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Why You Are Thinking About a Budget the Wrong Way

The word “budget” gets a bad rap. It conjures up thoughts of restriction, poor money management, or even being broke. “I can no longer buy my morning latte because we’re on a budget.” Or, “Jim and Sally need to budget because Jim spends too much.” What about, “Mary is on a budget, so she probably can’t afford a vacation with us.” If these phrases sound all too familiar, you are thinking about a budget the WRONG way! Let’s look at each one of these scenarios, explain why they are not necessarily true, and why ALL of us, no matter our financial situation, should have a budget.

1. Budgets are Restrictive!

This is probably the most common feeling folks have about budgets. If you are on a budget, you are not able to enjoy the things you once loved to do. This is not true. Your priorities may change, but eliminating everything fun from your life defeats the purpose. Why? Because the chances you will stick to something that brings you grief and unhappiness are basically zero.

Instead, you should first determine your Needs (food, housing, transportation, utilities, debt payments etc.), pay those first (automating as much as possible!), then move to the next category. Using the 50/20/30 rule of thumb, you should not be spending more than 50% of your net income on Needs, 20% on Savings, and 30% on Wants. This is a good starting point, but keep in mind, not everyone fits perfectly into these percentages and you may have to shift some money to make it work for you. For example, instead of 50%, maybe your Needs add up to 60% of your net income. Does that mean you have to move? Well, maybe (ha ha!)… but, that is extreme. If you have adequate savings and no debt, perhaps more of your income can be allocated to housing or Needs and you only have to save 10% of your income to meet your goals. And guess what? The rest is up to you! Notice, I did not say “No more lattes.”

2. You Are a Poor Money Manager!

Perhaps managing cash flow is not your strong suit, but perhaps you have the willingness to get spending under control and make savings a priority rather than an after thought? If you have never managed your income and expenses well, a budget will not help unless you have the mindset to change. I am not a Psychology major, but as a financial planner, I have observed that most spenders or savers are that way because of how they grew up and what they learned (or didn't learn) from others. There are many circumstances I can outline here, but understand it is probably not your fault if you lean one way or the other. What matters most is what you do with that knowledge. Most likely you will require assistance and an accountability partner. No shame in that!

3. You Are Broke!

Do you believe that rich folks who built their wealth got there because they spent every dime they had? No, it was because they were able to manage their income and expenses well, even if they never used the term “budget,” they were essentially budgeting. If you have not done so already, read the book “The Millionaire Next Door” by Thomas J. Stanley. It should be a staple for anyone interested in building wealth. He gives real world examples of folks who may live next to you in a modest house with a modest income, but were able to build a million dollar portfolio (or more!) simply by living below their means. And they stuck to their budgets even AFTER they made their millions. Many of you may know that one of the world’s richest men, Warren Buffet, still lives in the same house in Nebraska that he bought in the 1950’s and has driven the same vehicle for years. While this may seem extreme knowing he could afford a mega mansion, an island, and a new Maserati, he is happy with his house and used automobile. What makes you happy? Really think about that.

Hopefully, I have debunked many of the common myths around having a budget, but you may still be wondering, "WIIFM (what's in it for me) or what is the benefit?" Well, there are quite a few actually:

1) You no longer feel guilty spending because you “budgeted for it."

2) You are no longer strapped for cash or are constantly digging yourself out of a hole.

3) You appreciate things more when you do them less frequently (treat yourself).

4) You feel more in control of your money and have a plan to meet your goals.

The first step is to have the mindset to start (and keep it going!). Know that as your income, expenses, and circumstances change, you will need to re-evaluate periodically. This is a living and breathing document. Speaking of document, the second step is to write it down. Also, do not forget to include the activities, interests, hobbies, etc. that make you happy. Do not eliminate “fun,” but perhaps you no longer buy a latte every day and it becomes twice/week? I use “latte” as a metaphor for a Want, but you can replace it with anything: manicure, Jimmy Choos, dining out, doesn't matter.

All of us can benefit from a budget, no matter our financial situation. If you need help, a financial coach or financial planner have many resources to assist. And best of all, we serve as an accountability partner and work with you to ensure you develop good, solid money habits that last a lifetime.

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