A budget is essential. It sounds like a personal finance 101 course, and let's face it, book covers and budgeting guide marketing seem more geared for middle schoolers than at you, a capable adult who generally manages to have money for things.
You may think that you are too sophisticated to require a budget. You have an account for retirement! You use automatic bill payment! Sure, you've got this.
You don't enjoy doing it, I know that. I'm here to tell you to do it nevertheless, so sit down. A budget is required.
Let's look at how not budgeting can harm you if you manage your money by the seat of your pants.
Would you gamble with your well-being?
Let's say you see the doctor for your yearly checkup. You complain about it the entire way there. You think, "I don't know why I'm bothering. I feel good!"
As soon as you arrive at the doctor's office, you weigh yourself, have your temperature taken, and have your blood pressure checked. You get up from the table because the nurse didn't seem concerned about those initial numbers. You reassure them, "I'm good to go." I'm all right.
The nurse cannot force you to stay, but she also is unable to reveal to you any observations the doctor may have made while peering into your nose and throat, listening to your heart, or massaging your abdomen to feel any organs they are sensing.
You can't be certain that you're genuinely healthy if you leave without having the entire examination.
Likewise with your money. It doesn't necessarily mean you're doing the best possible job of money management just because you make it to your next payday with a positive balance in your bank account. To identify what's working well, what isn't, and what could be improved, you need a more complete understanding of your finances.
You must take control of your finances.
When you're unsure whether you actually want to know how much money you spend each month at restaurants or breweries, it might be challenging to break down your spending by category.
Perhaps the thought of your childcare expenses makes you feel queasy. Perhaps you feel depressed when you see your monthly student loan debt due.
But now is the time to move forward and organize. If you don't, your ignorance might catch up with you.
A reader recently mentioned in a comment that they laboriously created a budget only to learn a few days later that their income would decrease during the pandemic. Even while there is already cause for concern, this person also appeared annoyed that they have to go through and modify their budget in order to take the lost revenue into account.
And let's face it, no one thinks that changing your budget to find areas of savings in a pinch will be a really enjoyable evening. The reader was fortunate, though, because they weren't starting from scratch. This reader had a starting point and a baseline, as opposed to immobilized in fear when staring at a blank spreadsheet. Instead of creating a budget from scratch, they only needed to alter their current one.
When things start to go wrong and you need to quickly come up with a strategy, that's when you truly need a budget. It's not a good idea to sit down and prepare a budget on the day that you lose your job, become sick, or have an unforeseen expenditure. Because it will already be too late. By that time, you're responding to whatever external forces are influencing how you spend your money.
Making a budget while things are going well—or at least okay—is a proactive action you can take to safeguard yourself in case the unexpected happens. Making a strategy will make it simpler for you to make adjustments if the worst happens.
How to create a budget you like
The secret to creating a budget that you can live with is to get rid of the mental picture you have in your head of what it will look like. There isn't a single spreadsheet that can replace them all or a single approach that is more effective than the others.
The budget that works for you is the best one. Finding one that makes sense for your particular scenario may need some trial and error.
To truly determine whether a budgeting strategy fits into your lifestyle, I advise trying it out for at least three months.
Several alternatives to get you going
The 50/20/30 strategy:
You divide your spending into three major categories: necessities (50%), financial objectives, such as savings or debt repayment (20%), and discretionary costs (30%).
The 60/40 rule:
It states that you should spend 60% of your income on necessities and 40% on everything else, including savings objectives.
The kakeibo system:
This divides expenditures into four categories: culture, extras, survival, and extra. What falls under which heading? With this approach, choosing for oneself is half the joy.
The zero-based budget:
The goal of the zero-based budget is to have no money left over or unaccounted for by the end of the month. Every dollar is assigned a job.
You can look for templates online that make keeping track of the numbers a little bit simpler if you want to try one of these budgeting approaches.
If you create a budget using an app, you'll concentrate more on tracking your expenditures on a daily basis and less on the budgeting process. For readers searching for their first budgeting software, please share your favorite apps in the comments section!
Hold on to it
Another thing to keep in mind while creating a budget is that mistakes will be made.
I make that promise. Until that large payment comes around, you'll forget that you only pay for vehicle insurance twice a year, or you'll forget to classify the kids' piano lessons.
It's alright. Because you can't just set a budget and forget about it. It takes time and nurturing to develop. You'll need to make adjustments, create a replica of your existing budget, and run a few other scenarios through it. You'll also get a raise and need to use the extra money you receive wisely.
And you won't want to just dive into the following month—a wise budgeter looks ahead to the following month and evaluates the prior month to see what worked and what didn't.
Being proactive is key, and if you're monitoring your finances at least once a month, you're already making progress toward financial stability.
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