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pls excuse my typo. That should be “if you OWE money on your credit cards . . .”
Simply speaking, one should spend less than they make. It should be pretty easy to total how much is spent each month. (A computer or fancy software is not needed.) A good rule of thumb is to save 20% of monthly income for retirement, but each of us can set their own percentage as we all have different commitments. Lastly, if you own money on your credit card(s) you are in big trouble – seek help immediately.
I have a monthly budget and track expenses, but that’s it. I don’t have a specific budget for each item or expense category
A permanent, forever-set-in-stone, never-ever-to-be-changed budget should be created and implemented every year.
Tracking (expenses) – absolutely. Quicken is built for this exercise – downloading directly from my banks and then helping me assign spending categories via “autofill” feature based on my past spending for a particular merchant or vendor.
As for following the budget in a dogmatic fashion? I like what Captain Jack Sparrow said in the “Pirates of The Caribbean” – there are rules, and then there are guidelines. For us, a budget is a look-back guideline exercise to help our family exercise some restraint when projecting future purchasing decisions. Too often, the realities of life get in the way. So it’s like a GPS in the car, it helps us mentally recalculate the right path when we periodically verge off our ideal path.
It’s clearly very difficult for most people to follow a budget. Bringing as much automation into your financial life the better IMHO…
A budget is probably a good idea for most people. My wife likes to say that our budget for the forty years of our marriage was: DON’T SPEND ANY MONEY! That is no way to live. Only now that I’m retired do we budget and it turns out that we have plenty of money for everything that we want. I wished I had figured that out sooner and a budget would have helped.
A budget is just a spending plan. Everyone needs a plan, but not everyone needs a detailed written plan. If you’re starting something new (job, city, marriage, children, saving for house, etc.), writing your plan down and tracking expenses for a bit is useful in establishing purposeful spending that supports your goals. Once you’ve established spending habits, you may find it useful to continue or you may decide it’s not necessary.
As I was finishing college and starting my first job search, I wrote a tentative budget outlining estimated needs for saving, rent, college loans, etc. I went over my plan with my parents, who used their check statements for the last year to help me find holes, like the semi-annual car insurance payment I’d forgotten. That tentative budget convinced me not to sign a lease at the apartment complex with tons of amenities immediately, but to pay my parents rent to live at home for a little while. I tracked my budget closely for a few years, then stopped once I’d established my saving and spending habits, because I didn’t need the written details.
Each time I changed jobs and moved, I used a written budget for a while, as I adjusted to new circumstances. Other than adjustment periods I use the “save, pay bills in full, then spend what’s left”method of budgeting. I’m an advocate of figuring out what works for you, as long as your budget method includes regular saving and investing for retirement.
I maintain your spending budget is determined for you if two things are followed. First, save first from net of tax and deductions income and automatically (even in retirement which may mean saving for travel or other special spending) and second do not use credit cards that will not be 100% paid in full at the end of the month.
What you have left sets your standard of living, spend as you like, you cannot over spend. After a few months you will know exactly how you spend money. No budget needed, just a bit of discipline.
I think it’s more important to track spending. This may sound like a semantic twist, but you can’t really form a good budget unless you’re diligent about tracking spending – all spending. We download our monthly transactions from our credit card and checking account, and then I manually categorize everything. Yeah, there are various ways of automating this, but I haven’t found one that does it the way I want to think about it, so I do it by hand. Over time I have a good view of year over year consistency and differences, and have a keener understanding of how much is “enough” in each category. That’s my budget!
From personal experience, I feel most folks can benefit from some form of budget- whether it’s approximate/coarse or detailed/granular. This is true not only for money but also for other measurable resources such as time. I’m not sure if more granularity helps in all situations, but it makes tracking harder.
The first time I used methodical budgeting was during my high-school days in India. I was preparing for the state-level board exam and had about 3 months to go. I created a fancy schedule detailing which subject to study on what days and for how long. My parents found it a bit amusing but they encouraged my efforts and often checked on how it worked. I found it useful as well as fun.
I did a similar exercise at work after becoming a manager. The first few months were overwhelming- so much to do in so little time. I started to track where my time was going. I reverse-engineered the data to create a weekly budget for various activities, and to spot the things that I need to say No to. This was very helpful in getting a better handle on my workload.
For money matters, I use an overall budget for open-ended spending, e.g., family vacations, where things can quickly add up. E.g., I’d start with an overall amount in mind, and plan the vacation accordingly so that the known expenses (airfare, hotel, excursions, etc.) come to at most 80% of the total budget. This gives enough buffer for miscellaneous expenses during the trip.
All my expenses come from a single spending account. I used to monitor my expenses for the major spending categories, but I don’t do it anymore. I simply monitor how much am I funding this account each year and whether I can explain any big year-over-over change.
Overall, I think having a sense of budget and being able to track spending is important. It doesn’t have to be too rigorous and time-consuming. But without one, it may be hard to know what’s going on. I echo Nicholas’s comment that it creates a discipline.
Well said. Find your process in budgeting time as a manager very interesting but difficult to keep up. I’m sure if I did it, I’d be a much better manager.
I’m a big believer in a budget. I was going to give the budget up this year because I know that I am not going to overspend but I decided to keep to it. Frankly it’s a great way to know where your money is going and it helps to provide some spending discipline.
I’ve never regularly budgeted. For most of my career, I figured I didn’t have to worry how I spent my money as long as I saved plenty each month. These days, with my heavy-duty saving days behind me, I pay more attention to whether I’m dipping into my portfolio or not—and get concerned when I find myself making large withdrawals. While I don’t regularly budget, every so often, when I have a major purchase coming up—a big trip, new furniture—I do run the numbers to make sure I have the necessary cash available.