ask basic financial questions they cannot answer them – because they don’t have a budget. Effective budgeting is simple, takes 10 minutes a week, and can free you of worry, doubt and indecision. – Reeve
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.
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 to 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’t 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 addition and subtraction — the only necessary mathematics for
budgeting — doesn’t mean they’re ready to consciously apply it to their
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,
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.