Why Bother Budgeting?
Budgets are more powerful than you think
What’s the ultimate purpose of budgeting?
Is it to make sure that you’re not spending too much money on shoes versus cat food versus toilet paper? Of course not.
The point of budgeting is to make sure that at the end of the month, you still have money left over.
The Real Point of Budgeting
The purpose of budgeting, in other words, is to make sure that you’re living below your means, rather than living at or above your means.
Some people use a budget as a tool to make sure that they don’t live paycheck to paycheck.
In fact, I know people who didn’t even realize that they were living paycheck to paycheck until they actually created a budget.
How Budgeting Can Help
One of my good friends used to move money into his savings account at the start of each month. He'd pat himself on the back, thinking that he was saving money.
At the end of the month, in order to pay his bills, he'd transfer money from savings back to his checking account. His savings account wasn't growing – he was just playing the transfer game.
Monitoring his net worth, he says, also helped him recognize the effects of his money habits.
Don't be like my friend. (Or, if you're already like him, act like his new, reformed self.) If at the end of the month you’re breaking even and you don’t have any margin of error left over, you're living for the next check, and that isn't a position you want to be in.
A budget is one possible tool that could get you out of that bind. Strictly speaking, a detailed line item budget isn't necessary.
If you simply pull your savings off the top first and then commit to living on the rest of your money, you’re achieving the purpose of budgeting. You're living below your means and saving a healthy percentage of your income.
You don’t need to track or care about how much money you’re spending on restaurants versus clothes, particularly if you’re already debt-free and saving a significant portion of every paycheck.
How Much Should You Be Saving?
At a minimum, I believe everyone should save at least 20 percent of their income. That divides out as 10 to 15 percent into retirement accounts, and 5 to 10 percent into other savings goals.
A detailed line item budget is simply a tool that helps you get there. It’s not the solution to your problems; it’s just a mechanism that you can use to help you save more.
Different Kinds of Savings
By the way, when I talk about savings, I’m referring to any activity that ultimately boosts your net worth. I don’t literally just mean money that you stuff into a savings account.
I’m referring broadly to money that you might put into retirement accounts, a health savings account, flat spending accounts, or that you might use as additional payments on a debt.
For example, say your mortgage is $1,500 per month, but you pay $2,000 per month. That marks the extra $500 as an additional principal payment, so the $500 counts as savings.
Sure, it’s not literal savings in a bank account, but it’s money that directly boosts your net worth. It’s savings nonetheless.