Note: For the most part, this post is for those who are at the beginning of their personal finance journey. As I've noted previously, once you have control over your spending you can dial back on how much budgetary control is needed.
Whether you call it a spending plan, a budget, or something else, you need to have a way to keep track of your finances. It doesn’t seem like a lot of fun at first, but a spending plan can really help you take your money management up several notches. It's so vital that I put it near the beginning of my 30 steps to great finances.
With that said, here are six reasons you need a spending plan:
1. Know Where the Money Comes From
A spending plan helps you keep track of where your money comes from. This isn’t just about the money you earn working a traditional job. Your spending plan should also include money from other income sources, including investments, odd jobs, and gifts.
Examine your income trends to get a better idea of your average monthly income, as well as times of the year when you can expect more or less money. Your spending plan can help you tweak matters, and look for ways to more efficiently make more money.
2. Understand Where the Money is Going
Your spending plan helps you see where the money is going. How are you using your money? What are your regular expenses? Are there quarterly or semi-annual expenses coming up? Your spending plan helps you keep ahead so that you aren’t unpleasantly surprised each time the insurance premium is due, or you need to pay property taxes.
3. Make Long-Term Goals a Priority
It’s easy to lose sight of the important long-term goals you might have. Retirement is hard to picture when it’s 30 years in the distance. Even college for the kids is a long 10 to 15 years away. A spending plan helps you bring these long-term goals into focus. Your spending plan requires that you look at your current situation, and where you want to be. With a spending plan, you focus your efforts and work toward your long-term priorities.
4. Large Goals Become More Manageable
A good spending plan helps you break down your goals into something manageable. Large expenses, such as new flooring or a family vacation, can seem overwhelming when you look at the total cost. Instead, use a spending plan to break down your goals into something more manageable. Figure out how much money you need each month to accomplish your goal, and use your spending plan to assign funds to that goal every pay period. With your spending plan laying it all out for you, it becomes easier to see exactly how you can direct your finances to best effect.
5. Prepare for the Unexpected
Your spending plan can also help you prepare for the unexpected. Use your spending plan to designate money for an emergency fund each month. Build your emergency fund faithfully, and you won’t have to worry (about money, at least) the next time your car breaks down, or your child breaks his or her arm. You’ll be ready with your emergency fund money.
6. Increased Peace of Mind
The best reason for creating a spending plan is the peace of mind that comes with it. When you know where your money comes from, where it is going, and you now that you are prepared for emergencies and the future, you will enjoy better peace of mind. A spending plan keeps you from worrying as much. As a result, you are healthier in your life and in your relationships.
No matter how you manage your finances, make sure you include everything in your spending plan. Set it up in a way that puts you in charge. Think of yourself as a resource director, and it will be easier to give every dollar a job that will help you reach the financial destination you seek.
Whether you call it a spending plan, a budget, or something else, you need to have a way to keep track of your finances. It doesn’t seem like a lot of fun at first, but a spending plan can really help you take your money management up several notches. It's so vital that I put it near the beginning of my 30 steps to great finances.
With that said, here are six reasons you need a spending plan:
1. Know Where the Money Comes From
A spending plan helps you keep track of where your money comes from. This isn’t just about the money you earn working a traditional job. Your spending plan should also include money from other income sources, including investments, odd jobs, and gifts.
Examine your income trends to get a better idea of your average monthly income, as well as times of the year when you can expect more or less money. Your spending plan can help you tweak matters, and look for ways to more efficiently make more money.
2. Understand Where the Money is Going
Your spending plan helps you see where the money is going. How are you using your money? What are your regular expenses? Are there quarterly or semi-annual expenses coming up? Your spending plan helps you keep ahead so that you aren’t unpleasantly surprised each time the insurance premium is due, or you need to pay property taxes.
3. Make Long-Term Goals a Priority
It’s easy to lose sight of the important long-term goals you might have. Retirement is hard to picture when it’s 30 years in the distance. Even college for the kids is a long 10 to 15 years away. A spending plan helps you bring these long-term goals into focus. Your spending plan requires that you look at your current situation, and where you want to be. With a spending plan, you focus your efforts and work toward your long-term priorities.
4. Large Goals Become More Manageable
A good spending plan helps you break down your goals into something manageable. Large expenses, such as new flooring or a family vacation, can seem overwhelming when you look at the total cost. Instead, use a spending plan to break down your goals into something more manageable. Figure out how much money you need each month to accomplish your goal, and use your spending plan to assign funds to that goal every pay period. With your spending plan laying it all out for you, it becomes easier to see exactly how you can direct your finances to best effect.
5. Prepare for the Unexpected
Your spending plan can also help you prepare for the unexpected. Use your spending plan to designate money for an emergency fund each month. Build your emergency fund faithfully, and you won’t have to worry (about money, at least) the next time your car breaks down, or your child breaks his or her arm. You’ll be ready with your emergency fund money.
