Almost every personal finance book you’ll ever pick up starts with the importance of budgets. This advice seems pretty universal among all financial professionals. So why is it that so few of us actually maintain a budget?
For many of us, we seem to get by without a budget, and while few people are happy to admit they are right where they want to be financially, there isn’t enough pressure to change. Despite this lack of urgency, the best personal finance practices that I can recommend is this: create a budget, and stick to it. But we know that, and many of us still don’t have a budget. So what else can we do?
To answer that question, we need to look at why budgets are so powerful.
The act of budgeting involves planning, and keeping track of our progress towards the plan. Much like the way we pursue achievement in other areas of our lives. If we want to become healthier, we adopt a nutrition and fitness plan, and keep checking in on our progress. How much more can we lift? What is our weight? Our body fat %? These are measurable figures that help us know if we’re on the right track. Budgets work the same way. How much did we spend on dining out? Are our shopping impulses in check?
These metrics are our analysis of performance. But the metrics didn’t just materialize out of thin air. The most powerful aspect of budgeting is not creating the plan, but instead of knowing where you are starting from. And there lies the glimmer of hope for all of us as we tackle our own financial futures. We can all take a look at where we currently stand.
We are all creatures of habit, and because we are creatures of habit, our spending is fairly consistent. As a result, if we follow what we do for a couple of weeks, or even a month, we have a pretty good estimate as to how the next few months will play out. Tracking our spending, even just for a short period, will help us make more educated decisions about the financial resources we will need in the short term. Any surplus can be invested, and any deficiencies will cause us to pause before we become saddled with consumer debts.
This tracking aspect helps shine a light on our spending habits, and that alone will help shape our future actions. If you realize that you are spending more than you want on restaurants, perhaps you’ll be more inclined to make your lunches several days a week. And while you won’t have the measurable insights brought about by a budget, simply knowing where you spend your money will help you make better decisions.
To answer the question, “Do you need a budget?” we can summarize by saying No, you do not need a budget. Budgets are valuable in their own right, but you can start making better financial decisions simply by looking at where you spend your money right now. And those better decisions add up, bringing you closer to the financial freedom we all desire.
What about you? Do you have a budget? If so, how is it working for you?
If you don’t have a budget, look at your spending from last week. What insights can you see? Does it surprise you where and how you are spending your money? Are there better choices you can make in the future?