To some people (like my partner Dave) they live and die by a budget. For others, it is literally (figuratively) a 4-letter word. The question at hand is who is right, and who needs to be budgeting? Sadly, there is no one size fits all formula, but I certainly have some strong opinions on for whom and when a budget makes sense. Also, it is important to remember – all budgets aren’t created equal. Let’s have fun, shall we?
What’s a budget?
At its simplest form, a budget is a way one can keep tabs on their expenditures. Or more simply put, it helps us live within our means to assure we don’t spend more than we make.
When to budget?
This to me is the much more interesting discussion, which is: when should one budget? In addition, who should budget?
It can be useful in many circumstances such as:
- Staying out of debt
- Understanding our retirement needs
- Saving for a large expense
- To get a sense for what one can afford
- Understanding where one’s money is actually going
So, you see there are numerous different reasons one generally budgets. There are also individuals who don’t need to or want to budget. This is where things get interesting. As you’ll see below this group falls into two distinct categories. They are either burying their head in the sand or so wealthy they need not budget.
Category 1 of non-budgeters (bury head in the sand):
- Debt- They have so much debt they rather ignore things than budget
- No Savings – They are embarrassed (to themselves) at their lack of savings to date
- Over Spenders – They have a spouse who spends way above their means, and doesn’t know how to confront
- They subscribe to the old mantra of “Ignorance is bliss”
Category 2 of non-budgeter (super-wealthy)
- They earn enough – they can save plenty and simply spend the rest
- They have enough assets that they know their lifestyle could never realistically spend all their funds
- There is a big inheritance coming down the pipeline, thus they are not concerned with their current finances
How to budget?
Here comes the difficult question. How to even go about budgeting? Now there is no right answer, as I’ve seen numerous, very effective ways to go about budgeting. I’ve seen people create spreadsheets and update them every single day with what they spend and where. They then reconcile these spreadsheets every month. G-d bless these individuals as just writing that makes my non-detailed head spin.
There are numerous different programs out there such as Quicken or for our clients our Lifelong Wealth Planner. These programs attach to your credit cards and bank accounts. They can track and categorize your expenses pretty well. They are pretty intuitive, but from my experience, all need a little bit of human touch to stay accurate.
There are individuals who do the bucket approach. They know what they can spend each month on different things and have 5 different bank accounts. His account, her account, mortgage account, bills account, savings account. Each account gets funded every pay and this works for certain people.
Then there is my personal favorite (only because it is what I do) and the least technical way to budget. I automate what I save for retirement and college monthly. I know what I need to save to live my ideal lifestyle in retirement and back into that savings both monthly and annually. From there I simply spend the rest. For example, let’s say I make $10,000 a month. I’ve run a financial plan and know I need to save $2,000 a month to accomplish my goals. Well then, I simply know I have $8,000 a month I can do whatever I want with. I don’t care what categories they go to I just know after my automatic savings of $2,000 a month I cannot, nor will not spend more than my allotted $8,000 a month.
Now, as I stated earlier everyone does not need to budget. Or, said differently, the importance of budgeting varies depending on numerous factors, one of which is wealth and/or desired lifestyle. And although everyone doesn’t need to budget at the same level, here are the key situations I think one should consider budgeting:
Finances are a mess–
If you know your finances are a mess then one of the only ways out of it, short of winning the lottery, is through budgeting. The old adage goes like this, life is hard by the yard, but a cinch by the inch. I find if your finances are a mess there is no other good option but to budget. Generally, the lack of budgeting and understanding what the inflows and outflows are got you into this mess. The only remedy is to do the complete opposite and get anal about where your funds are.
Get or keep financial goals in order–
For many, they have clear-cut goals to attain. The only way they know how to do so is through living and subscribing to some sort of budget. I can tell you, building financial plans for a living becomes a very useful tool to understand what is doable and what is not. It can really shed a light on the limits of possibilities one has when it comes to their financial plan. It can also serve as a crutch to help one stay on target.
Preparing for retirement–
This may be the one example that almost everyone needs to budget for at some point in their life. You see as we approach retirement there is one glaring similarity between us all. That is our paycheck will inevitably stop. At this point, we will rely on Social Security, our investments, and for the lucky few a pension. The question everyone asks me is how much do they need to retire? The answer is simple, tell me how much you need to spend from your investments each year and I’ll give you that answer. Now you see the only way to give me that answer is with some form of budget. Whether it be a detailed spreadsheet, or a back of an envelope answer of, “well, I live the lifestyle I want now and that is being afforded through my $10,000 a month paycheck”. Whatever it is, retirement planning almost always needs some form of a budget.
That’s all folks
As you can see there is a who, what, when, and why of budgeting. It comes in all shapes and sizes. At some point in our life understanding our inflows and outflows is a very healthy exercise. For some, it must become a habit. For others, it can serve as a good occasional exercise to keep their lives in check. Whatever category you fall in, know we are always here to help regardless of your financial situation.
As always stay wealthy, healthy, and happy.
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