6. Increased Peace of Mind
The best reason for creating a spending plan is the peace of mind that comes with it. When you know where your money comes from, where it is going, and you now that you are prepared for emergencies and the future, you will enjoy better peace of mind. A spending plan keeps you from worrying as much. As a result, you are healthier in your life and in your relationships.
No matter how you manage your finances, make sure you include everything in your spending plan. Set it up in a way that puts you in charge. Think of yourself as a resource director, and it will be easier to give every dollar a job that will help you reach the financial destination you seek.
Reason #7 - If you are in the financial service industry, and trying to sell me your product, you lose all credibility the minute I find out you don't have a budget, yourself.
Posted by: Jon | October 20, 2012 at 08:00 AM
Thanks for the caveat at the top! Many personal finance bloggers hound people to have budgets (perhaps because they themselves need one) as if it is not possible to be financially responsible without one. I think a budget is a great tool for being able to learn about your own financial habits, weaknesses, and overall picture, and using one is a great way to learn to modify your thinking of money and its purposes. But once you've learned to stop thinking of available cash as needing to be spent and shift toward a saver's or investor's mentality, the budget can quickly become a form of financial shackles that is counter-productive to leading a well-managed life (i.e. Oops! I used too much electricity the first 3 weeks of the month, I'd better use candles from here on out to meet my electric bill budget!)
Posted by: Jonathan | October 20, 2012 at 09:43 AM
Everytime that I make a goal a priority that is when I have success whether it be a short, intermediate or long term goal. That is #1 in my book.
I know retirement looked so far away 30 years ago and now I am within 15 years to the finish line will more than my fellow coworkers.
College is a big expense which we are hyper focused on with savings right now and not neglecting the others.
Shorter term is vehicles for us to add to our need.
People don't like them me inculded but think about me when I am retired and you are not because I tried my hardest to have a plan.
Posted by: Matt | October 20, 2012 at 05:11 PM
I've never seen a better explanation of why one would want to budget. Very well thought out post!
Posted by: Concojones | October 20, 2012 at 06:38 PM
I don't have any kind of Spending Plan. At age 78 and having been frugal my whole life it isn't necessary.
I should have had a spending plan when I was 29 when we bought our first ever new home in 1963. I made a mistake going overboard by spending way too much on carpets, drapes, furniture, and landscaping, and airfares to bring my parents here from England for a vacation, leaving us with a fairly small emergency fund. If I had been forced to sell the home and move out of state to a new job, with our two small children, (and a third on the way), we could have been really hurting for money but as fate would have it my job was never threatened and I kept it from 1960 to 1992 when I retired.
We let our pride get ahead of our good judgment and learned a lesson. Many years later after I got to know my boss really well he confided in me that he always gave married men priority over single men if layoffs had to be made. He also did the same when it came to raises.
Posted by: Old Limey | October 20, 2012 at 07:59 PM
Very great informative post! Yes you need to be in total control of your money and know what comes in and what goes out. You need to learn how to effectively Create, Preserve and Enjoy your money.
Most people tend to skip or neglect the preserving part of money and this usually cause financial problems later on in their life. The majority of people cannot seem to retire comfortably, because of how they have been conditioned as to how to think and act towards money and finances.
The trick of course is to equip yourself with the right knowledge and skill-sets in order to optimize your finances and improve your chances for financial freedom.
One more thing...you need to take full responsibility for your finances. Be careful with the so-called financial 'experts' and trusting the financial institutions with your money. They will usually show you the "pages of the book" that you want to see that seems enticing, but they cannot guarantee the expected growth on your money.
Posted by: Tez Williams | October 21, 2012 at 06:27 PM
Tez
While I am one of those people that has taken full responsibility for my finances there are a few caveats.
1) It was very hard to do in the days before the Internet (prior to 1992), that's when I used a stockbroker.
2) You have to be very interested in the mechanics of investing if you want to be very successful.
3) You have to have abundant time to spend, that's why being retired is ideal.
4) You have to have some basic mathematical skills.
5) You need some very good software that allows you to rank, chart, and compare mutual funds.
6) You need a comprehensive database that is updated daily, accounts for all dividends and distributions, and that has all of the available mutual funds arranged into families.
Only then can you do a superb job of managing your investments.
Here's my data from 12/28/1992 through 10/19/2012.
Vanguard's S&P500 fund -- ANN= 8.15%
Old Limey's results ----------- ANN=16.94%
Posted by: Old Limey | October 21, 2012 at 09:28 PM
Tez
I left out one caveat that's probably the most important one of all.
I am always very suspicious of any one that is offering to give me some very valuable information FOR FREE!
Posted by: Old Limey | October 21, 2012 at 09:44 PM
Plan is basic and most important step of everything you cannot survive for a long time without a proper planning. Your all points are motivational about spending money with a plan but the problem is making a plan is easy, but the difficult part is adhering to it. As people make plan for a month or a year but they don't have patience while the plan needs time and commitment. One needs to be determined to follow a plan of anything.
Posted by: Julie Robert | November 05, 2012 at 01:01 AM