(This article is a part of the series aimed at dispelling some of the popular financial myths. Please refer to the full index for myths related to other financial topics. Oh, and a quick disclaimer: I am not a financial advisor. I have made every effort to research the facts before presenting them here. But, if you have a reason to believe any of the statements are incorrect, please feel free to correct me.)
- Myth: “Budgeting is tedious.”
- Myth: "I need a budget only if I am in debt" (Variation: "I need a budget only if I am poor").
- Myth: “My situation is too far gone. A budget is not going to help me.”
- Myth: “I need fancy/expensive software to track my budget.”
- Myth: “I don’t have time to track my budget.”
- Myth: “I have to give up all my fun activities once I start a budget.”
- Myth: “Having a budget will make me rich.”
That really depends on the granularity and the mechanism you use to track the expenses. Sure, if you want to track your budget down to a penny, use only cash for all your financial transactions and maintain records through fancy software that require you to fill up three screens of information for each expense, yes, it will be quite tedious. On the other hand, if you choose a granularity of tracking to a dollar it will be a lot less tedious, but at the end of the month you may have a few dollars in expenses that are un accounted for (If you round up, instead of rounding down, you will have a few dollars extra left over, which is always a good thing). Also, if you primarily use debit cards (or credit cards and pay off your bill in full each month), you will receive statements that will do the expense tracking for you. Many of the credit/debit cards easily interface with software like MS money or Quicken, so that makes life even more easier. So, choose what works for you and stick with it.
This is a nasty misconception among many people. Why have a budget if I am not "in trouble"? Well, for the simple reason that we humans have a tendency to increase our spending as our earning increase. Unless there is a system in place that sets some limits and tracks our expenses, we will slowly slip until the savings rate no longer correlates to our earnings rate. What's worse, in some cases, there may be a negative correlation, where increase in earnings actually causes a decrease in savings rate! This is what is termed as lifestyle inflation. In order to protect ourselves from this, it is better if you have a budget in place.
This is the other end of the spectrum from the myth above. People who have too much debt or who have made too many financial mistakes think it is too late for them. When you are in a nasty situation, it is easy to conclude that your situation is too far gone for any help. In such a case, I highly recommend these two posts that have really inspired me and that are proof that a budget can really help you out of any situation. The first one is by Flexo on Consumerism Commentary titled How to Be the CFO of Your Own Life. In this post Flexo talks about how he was inspired to make a financial turnaround by starting out a budget. The second one is by Trent on Simple Dollar titled The Road to Financial Armageddon #9: The Road to Recovery. This article is a part of the series of posts in which Trent shares his personal story of how he spiraled into financial Armageddon and in this particular post Trent discusses how budgeting help him rise out of it.
OK, hold on a minute. What do you think has been around for longer -- computers or budgeting? For all I know, budgeting must be as old as the concept of money itself! That means, you don’t need a computer with fancy software to track your budget. A small notebook and a pencil will work just fine. If you do have a computer however, I would recommend using it :) You do not have to go out and pick up any expensive software though. Excel (or any other spread sheet software) should suffice. In addition, these days there are several free online software that can be of help (E.g., mvelopes, buxfer, billmonk).
In most cases, this just turns out to be an excuse to get out of budgeting. There are several different ways in which you can track you budget. A very common technique used for budgeting is the envelope system. Dave Ramsey has an excellent article on this. Another popular method for tracking a budget with minimal involvement is the automatic budgeting. This is the technique we use. We set up automatic deductions from our bank account to various savings accounts, bills and mortgage. This is a one-time process, and after that, each month the money is taken out automatically. We leave just enough in our account to pay the credit card bill. We pay for everything using credit cards, and make sure we never exceed what we can pay off in full each month. If you are not a big fan of credit cards, you can do this using a debit card also. And every month, we receive a statement which eliminates the need for us to record anything.
No, you don’t. You just have to account for it, that’s all. If you like going to the movies a lot, make sure you have enough money marked for the entertainment category. If you like traveling a lot, start a travel fund and put away some money towards your travel fund every month. The aim of the budget is to help you stay below your means. You don’t have to go on a crash financial diet unless you want to. Make a list of all the things that are important to you and prioritize them. If you want to keep a big chunk aside for “fun” activities, then learn to cut down on others that are not as important to you. There is nothing wrong in spending on “fun” activities, as long as they are planned and accounted for.
One of the main requirements to ensure success in your efforts to have a working budgeting system, is to set your expectations right. A budget is a technique to make sure that your spending stays within your means and you have a little left over to save for the future. There is nothing mystic about a budget and it is not going to make more money magically appear in your account than what you had to begin with. It will however help you keep some of that money there if you execute it right. So start out with the right expectations.
Those are most popular myths and misconceptions I have come across regarding budgeting. If you know of others that should be on this list, please do leave a comment. Over the next few weeks, I will cover more about the common myths in other finance-related matters - so stay tuned. Once the series is complete, you should be able to access the full list of myths via this index.