Personal Finance 

Why You Need A Budget

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Not A Good BudgetWhen I was in college, I never had a budget. I didn’t keep a budget because most of my expenses were paid for in a lump sum at the beginning of the year. My room and board were all integrated into that payment, which made for a pretty simple financial life. The extent of my purchases were at the local bar or at the grocery store when I wanted something a little more interesting than what was available in the fraternity kitchen. I had little income, little expenses, and almost no need for a budget.

That all changed when I started working. Here I was, with a real salary, real expenses, and little by way of advice on how I was supposed to track anything. Fortunately my friend sent along an Excel spreadsheet she used to and that got me on my way. I quickly learned I was spending way too much on food, specifically a mediocre lunch in the cafeteria, and was able to adjust my spending to reflect what I wanted. I learned that having a budget is absolutely crucial.

This isn’t an article on how to budget, a topic I’ve written about extensively in the past, but more about why you need to keep and maintain a budget.

This post is part of Bargaineering’s 2010 New Graduate Guide series where I’ll share my insights and offer my financial guidance to the graduate class of 2010. This post is part of day 2, the financial basics.

Budgeting Helps You Save

If you have set any goals for yourself, you’ll recognize the importance of budgeting as a way of tracking your performance. Budgeting, and knowing how much you spend on what each month, will help you plan a savings strategy to hit any financial goals you’ve set for yourself. If you want to buy a new car and need a down payment, a budget lets you determine how much you can put towards that down payment. If you can afford to save $100 a month, you can save $1,000 in ten months, $2,000 in twenty months, etc. If you need a $2,000 down payment, you know that you can reach it in less than two years (slightly less if you put the savings into a high interest savings account).

Without knowing how much you’re spending, and thus how much you don’t spend each month, you can set up a savings plan with a schedule so you know when it’ll end.

What Gets Measured, Gets Improved

If you think you are spending too much, you’re probably right. Fortunately you can fix that simply be keeping track of what you spend your money on. I am almost certain that if you start tracking your spending, you will begin to spend less each month. The reason this happens is due to human nature. If you have no idea how much you’re spending on eating out each month, you will probably be surprised when you start tracking it. You’ll start to eat out less, because you’ll recognize that you’re spending too much and you’ll see it in your budget.

Prosperity Requires Discipline

Finally, the key to success in anything requires a certain amount of discipline. Having and sticking to a budget is that discipline and if you hope to be financially successful in the future, it demands that you have some measure of discipline in your life. If you think financial responsibility is about the number of dollars in your bank account, you only have to think about the bad luck of lottery winners. They weren’t undone because they had a lot of money, they lacked the financial discipline to manage their new found wealth.

Those are just three of the many reasons why you should budget as soon as possible. Why do you budget?

(Photo: spiderpop)

{ 14 comments, please add your thoughts now! }

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14 Responses to “Why You Need A Budget”

  1. The thing I hate about budgets is that it is so difficult to categorize some things correctly, unless you have a ton of different categories. I try to keep my budget fairly simple, so that it doesn’t take me hours to track each month, but that usually means there are a few purchases that I have no idea where to place them.

    For me, one of the biggest things to remember with budgets is to allow yourself to be a little flexible. Unless you do the envelope and cash method and strictly adhere to it, you WILL go over in some categories from time to time. Sometimes that might be something that you can look at and try to improve in the future, sometimes it is just needed. Basically, I think it is best to just get the average monthly spending to the point where you are comfortable.

    • cdiver says:

      This has always proved agrevating to me as well. Classify everything and you end up with way to many cateories, but if you don’t clasify them this way, you don’t get a true picture.

    • Shirley says:

      My ‘budget’ actually started out as simply an ‘expected expenditure spreadsheet’ to see what 401k monthly disbursement we would need at my retirement.

      A few months later it was easy to put expenditures into catagories because they were all laid out and ready.

      Thinking of it as insight to your spending, rather than a budget to control your spending, seems to make it less formidable and something you want to know, rather than have to do.

  2. cubiclegeoff says:

    It’s frustrating to me that keeping a budget is often an after-action event. So once you go over, it’s too late, unless you know exactly how much you can spend all the time in each category. I know there’s a company that has proposed a card that provides balances on it (which it obviously seems like credit card companies don’t want), but if reprogrammed, it could be helpful to know how much money is available in each category. I guess you could use cash too, but for some, that’s inconvenient and a hassle.

  3. zapeta says:

    I budget so I know exactly where I spent my money and so I can make sure that I am saving each month. Going over budget isn’t the end of the world as long as you are aware. I just defer some spending somewhere else to cover where I went over. I think its much better than having no idea where you stand in terms of money. The money I spent on YNAB is probably the best I ever spent. That program really put me and my budget on the right path.

  4. DDFD says:

    Written budgets are key . . . we need to see it in order to feel it.

    I also believe you should have a written spending plan . . . know what you will buy and why you will buy it.

    • jsbrendog says:

      excel worked [erfetly for me on this. I even had money budgeted for savings, fun, and random

  5. Master Allan says:

    These are the categories that work for me since creating my Excel spreadsheet tracking (est 2004):

    1 Monthly Rent
    2 Food & Grocery: Going Out to Eat, Food & Personal Care products at SuperTarget.
    3 Electricity
    4 Water: (water/sewer utility bill)
    5 Landline Phone: Former phone service, now a placeholder for occasional skype fees.
    6 Cell Phone
    7 Internet
    8 Insurance: Entry about every 6 months
    9 Gas
    10 Misc. Expenses: Stuff I need, the catch-all category. Tires, Temp. Storage Unit, Haircut, Contact Lenses, Car Registration, wedding gift, post office…
    11 Allowance: Stuff I WANT – toys and personal enjoyment/relaxation

    I’m my own CFO so I can invoke sketchy padding of the numbers just like big business. For example, since my budget is partially based on the envelope system I could put a dinner out under the category food, misc. expenses, or allowance. I try to keep categories under their predetermined spending limit but I’m more concerned with the year average and *spending less* than I earned for the month.

    • Shirley says:

      An eye-opener for a spreadsheet of this type is a line with total income, one with total outgo and one with the difference between the two.

  6. eric says:

    My experiences have been pretty much the same. In college, I didn’t really keep a budget. I knew mentally what I was spending on but never had hard numbers. It’s a lot more important when you’re in the real world and working.

  7. daenyll says:

    I found that tracking expenses for a month or two gives a good approximate for what you’re spending, then you can set a goal amount in each category for the future. This way you get an idea of where you are starting out in college or your fisrt job, then you can adjust as you get the hang of finance and living within your means and you can save for emergencies and retirement.

  8. jsbrendog says:

    “When I was in college, I never had a budget”

    for me it was when i was in college, I never had money haha

  9. jsbrendog says:

    and also, regarding “Prosperity Requires Discipline”

    thought this would be interesting as well

  10. BenW says:

    For me, the biggest eye-opener in budgeting has been how many expenses get overlooked. I started out budgeting with a simple Excel spreadsheet, but I found that whenever I synchronized my budget with reality a surprisingly large amount of money was missing and unaccounted for. Creating a budget is fine, but reconciling the budget with reality on a regular basis is critical, otherwise you’ll miss the real picture.

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