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A few weeks ago, I was lamenting the cost of graduate school with a friend over coffee. I commented that I had no idea why so many people were willing to go back to school for an MA or MBA and happily load up on debt that would have to be factored into their budget.
Yup, I said the b-word. My friend winced, as if I had just kicked him in the shin under the table.
For reasons I will forever struggle to understand, the word budget is a major taboo in today’s culture. Of course, I have never let that fact deter me in the past, and I wasn’t about to let it in this conversation, either.
“You do have a budget, right?”
“No. . . Budgeting just isn’t my thing. Besides, I’m always going to have debt anyway. What’s the point?”
Sadly, this attitude isn’t all that uncommon today. Chances are, you have also had similar conversations with friends, relatives, co-workers, or maybe even your neighborhood barista.
This, my fellow Superheroes, is a tragedy. With proper budgeting, there is no reason that the average person today cannot retire a millionaire and live a life of financial independence.
Five Reasons to Budget
While there are far more than five reasons everyone should have a budget, today I will present five reasons. My intention is to make you think and simultaneously stir your emotions. After reading this, please do not go another day without having a budget in place for your family.
- A Budget is Easy to Create
I am convinced that the average person’s aversion to budgeting stems from the budgetary failures of both federal and state government units. They ask, “If they can’t figure it out, how am I supposed to do it?” In my home state of Illinois, for example, our elected representatives and Governor have consistently demonstrated an inability to play nice and do what is best for their constituents. Ironically, the Illinois General Assembly recently enjoyed a vacation after months of accomplishing nothing.
With a Superhero mindset, you can do much better. Let’s walk through the basics of a simple starter budget:
- If you have an understanding of addition, subtraction, basic fractions, and can operate a calculator, you can do a budget. Grab a pencil, a legal pad, and get started.
- List your income from all sources at the top of the page. I recommend using net income, commonly referred to as “take home pay.”
- Gather information on your fixed necessity expenses: mortgage/rent, utilities, and medications.
- Gather information on your flexible necessity expenses: food/groceries/toiletries, clothing, and fuel/transportation.
- Gather information on your discretionary expenses: restaurants, entertainment.
- Calculate the total of your expenses and subtract this figure from your total net income. If you are spending more than you are earning, something must change. First of all, aim to reduce unnecessary discretionary spending. Next, explore ways to reduce/eliminate restaurants, save on groceries and toiletries, and formulate a plan to reduce fuel/transportation expenses through well-planned travel. If you have money remaining at the end of your budget, it can be used to build your emergency fund, pay off your debts, and give to organizations/individuals in need.
- Lastly, examine your fixed expenses and explore all avenues to reduce them. This can be done by paying off debts, thereby reducing your monthly obligations, negotiating rent/refinancing your mortgage (especially if your mortgage is 3-5 years old, you may be missing out on historically low interest rates), and reducing your usage of utilities. Any additional cash you can save is equivalent to receiving a raise.
Note: I realize that this guide to a simple starter budget is basic. We will dive into the nuances of a more detailed budget in a future post. Your starter budget will be approximate. That is OK. The goal is for you to establish a wide lens view of your current income and spending. When assembling future, more detailed budgets, we will use budget software, such as EveryDollar, to add precision to our process. If you prefer, you can jump to this step rather than the old-fashioned paper and pencil method outlined above.
- A Budget Puts You in Control of Your Money
Superheroes, you work hard to earn your income. I know I do. Without a budget, it is difficult to keep your income inline. Each dollar you earn in your lifetime is like a tiny employee that is ready to work for you. You wouldn’t hire an employee for your department or business and fail to provide her with a detailed purpose and role. If you did, you would be a poor boss. Employees need guidance and structure to succeed, and your money is no different. Put those dollars to work by assigning them a unique role. That begins and ends with a budget.
- A Budget Requires You to Pay Attention to Your Money
With several Mr. Washingtons working for you, suddenly doing exactly what you tell them to do, things begin to change. Suddenly, you notice that your grande non-fat no whip latte costs you $7 each morning. You may even experience a bit of pain upon realizing that this equates to $35 per week and over $1800 per year.
Noticing details like this is just the beginning when you maintain a monthly budget. And when you start to pay attention, innocent trips to the ATM don’t seem quite so innocent anymore. You begin to think twice before you spend because you understand the ramifications of departing from your plan, a point which segues nicely into the next reason to budget.
- Operating Without a Budget is a Missed Opportunity
Though the US government prints money like it is going out of style, you and I know that money is a finite resource. Each of us has a limited number of working years, and logically, our earned income is similarly limited as a result. Do not let any of it go to waste. You must be intentional to be successful.
Today, more and more people strive to out earn their stupid spending. They work long hours to pay for cars, boats, and summer beach homes, yet they are too busy working to enjoy the fruits of their labor. I am not condemning hard work, nor am I saying that you should not have nice things. However, as Chris Hogan puts it, “I don’t want nice things to have you!” If you do not have a budget, your hard-earned money is likely being wasted on buying things you don’t need to impress people you don’t even know. The longer you continue this way, the longer you are missing out on what Albert Einstein dubbed the Eighth Wonder of the World: compound interest. And in this case, being late to the party isn’t fashionable; it’s foolish.
For example, consider the following scenario: Ben and John are both 20 years old. Ben begins investing $250 per month in index funds, and he continues until he is 30 years old, at which time he never invests another cent, allowing compound interest to grow his money until retirement at age 59 ½. John decides to lease a vehicles for $250 per month during this same 10 year window, and wisely snaps out of it when he reaches age 30, at which time he begins investing $250 and continues until age 60. For the sake of argument, let’s assume that both gentlemen invest in similarly-performing index funds, which average a 10% return each year. Surely John must catch up to Ben? Take a look below:
|Ben’s Investments||John’s Investments|
At age 59 and approaching retirement, Ben will have invested a total of $30,000 and hold a portfolio valued at $917,725.45. John will invest $90,000 over 30 years -three times what Ben invested-yet he will only hold a portfolio valued at $542,830.31! John never caught up due to the avalanche of compound interest that worked in Ben’s favor.
- A Budget is Freeing
When my friend claimed that a budget really wasn’t his thing, I immediately realized that he had never experienced the freedom that results from a fine-tuned budget. When you maintain a budget, you have the benefits of:
- knowing how much money you have at any given moment
- knowing you do not have to fear a bounced check or overdraft fees
- no surprises
- peace of mind that comes from having budgeted for emergencies (a post on the value of the emergency fund and how much you may need is coming later this week)
Surprisingly, the notion that a budget is restrictive is pure nonsense. As a regular listener of The Dave Ramsey Show, I have heard countless “Debt-Free Screams” in which the callers said that planning a budget felt like they had received a raise.
Lastly, a budget is freeing because it causes you to think. Thinking leads to reflection, and reflection leads you to consider your values and decide what is most important to you. Value driven budgeting is the key to seeing beyond the numbers and focusing on the why behind the numbers.
What Are You Waiting For?
A budget only takes a few minutes to assemble, but the rewards are potentially without limit. Getting on the right path, understanding your money, and controlling your money are keys to being a Finance Superhero. A budget doesn’t require sophistication, manipulation, or secret wisdom. It requires patience, intentionality, and a desire to be in control of one’s money.
Do you have a monthly budget? How you maintain it? How much time do you spend on budgeting each month? Please share your thoughts on all things budget-related in the comments section below.