Creating a budget seems to be a “love it” or “hate it” proposition for many families. In coaching couples and leading small group finance classes, I can usually surmise quite easily those open to the concept of creating a financial spending plan and those who are not.
The decision people reach regarding budgeting doesn’t seem to have a predictable set of traits. Age doesn’t seem to be a factor as I’ve seen both young and “seasoned” people on both sides of the discussion. Economic status doesn’t determine one’s openness to creating a spending plan either. One could attempt to argue that the wealthy don’t need to budget as they have “plenty of that!” But are they being a good steward of whatever riches they are managing? How would they know without a measuring stick to which to compare their actual spending?
A 2013 Gallop poll showed that only 32% of Americans prepare a monthly budget. Their results seem to back up my experience that the lack of budgeting crosses all demographic classes. Across every age, income level, education level, and even political ideology, the results are similar – collectively, Americans are not planning their spending.
Until a few years ago, my wife and I were with the majority as we didn’t prepare a formal budget each month. Yes, we had a general idea of our spending, and we stayed within the monthly spending cap we set for our family. But how much was spent on food… or clothing… or eating out… or entertainment? We had no idea…..and I wasn’t sure that it even mattered to me.
I’m always interested in trying to improve the way we handle money, and I kept reading about the wisdom and benefit of having a monthly budget. So we decided to start creating a plan each month and the results were shocking. When we saw how we were spending money – and how it often didn’t match up to our goals – we quickly changed our spending patterns. And because our new spending plan was more closely aligned to what was important for us, the spending “cuts” weren’t painful at all! Giving up something that was less important to achieve goals much more important isn’t a sacrifice at all – it’s winning with money!
7 Advantages of Budgeting
Here are some of the benefits we’ve seen through creating a budget before the month begins and accounting for every dollar of income that month:
1. It Helps the Natural Savers to Spend – the Natural Spenders to Save
I’m a natural saver, while my wife is a natural spender. Neither of these is “better” than the other…..we’re just different. And thank goodness for that difference! Without me, my wife would probably struggle to save. And with her, I’d struggle to have a life!
It’s through the budget we prepare each month that both of our needs can be met, without either party feeling left out of the process. I can see – in advance – where we’re able to save and invest. And my wife can see – also in advance – where we’re funding some of the activities and goals important to her.
2. For Natural Savers Like Me, a Budget Is Liberating!
Prior to creating our budget each month, I often struggled with spending because I didn’t know what we’d miss out on because certain dollars were already spent. The economic term for this is “opportunity cost.” If the funds were spent, what couldn’t we then do? What opportunity would it cost us?
But now it is so much different. If we budget $XXX dollars for eating out that month, I know that we can freely use those funds for that purpose and not sacrifice some other opportunity. Why? Because those other spending goals are also built into the plan and funded, too. Were it not for the budget process, I would have no way of knowing if that were true.
3. It Holds You Accountable
A budget gives us a guide by which we can hold ourselves accountable in regard to our spending. Did I follow the plan we set out in advance? Or did my need for immediate gratification lead me to toss the budget aside and instead make an emotional purchase? The written budget can help prevent this costly mistake.
Likewise, if you’re married, I believe you have accountability to your spouse in regards to how money is handled. It’s not my money or her money – it’s OUR money. We should work together to decide how it’s spent or invested – taking the desires of BOTH parties into consideration. Within the spending plan should be what I refer to as “blow” money for each party to spend the way they see fit, but the amount should be set jointly.
4. It Helps You Meet Your Goals
Many important financial goals can’t be fully addressed with one month’s income. This is true for both long-term and short-term goals.
Some short-term goals may be:
- to save for an upcoming vacation
- funding the braces your child will need in a few years
- saving for the car that will need to be replaced or a down payment on a new home
- or perhaps giving to an upcoming charitable event that is important to you.
Conversely, your long-term goals may include things like:
- saving for retirement
- saving for your child’s college education
- buying a vacation home
- being able to move to a rewarding encore career earlier than full retirement age
A spending plan allows you to more easily set aside funds to meet these goals in a timely manner. Could you meet them without a budget? Of course, but it’s likely to take much longer to do so. Without the discipline of regularly contributing to these goals, the amount of time required to fund them will be longer, and perhaps cost you the opportunity to meet them.
5. It Helps Show Your Bad Spending Habits
All of us have spending weak spots. We’re all human and sometimes our natural desire for something leads us to mismanage our resources. A spending plan will shine a light on those areas and give us the opportunity to address them.
6. It Increases Your Financial Peace of Mind
How much more stressful would your vacation be if you simply packed up your family in the car and started driving in a random direction, not sure where you were going or when you’d get there? How could you even pack correctly for the trip? Will you be at the beach or on the ski slopes?
Likewise, how can you gain financial peace without a plan? How much more confident would you be with a fully-funded emergency fund (made possible by funding it each month until it was complete)? Don’t increase the uncertainty of the future by not preparing for it today.
7. It Helps You Avoid Debt
One of the most common causes of debt is a lack of planning. A broken heat pump can lead to a credit card balance because you didn’t budget for funding an emergency fund. A car purchase may include a new car loan because you didn’t set aside money each month for the vehicle you knew you’d eventually need. Loans for your child’s college education may have to be paid for years after graduation because the money wasn’t set aside each month when they were young.
With all the advantages of budgeting listed above, why do less than a third of all Americans actually prepare a monthly budget?
I think a few of the most common reasons are:
1. It’s too restrictive.
2. It’s too time-consuming and complicated.
3. I don’t need to because: a. I’m doing well financially; or b. I’m too poor.
4. I pay my bills on time and in full each month.
Honestly, prior to budgeting, I see myself saying some of these very reasons. I thought we were doing fine financially, so why mess with it?
What I’ve learned is that creating a budget isn’t restrictive – it’s liberating as discussed above. It’s not time-consuming once you’ve done it a few times – in fact, it takes us less than an hour a month and it isn’t complicated either (again, after you’ve worked your way through the first few months). It can be a simple spreadsheet or even a hand-written form or sheet of paper. The benefit isn’t in the method used – it’s in completing the task regardless of method.
Whether you’re wealthy or of limited income – my belief is that we still have the duty and responsibility to manage the funds well. And finally, being able to pay your bills in full each month has absolutely no bearing on whether you are spending wisely.
I find it interesting that I’ve never met someone who took budgeting seriously and later regretted it or felt it was a waste of time.
I always advise budgeting skeptics to make a good faith effort at budgeting for 90 to 120 days. If after that time you feel it’s been unproductive, you can walk away knowing you tried. But I’m convinced that those who work diligently on creating a spending plan each month will quickly see the benefits and it will become one of the most productive and rewarding hours of your month. Are you willing to take that challenge?
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