I love to read personal finance books (yes, I’m a nerd and I know it). However, there is one thing that I’ve seen in multiple books that just isn’t correct. I keep seeing the authors discuss ways to reach financial goals and plan for your money and say things such as “IT’S NOT A BUDGET. BUDGETS DON’T WORK”. And then they suggest that you make a spending plan instead. They say that a spending plan is a realistic plan for the week/month/year for how much money you’re going to spend in a number of different categories. Well folks, I’m here to tell you this:
Any money spending plan for any length of time is a BUDGET.
There you go. Call it whatever you want, but if you’re make a spending plan of any kind, it’s a BUDGET.
WHAT IS A BUDGET?
The word “budget” that we are talking about is not to be confused with the adjective “budget” which is defined as being inexpensive or cheap. I understand why people hate the word budget. They feel some sort of connection between the Budget (noun) and Budget (adjective) because their previous attempts to budget were unsuccessful, their previous budget amounts were possibly unrealistic, or they just didn’t allow themselves enough time to really make it work.
It’s time to change the way that you think about budgeting. You (and only you) should set up your own budget categories and amounts and if you can afford to and want to spend a thousand dollars on eating out this month, put it on your spending plan (aka BUDGET) and go eat! The noun budget isn’t actually defined with any sort of restriction or limitation attached. It’s very simply a plan and that’s it.
If you’re struggling with the word or even the concept of budgeting, it may be because you’re in a precarious financial situation and it’s painful to look at your money situation. Maybe you’re having trouble cutting your expenses and you are feeling discouraged and feel restricted. That’s why we started out with setting financial goals. You have to have a specific goal in mind that is worth more to you than the things that you want right now.
Your budget doesn’t have to be a minimum of what you want to spend in each category for each month. There’s no right or wrong answer for how much you budget for any category. If you want an example of this, go to this awesome website Save. Spend. Splurge. Her most recent month (March 2016) shows her spending significantly more on clothing and shoes than even on rent and utilities. And it’s okay, because she can afford it-it’s in her budget!
THE LINK BETWEEN YOUR BUDGET AND YOUR GOALS
Your new spending plan (aka BUDGET) is going to help you reach your goals and here are 5 ways that it will:
- A budget compares your income to your expenses – the absolute number ONE rule of personal finance is to make sure your expenses do not exceed your income. It’s so simple, but when you’re out spending money daily on things that you both want and need, you need some way to plan for them in total so that you can plan to meet your goals.
- A clear written budget helps you to be on the same page as your spouse or partner so that you can meet your goals together.
- A budget helps you to know how much money to allocate to certain saving categories so that you can meet your goal of having an emergency fund and putting money aside for future retirement needs.
- A budget organized with clear categories forces you to look at what you really want to spend your money on and whether what you’re spending on is in line with meeting your goals.
- A budget helps you to determine major financial decisions such as how much you need in an emergency fund & cash reserve, how much you can afford to spend on a mortgage or car payment and how much money you will need at retirement to cover your expenses and still be able to meet your other financial goals.
It’s about goals, really. If you have financial goals that you want to achieve, you need a budget!
MY TOP 2 BUDGET SUGGESTIONS
The substitute for not having clear financial goals seems to be the goal of amassing as many material goods as possible to have something to “show” for your hard-earned income, but this is at the expense of your future. A budget is going to help you to reach your goals! It’s an essential financial tool and it’s going to help you measure your progress, not restrict you from things that you want. Here are my top two suggestions for your budget that I highly suggest you consider to make it work:
- Set up an allowance amount for each member of your family, both adults and children. Even if you can only afford a few dollars, it will mean that everyone has some money to spend that doesn’t have to be accounted for in any other category. My husband and I have had this allowance system for at least 5 years now and it has saved us from so many arguments about spending habits. The unused allowance amounts should carry over each month or you should pull out the cash every month for each person.
- Make your budget flexible and change it each week as you have updated information on your financial situation. For example, if you reach week 3 of the month and you have already spent 95% of your grocery budget because of a dinner party you had, add more money in your grocery budget if you need it for the rest of the month. It’s not realistic to expect yourself not to buy groceries for 2 weeks. From my own personal experience, I know that if you don’t make your budget flexible you may be inclined to “blow” the whole budget because you’re already so far over that it “doesn’t matter anyway.” Remember a budget is just a plan and plans change sometimes!
Don’t give up on your BUDGET! Give it a couple of months and be sure to be realistic. And don’t forget-it’s all about reaching your goals!