Budgets are essential for financial planning. Managing financial life without one is like driving into the future blindfolded. We have no idea where we are now, where we will be later, and the financial distance between these two points. In addition, there may be some serious impacts along the way. The obvious first step to achieve any financial goal, whether it is retirement, buying a house or financing a child’s education, is to save money. Saving is much more difficult though. We’re constantly being bombarded with ways to spend, so saving requires a very strict discipline. The best way to ensure that focus is to create a budget. And the very first item in the budget should be savings. Saving shouldn’t be what is justify over after you’re done spending. As the saying goes, pay yourself first. Then figure out how all of the other pieces of consumption fit into the puzzle. When we spend money we are in essence spending our life’s energy. Viewed through this lens, the point of budgeting isn’t to deprive ourselves but rather to make sure that our hard-earned money is going to the experiences and items that most make our hearts sing.
But what we see is that even responsible and hard-working adults hate the idea of budgeting or planning their spending. The main causes for most people not having a personal budget are that it requires a lot of personal discipline to implement, it requires time to create and manage, it may lead into missing opportunities etc. The tough task of implementing a personal budget is generally one of the most mentioned reasons why individuals who try to have personal budgets find that coming up with a good plan is the easier part but turning the budget into a reality is a challenge.
Despite the many causes as to why some people prefer not to have personal budgets, it is an important tool as far as managing personal finances is concerned. Not having a personal budget has many effects on individual earnings and expenses. Most of these effects are negative. Not having a personal budget is one of the reasons why people are unable to manage their finances. Here are some good reasons why everyone should create and stick to a budget:
- It helps keep an eye on the goal
- It ensures that we don’t spend money that we don’t have
- It leads to a happy retirement
- It helps to prepare for emergencies
- It sheds light on bad spending habits
When creating a budget for the first time it isn’t essential to look backward through piles of receipts and credit-card statements. Rather writing down everything purchased—for a week or a month—on a slip of paper which we can carry around in wallet or purse. At the end of the time period, take out a highlighter and mark anything spent money on that really put a smile on our face. Now we are ready to start budgeting as we can see clearly what areas of spending aren’t enhancing our enjoyment of life. It may be eating out with friends we don’t even like or a gym membership that we never use. Whatever the item, the point is this exercise helps highlight why we are budgeting.
After this step we are often much more motivated to sit down and think through what items we need to spend money on and what items we want to spend money on—and what adjustments if any need to be made to both to enhance joy and increase savings to meet future goals.
The key to any budget is to know how the money is being spent and allotting for a fudge factor. Anyone can write a budget; the problem is sticking to it. The only solution is first tracking how the money is being spent and then start making small, but gradual changes.
If just the thought of budgeting makes us feel grumpy, try thinking about it in a brand new way. Instead of seeing budgeting as a set of self-imposed restrictions, think of all we could gain instead. We all have financial goals we want to achieve someday. Maybe we want to retire early, dream of paying for our child’s college tuition, or simply want to stop stressing over money every month. Either way, budgeting is the best way to make our dreams come true. And no matter how much we hate the idea, no amount of shrugs or eye rolls can change that fact.
So what are we waiting for? Time to start budgeting!
Blog Submitted By:
Assistant Professor (PGDM), ISBS