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That guy in the back gives me nightmares.
If you're at all interested in personal finance, chances are you have heard plenty about the importance of budgeting. You may have come across specialized tools and online resources to help you in this quest, such as Personal Capital or Mint. But there continues to be misconceptions about the purpose and value of budgeting. Why do I believe budgets are the most important single thing you can do for your financial health? It comes down to the three powers of budgets:
The Value of Budgeting
That Which Is Measured, Improves
Measure and Track. Before a budget can even really be called a budget, it begins as a tracking mechanism. This reality first set in for me my freshman year in college. Back then, we were given a card which worked at the campus eateries and restaurants. It was pre-loaded with a typical amount for "board," and worked similar to a debit card. Swipe the card, your balance decreases. My enemy in this system was Starbucks.
I went to Starbucks every day. Sometimes I went twice a day if, you know, my blood felt insufficiently caffeinated. Or if it was Tuesday, or if it was cold outside, or hot for that matter. Who am I kidding, I was addicted. And this legal drug hit me hard in the easy-to-swipe debit card. I had no idea how much I spent at Starbucks, but it was only coffee, right? At the end of the first month, I had spent around $300! This realization scared the espresso out of me. There was a real chance that I would not have enough money to eat the rest of the semester, all because I spent without knowing how much money was leaving and where it was going.
Now this story has a happy ending. I began rationing my remaining food stipend, doing quick math to figure out how much I could spend each day. If I spent a bit less one day than my allotted amount, the remainder of the days looked a bit better. I had stumbled my way into budgeting, and did not even realize it. The most important lesson here was understanding where my money was going. It was not about placing blame on Starbucks. Who can really blame a Caramel Macchiato anyway - they are truly blameless. No, this was about knowing how much money I had and how much money was leaving. This is the first major power of budgets.
Too Much Month at the End of the Money
Survive. After understanding where your money is going, you can begin to get a better grasp of how you should be spending those well-earned dollars. This may seem like common sense to most, but if you spend more than you make month after month, you will find yourself in a tough situation. A small piece of advice? If you find yourself standing in a hole, stop digging.
Your goal is to end each month in the positive. If you aren't positive yet, you simply cannot afford some of the things your buying (by definition!). Cut out restaurants, cable, Netflix, social outings, and whatever else you must in order to get back to the positive. This is survival mode. Learn to love it.
Once you are in the positive, those items can be added back in. In fact, this is where most of the true power of budgeting really begins.
Budgeting = Deliberate Spending
Plan. I titled this post "Why can't I have fun anymore?" for a reason. You absolutely can, and budgeting can help you do it (responsibly). You can, and should, have budgets for entertainment, bars, vacations, and any other items that you see yourself buying. Don't throw out step 2 though. If you can't afford those things, cut them. But once you can afford them, feel free to add them back into your budget in a responsible manner.
I think of budgeting as similar to dieting - if you tell yourself you can never have dessert, or carbs, or greasy cheesy goodness, and those are the things you enjoy (your triggers), you may do alright for a short time. Eventually though, you are likely to "cheat" and feel guilty about it. Instead of denying yourself everything, allow for a few things in moderation while sticking to the overall goal of eating healthy.
In your budget, plan (budget) for those expenses that bring you true joy and don't feel guilty about them. My wife and I have an "entertainment" budget, a "Netflix" budget, and so on. We work to make sure those expenses are reasonable and they would be cut out the moment we were in danger of "going red," but they are there in the meantime.
We plan for things in advance. In fact, far in advance. Our budget spreadsheet tracks over 15 years into the future! Now am I saying that we know for sure how we will spend 15 years from now? No, definitely not. But we do plan and constantly update that plan as time and situations change. And while 15 years in the future is much less known, later this year can be predicted with relative ease. I know there is a wedding coming up in September. I know Christmas will probably call for a few gifts to family and friends, and I know how much we spent last year for those same people (see, step 1 in action). Those things should have a dollar amount given to them, so that they are budgeted. What if we don't hit that budget? That's okay. We do the best we can do, with budgets giving us the yard-stick that we use to gauge our behavior.
Budgets are, in my estimation, the most important single step you can make toward financial health. From tracking and understanding your spending, to making decisions about what (and what not) to spend on, and finally allowing you to plan for future spending more effectively, budgeting is the foundation of deliberate finances.
What do you think? Are budgets as important to you as they are to me? Am I wrong for loving Starbucks so much? Discuss!