Having a cash flow plan – aka a budget – is a key requirement for success of any financial plan. Actually, success isn’t determined just by HAVING a budget, but actually having a budget and FOLLOWING it. You won’t believe how many people we talk to who say they “budget” but what they mean is they created a cash flow plan – but they never check in with it and use it to guide their spending. A plan – for any purpose – that isn’t followed, is worthless.
Why do so many people not follow their budgets?
They think budgeting is restrictive
Really, it isn’t. Think about it. A budget is nothing more than a plan for your cash flow. If there is something restricting you, I’d say that its the amount of money coming in – not the fact that you have a plan for the money. Not honoring this limitation is exactly what causes people to fall into debt.
If you don’t like being limited on your spending, a great option is to make some more money. I know, that’s no fun, but is spending beyond your income and getting yourself into debt any more fun? Yes, I can it can be – for a short period of time. Sooner or later excessive spending (beyond your income) will catch up with you though.
Another common reason people don’t follow their budgets is…
They think budgets are inflexible
It’s unfortunate when we see this issue. People will sometimes create a budget and then try to hold themselves 100% to the dollar of what the budget says. This causes a great deal of stress so after a while they abandon budgeting altogether.
What really matters with budgeting is the bottom line. If you bring up X dollars per month, then X dollars per month is what you have to allocate. If you have $40 budgeted for going out to dinner but you want to spend $60 – go for it! Seriously, go ahead and spend extra in that category this month. But remember that you have limited dollars, so if you increase one category by $20 then you need to lower another category by $20. Maybe you cut back on groceries a small bit (tuna? Raman noodles?) to save the amount that you decide to spend elsewhere.
Everyone should have flexibility in their budgeting process. I’m not sure budgeting needs to be “fun” but it certainly doesn’t need to be miserable either.
If YOU aren’t budgeting because it seems too complex, you should definitely check out the 50/20/30 rule of budgeting. It’s one of the easiest, most flexible budgeting options available.
That leads me into what one thing is most important in budgeting…
As mentioned, the amount of money you have available is the only restriction in your cash flow planning. Once you understand that single limitation, you just need to allocate those dollars to the areas that are most important to you first, then if you “run out” of dollars left in the process you either a) defer something of low priority or b) go back and re-adjust other categories/priorities.
Budgeting is all about ruthless prioritization. If dining-out is a priority for you then by all means have it in your budget. If your budget is so tight that spending $20 eating at a restaurant is going to make you come up short for your rent, well then, what’s your priority? I hope your priority is to pay the rent and have a place to live (please let that be more important than a meal out!)
If you are planning for retirement, or your child’s college education, or a down payment for a new house, and these are priorities for you, then that should be reflected in your budget. Either do some research on your own or meet with a financial coach or financial advisor to determine an estimate of how much money you’ll need to have at a certain point in time to achieve funding these goals. From there it is easy for a professional to use historical saving/investing returns to estimate how much money you should likely save each month – that’s the number that should go into your budget.
What are YOUR priorities?
If you haven’t taken the time to actually sit down and think about both your short and long term goals and priorities, then you should consider doing that very soon. The longer you wait, the more of a challenge it becomes to actually achieve big future goals.
Not sure where to begin? If that’s the case here’s a bit of a quick start for you. When we teach budgeting we recommend people always start with the “four walls” – housing, utilities, food, and transportation. For almost everyone those need to be top priorities. Once those are covered you have a tremendous amount of flexibility in allocating the rest of your money.
You should have some money allocated toward retirement (and very likely invested in the stock market) because everyone is going to want to retire comfortably some day. Priorities tend to be very personal, so take some time on this. Write the priorities down and start planning to reach those goals.