Disclaimer: The statements made in this post are the opinion of the author. They should not be viewed as financial advice. Please consult with a financial specialist before making any financial decisions.
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Traditionally, the first step to becoming financially secure is to create a budget. But is a budget enough to get you there? Honestly, budgeting is a great tool, but so is a diet and we all know how those work out. But before we get into that, we need to understand what a budget is.
What is a Budget?
To put it simply, a budget is a map of your finances that tells you how much you expect to make each month and how much you expect to spend on certain things, including how much to save. This tool is extremely helpful when your bills and your income are very similar to each other.
Here is an example of what a budget could look like. Let’s say you make $3,000 each month. Your mortgage or rent is $1,000 so you set aside $1,000 to cover that each month. That leaves you with $2,000 left. Your car (including payment, insurance and gas) costs you $500 so you set aside that amount and so on. Other things to spend money on can include food, entertainment, clothing, bills, eating out, etc. By deciding how much you are going to spend, you can stop yourself from overspending and end up with more money in your pocket.
Or at least that is what is supposed to happen.
The Problem with Budgets
The problem with budgets is same as the problem with diets. You don’t stick to it. What you thought you would spend on food is always low. What you spend on entertainment never seems like enough. And then you get discouraged because you feel like you can’t
eat do anything (sorry, I forgot I wasn’t talking about diets).
To put it bluntly, budgets don’t work well because of one of three things. One, you write it but forget about it so nothing happens. Two, you write it but then you ignore it because each month is different and it is nearly impossible to predict your spending. Three, you write it then feel terrible because you keep messing up so you make excuses and don’t follow it any more. Instead of falling for one of these budget traps, there is a better option.
The Better Alternative to Budgeting
I know I have talked about this before, but the solution to the problem with budgeting is the first step to having more money. Just track it. Tracking your spending every day and totaling how much you spend on each category allows you to see what you’re spending your money on. Then you can consider if you want to spend your money there.
This works because you get the correct type of feedback from tracking your spending. Research tells us that feedback needs to be specific and immediate (I’m a teacher, we read about this stuff). By writing down what you’ve spent immediately you get immediately feedback. The amount you’ve spent is specific feedback. On the other hand, when we review our budget at the end of the month it is just a big slap in the face without a lot of specific information on when and how you overspent.
When a Budget is Necessary
Let me be clear, I am not saying that nobody should ever budget. What I am saying is that tracking your spending is more effective when you compare budgeting vs tracking your spending. But some people really need to budget.
The number one reason a person or family should budget is when your income barely covers your expenses. The budget is a strong defense against overspending, especially when it is done with Dave Ramsey’s Envelope method. To learn more about Dave Ramsey’s methods for building a better budget, check out his book The Total Money Makeover (affiliate link), I highly recommend it.
The second reason to budget is if you need firm walls to keep your spending within limits after you’ve started tracking your spending. Most people automatically lower expenses when they track their spending, but some people need an additional push. A budget can help people in that situation as well.
The important thing to remember though is that tracking your spending needs to come first or your budget will fail miserably.
How do you set up your budget? What is the worst thing you’ve blown your budget on? Tell me about it in the comments below.
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Budget: A map of your finances that tells you how much you expect to make each month and how much you expect to spend on certain things, including how much to save. Categories include mortgage/rent, car, bills, food, entertainment, clothing, household, etc.