Budgeting is one of the cornerstones of a solid financial plan because its essentially the planning, tracking, and managing of your short-term finances. When it comes to budgeting, there are many ways to do it but the purpose is the same – knowing how much you are spending on what.
While I contend that all the deadly sins are equally deadly, I think that failing to budget is primus inter pares, or first among equals. If you were to commit all others but avoid one, this would be the one to avoid.
And with that, our third deadly sin of personal finance is…
Failing To Budget
Failing to budget can be one of the most damaging things you can do to your personal finances. Without a clear picture of how much you’re spending and on what, you’re basically wandering the forest at night without a flashlight. You might know that you want to buy a house in five years, but without an accurate figure of how much you’re spending or saving, you really have no idea whether that goal is even feasible. If it is feasible, you have no idea how much you should saving towards that goal. A budget gives you that accurate snapshot and it’s one of the reasons why an income statement, which lists expenses, is a crucial financial statement for a company.
You can’t improve what you aren’t tracking. You should always be trying to lower your expenses while maintaining the same standard of living. If you frequently shop at a particular store, it’s smart to try to find coupons so you get the same for less. If you like a particular food or drink, it pays to test out cheaper alternatives to see if you can tell the difference. Where you save in one area, you can then splurge in another. With a budget, you can tell where you stand the greatest chance of improvement. You may discover patterns you didn’t know beforehand.
You will automatically improve just by tracking. When I started working full-time, I had a budget where I tracked every expense to the penny . By virtue of doing that, my actions were affected by even recording the expense. I knew of times when I packed a lunch because my dining out expenses were nearing artificial milestones like $50 that month or $100. There was one time I thought about buying a new pair of jeans but stopped myself because I hadn’t spent money on clothes that month. Since I was nearing the end of the month, I figured I’d buy it next month (I never did until much later).
Budgets help you make informed decisions. With a budget and an accurate picture of your spending, you can make an informed decision. If you know you have slack in the budget, you can enjoy yourself more knowing that you’re safe. Friends planning a vacation next month? You can happily agree to go without guilt or concern if you know your budget can handle it. How long will it take for you to build up your emergency fund ? With a budget, you now know.
After a few months of budgeting, it’s okay to slack off and not track as diligently. Once you have an accurate picture, you simply need to adjust it to changes in your life. But every once and a while, track expenses for a week or two just to see that there haven’t been any big changes.