Nearly everyone will tell you that you have to have a budget. It's the most basic tool for building a sound financial future. But there are times when you need to question your budget as it stands - or whether you need one at all. (For more on budgeting, see The Beauty Of Budgeting.)
TUTORIAL: Budgeting Basics
The first thing to remember is that budgets come in all shapes and sizes. Some are extremely restrictive while others are merely common-sense guidelines. The biggest challenge when it comes to setting a budget for yourself is finding one that works with your lifestyle and your goals. With that in mind, here are the red flags that may signal your need to ditch your budget.
You Get Lost in the Details
Some budgets require a lot of paperwork. Some may mean trips to the bank to get exact change in cash to put into jars or envelopes that represent different categories in your budget. Whatever the details are, it's likely that sticking to the plan will take a conscious effort and may not become habit until a few months have passed. These are not reasons to give up on your budget; if you find after six months or more of consistently following the rules, however, that is a reason to switch tactics.
If you find the paperwork too much, look for budgeting apps that will track your spending with minimal input. Some can even track your account activity straight from your bank. If you find it too much of a pain to go with cash, don't be afraid to continue using your bank and credit cards - just be honest with yourself about whether you will stick to your limits.
You Cheat - Always
There will likely be a period of adjustment that comes when you start sticking to a new budget. You may find yourself going over in certain categories (or all of them). If you find that month after month you can't seem to stick to the numbers in your budget, you likely need to make some changes.
Budgets should not be static. That doesn't mean your numbers should change every month to allow for that extra dinner out you'd like, but it does mean you need to look critically at what works, what doesn't, and why. A crucial step to creating an effective budget is to incorporate change based on the feedback of trying each month. Are you always over budget on transportation? Perhaps you could switch from cars to public transit, or set up a carpool. Or perhaps the number you have set aside is simply not realistic. Reviewing your budget monthly (especially at the start) will help you establish limits and routines that will work for you. (To help you better establish your budget, check out Top 5 Budgeting Questions Answered.)
You Pay Yourself First
Believe it or not, there are people who don't need a budget - and it has nothing to do with how much money they make. Those earning six figures can just as easily be making poor financial decisions as those who make significantly less. However, if you are in the habit of paying yourself first, that is, prioritizing your savings, as long as your life expenses don't put you in the red, you can probably get away without a traditional budget.
Many people may find that overall guidelines make money management a lot simpler. If you know that after you pay your set expenses (housing, debt repayment, insurance, and other fixed monthly costs) you have X amount of money left, you may only need to keep that one number in mind while spending.
The Bottom Line
Budgeting really comes down to knowing where your money is going. If you don't, it can get you into trouble at any income bracket. Be honest with yourself about what you spend money on and why. You may be surprised to see all of those small costs add up. Remember, a budget is a tool to help you; if it's not working, find out why and make the changes necessary to be successful with your money. (To help you achieve a better budget, see The Best Budgeting Software For 2011.)