Debunking 10 Budget Myths
Even though budgeting is a wonderful tool for managing your finances, many people think it's not for them. The logic they use, however, is often flawed. Here is a list of 10 budget myths that stop people from saving as much as they could - and should. Do any of these budgeting myths apply to you? (To learn more, see our Budgeting Basics Tutorial.)
1. I don't need to budget.
The truth is, almost everyone, even those with large paychecks and plenty of money in the bank, can benefit from budgeting. Keeping track of your monthly income and expenses allows you to make sure your hard-earned money is being put to its highest and best purpose.
For example, if you knew how much money you were spending on restaurant meals every month, you might decide that you'd rather be putting that money toward something else, like a nicer vacation. (Creating a budget is incredibly easy. To learn more, see The Beauty Of Budgeting.)
2. I'm not good at math so I can't manage my money.
Thanks to budgeting software, you don't have to be good at math, you simply have to be able to follow instructions. If you know how to use spreadsheet software, you can even make your own budget. It's as simple as creating one column for your income, another column for your expenses and keeping a running tab on the difference between the two.
3. My job is secure.
No one's job is truly secure. If you work for a corporation, downsizing or losing your job is always a looming possibility. If you work for a small company, these concerns may not apply, but if the owner died suddenly, the company might die with the owner. You should always be prepared for a job loss by having at least three months' worth of living expenses in the bank.
It's a lot easier to accumulate this money if you know how much money you're bringing in and laying out each month. (To learn how to make your own emergency fund, see Build Yourself An Emergency Fund and Are You Living Too Close To The Edge?)
4. Unemployment pay will tide me over if I lose my job.
Unemployment benefits are not a sure thing. Let's say a bad situation at work leaves you with no choice but to quit your job. Because you weren't laid off, leaving your job will be considered voluntary and it's very unlikely you'll receive any benefits.
It won't help if you decide to remedy this problem by getting yourself fired, as those who are let go for bad behavior are also very unlikely to receive unemployment assistance. On top of that, getting fired will make it harder for you to get a new job.
5. It won't happen to me.
We all think that unexpected high bills and tragedies won't happen to us. With the number of things that can possibly go wrong in life, hoping for the best is the most logical emotional survival tactic. However, you might lose your job, be in a car accident, get cancer or need to help a friend or family member who falls on hard times.
It's best to be prepared and hope that you'll get to use the money for something fun one day instead. (To protect yourself from some of these pitfalls, check out Buying Life Insurance: Term Versus Permanent.)
6. I don't want to deprive myself.
Budgeting is not synonymous with spending as little money as possible or making yourself feel guilty about every purchase. The crux of budgeting is to make sure you're able to save a little each month, ideally at least 10% of your income, or at the very least, to make sure that you aren't spending more than you earn.
Unless you're on a very tight budget (and we all are sometimes), you'll still be able to buy baseball tickets and go out to eat. Tracking your expenses doesn't change the amount of money you have available to spend every month, it just tells you where that money is going. (Keep reading on this subject in Save Without Sacrifice.)
7. I'm not saving for anything big
This one is tricky. If you don't have any major savings goals it's hard to drum up the motivation to stash away extra cash each month. However, your situation and your attitudes are likely to change over time.
For example, many people thought home ownership would be forever out of reach when the housing bubble was pushing prices ever higher, so they gave up on the idea of owning a home. After the bubble burst and prices sank, however, those who previously couldn't even afford condos sometimes had the income to afford houses. However mortgage lenders require a down payment, so those who saved their extra money when prices were high put themselves in a great position to buy when prices dropped.
8. Any money I save would just be spent on college
Yes, the catch-22 of student financial aid is that the more money you have, the less financial aid you'll be eligible for. if you want to save money without compromising your financial aid eligibility, you can do so by using your savings to buy a house, prepay your mortgage or contribute more money to your retirement accounts. The savings you put into these assets can still be accessed in the event of an emergency, but you won't be penalized for them.
Paying down credit card debt and auto loans can also serve as a form of saving that won't detract from your financial aid eligibility. Just think of all that interest you won't have to pay when your balances go down or are even paid off completely. (For more, read Loan Deferment Saves Students From Disaster.)
9. I don't need to budget because I'm debt-free.
While being debt-free is unusual and commendable, it won't pay your bills in an emergency. A zero balance is better than a negative balance, but that zero can quickly become negative if you don't have a safety net.
10. I always get a raise/bonus/tax refund.
It's never a good idea to count on unpredictable sources of income. Your company may not have enough money to give you a raise, or as much of a raise as you'd hoped for, even if you've earned it. The same is true of bonus money.
Tax refunds are more reliable, but this depends in part on how good you are at calculating your own tax liability. Some people know how to figure to the penny how much of a refund they will get (or how much they will owe) as well as how to adjust this figure through changes in payroll withholding throughout the year.
To manage your monthly expenses, prepare for life's unpredictable events and be able to afford more expensive purchases without going into debt, budgeting is a great idea. Keeping track of how much you earn and spend doesn't have to be drudgery, doesn't require you to be good at math and doesn't mean you can't buy the things you want. It just means that you'll know where your money goes, you'll have greater control over your financial situation and you'll probably be able to sleep more soundly at night.
To keep reading on this subject, check out our Budgeting 101 special feature.