A budget is your most basic personal finance tool. It’s particularly critical if you’re looking to improve your finances. However, as with all tools, there are advantages of budgets and there are limitations of them as well.
Below we’ll discuss three advantages and three limitations to your budget.
Advantages of Budgets
1. Gives you control of your money
By setting a budget, you grab the steering wheel of your finances. You hold the power when you decide how to spend your money, in advance of spending it. Without a budget there is no mechanism for you to calculate how much income you have compared to your total expenses. It’s much better to control where your money is being spent than to realize at the end of the month you’ve spent more eating out than you thought, and now you’re not able to pay your landlord.
2. Provides an opportunity to review where you can create more money
Imagine sitting down to do your first budget and realizing that you have more expenses than income. You’re faced with two choices – cut your expenses or increase your income. Either way, you’re creating more margin in your budget. For example, if you cut back your cell phone data plan, you’re reducing the delta between income and expense. Or perhaps it’s time to start that side gig you’ve been thinking about. After all, needing money is the best motivator. Consider a budget as your first step to creating more money.
3. Keeps you focused on your money goals
It’s far too easy to set a financial goal, and then become distracted by the next shiny object. Don’t allow a short-term desire to sidetrack you from your long-term aspirations. A budget allows you to periodically track your day-to-day spending against what you’ve predetermined is necessary to meet (or beat) your long-term goals.
Limits to Budgeting
1. Needs to be updated regularly
Setting a budget is not a one and done exercise. While automating your finances is a practical strategy, you need to periodically evaluate your budget to determine if it aligns with your current circumstances and your current values and goals. Generally, a budget is set monthly. You may choose to stick to the same budget for three-month increments and update every three or six months. The best practice is to stick to the same timeframe – for example, the first Monday of every quarter or the 25th of each month.
2. You have to stick to them
It’s quite easy to set a budget. It’s sticking to it that’s the hard part. Build in a plan for obstacles, and foolproof your budget with sinking funds. You know what your triggers are. Plan for them in advance and regularly compare your actual spend to your budget to ensure you’re not going over. I do mine daily during the first hour of every day. It takes 5 minutes and prevents me from procrastinating (which is my trigger).
3. They can feel restricting
Budgets tend to have a psychological reaction where you immediately feel as if you’re restricted. Consider, however, what driving would be like without the restrictions of red lights and stop signs. Rules create freedom. If you know where you’re spending money and allow some wiggle room, and sinking funds, you can relieve that feeling of restriction. I call this line item in my budget, “flash cash”.
While these limits discussed above can cause resistance to budgeting, I urge you to overcome them. In all cases, the advantages of budgets outweigh the cost.
Have you resisted setting your budget? Let us know in the comments below.