Creating a spending plan, otherwise known as the dreaded budget, seems to be an idea that many families either love or hate. But there are many benefits to taking the time to create a personalized budget.
A 2013 Gallop poll showed that only 32% of Americans prepare a monthly budget. The results seem to back up my experience that the lack of budgeting crosses all demographic classes. Across every age, income level, education level, and even political ideology, the results are similar - Americans are not planning their spending.
Until a few years ago, my wife and I didn’t prepare a formal budget each month. We had a general idea of our spending, and we stayed within the monthly spending cap we set for our family. But, we had no idea how much was spent on food, clothing, eating out or entertainment. When we started creating a budget, we were shocked to learn how we were spending money and how it often didn’t match up to our goals. (For more, see: Best Budgeting Software for 2018.)
Because our new spending plan was more closely aligned to what was important for us, the spending cuts we made weren’t painful. Giving up something that was less important to achieve goals much more important isn’t a sacrifice at all. Here are some of the benefit’s we’ve seen through creating a spending plan before the month begins and accounting for every dollar of income that month:
A Budget Helps Natural Spenders Save and Natural Savers Spend
I’m a natural saver, while my wife is a natural spender. Neither of these is better than the other, we’re just different. Without me, my wife would struggle to save, and without her, I’d struggle to have a life.
It’s through the spending plan that both of our needs can be met, without either feeling left out of the process. I can see in advance where we’re able to save and invest. And my wife can see, also in advance, where we’re funding some of the activities important to her.
A Spending Plan Is Liberating for Natural Savers
Prior to creating our plan each month, I struggled with spending because I didn’t want to overspend. The economic term for this is opportunity cost. If the funds were spent, what couldn’t we do? What opportunity would it cost us?
Now that we have a budget, it is much different. Because we budget a certain amount of money for eating out each month, I know that we can freely use those funds and not sacrifice another opportunity.
All of our spending goals are also built into the plan. Were it not for the budget process, I would have no way of knowing if we were following our budgeting goals.
Holds You Accountable
If you’re married, you owe your spouse accountability for how your money is handled because you both typically share your incomes. You should work together to decide how it’s spent or invested. There should be money worked into the budget that each party can spend how they see fit, but the amount should be set jointly.
A spending plan also gives you a guide by which we can hold ourselves accountable. Did I follow the plan set out in advance? Or did my need for immediate gratification lead me to toss the budget aside? The written budget can help prevent this costly mistake. (For more, see: Budgeting Basics.)
Helps You Meet Long and Short-Term Goals
Many important financial goals can’t be fully addressed with one month’s income. This is true for both long-term and short-term goals.
Some short-term goals may be:
- Saving for an upcoming vacation.
- Funding the braces your child will need in a few years.
- Saving for the car that will need to be replaced or a down payment on a new home.
- Giving to an upcoming charitable event that is important to you.
Your long-term goals may include things like:
- Saving for retirement.
- Saving for your child’s college education.
- Buying a vacation home.
- Moving to a rewarding encore career earlier than full retirement age.
A spending plan allows you to more easily set aside funds to meet these goals in a timely manner. Even though you can meet these goals without a budget, it’s likely to take longer to do so. With the discipline of regularly contributing to these goals by using a budget, you will be building toward your goal in a time-efficient manner and you can track your progress toward your goals much easier.
Reveals Bad Spending Habits
Everyone has weak spots that lead us to mismanage our resources. A spending plan will shine a light on those areas and give you the opportunity to address them. You may be surprised to learn how much money you spend on a certain activity, such as going out to eat. (For more from this author, see: 10 Reasons People Don’t Create a Budget.)
Increases Financial Peace of Mind
Imagine if you treated other things in your life the way you treat your finances when you don't budget. How much more stressful would your vacation be if you simply packed up your family in the car and started driving in a random direction, not sure where you were going or when you’d get there? How could you even pack correctly for the trip? Will you be at the beach or on the ski slopes?
Likewise, how can you gain financial peace without a plan? How much more confident would you be with a fully funded emergency fund (made possible by funding it each month until it was complete)? Don’t increase the uncertainty of the future by not preparing for it today.
Helps You Avoid Debt
One of the most common causes of debt is from a lack of planning. A broken heat pump can lead to a credit card balance because you didn’t budget for funding an emergency fund. A car purchase may include a new car loan because you didn’t set aside money each month for the vehicle you knew you’d eventually need. Loans for your child’s college education may have to be paid for years after graduation because the money wasn’t set aside each month when they were young.
If you have a budget, these expenses can be planned for so that they do not impact you when they unexpectedly happen.
Everyone Can Benefit from a Budget
With all these benefits, why do less than a third of all Americans actually prepare a monthly spending plan? I think a few of the most common reasons are:
- It’s too restrictive.
- It’s too time-consuming and complicated.
- I don’t need to because I’m doing well financially.
- I'm too poor to budget.
- I pay my bills on time and in full each month.
Prior to using a budget, I used to say similar things. I thought we were doing fine financially, so nothing needed to be changed. What I’ve learned is that creating a plan isn’t restrictive - it’s liberating. It’s not time consuming once you’ve done it a few times. It takes my wife and I less than an hour a month and it isn’t complicated either.
It can be a simple spreadsheet or even a hand written form or sheet of paper. Whether you’re wealthy or have a limited income, my belief is that we still have the duty and responsibility to manage the funds well.
I’ve never met someone who took budgeting seriously and later regretted it or felt it was a waste of time. I always advise budgeting skeptics to make a good faith effort at budgeting for 90 to 120 days. If after that time you feel it’s been unproductive, you can walk away knowing you tried.
But I’m convinced that those who work diligently on creating a spending plan each month will quickly see the benefits. It will become one of the most productive and rewarding hours of your month. (For more from this author, see: Budgeting Tips for Beginners.)