Do I Need a Budget?

Dear Friend in Finance,

I have a confession: I'm in my mid-30s and I've never had a budget. Recently, my parents have been telling me that I really need one. But I've survived a long time without one. So, do I really  need a budget?

Sincerely,

Spending on Vibes

Dear Spending on Vibes,

You are not alone in never having used a budget.  One survey found that up to 25% of Americans never use a budget. And that doesn't account for those who only sometimes use a budget.

So let's dive into this: What is a budget?

A budget is a way to plan where you'll spend the money you have coming in. This can, and does, look different from person to person, with some people budgeting down to very specific categories, while others have much broader categories.

Example:

Ned brings in $4,000 per month. He budgets $2,000 for rent, $400 for food, $500 for car expenses, $200 for entertainment, $600 for utilities like electric, phone, internet, and the remaining $300 for savings.

Sheila brings in $4,000 per month. She budgets $3500 for living expenses, $200 for fun things, and $300 for savings.

Both of these people are aiming to have their money go towards the same things, but they've categorized them differently. Sheila also takes a broader look at "Living Expenses" instead of breaking it down. There isn't a right or wrong way to approach it. The most important thing is that your budget accomplishes 3 things:

1) It accurately tracks where your money is coming and going from

2) It helps you keep yourself accountable

3) It helps you work towards your goals

Back in the day, it was necessary for people to have a full budget, detailing where each dollar was going. They weren't important just to accomplish those goals, but because without written out ledgers, people had a much harder time knowing how much money they had in the bank.

These days, we can log into an online account and get an accurate account of how much money we have.

But this isn't necessarily a good thing. Without the same urgency for a budget, many people don't know where their money goes. This creates opportunities for credit cards and online retailers to siphon away much more money than people normally realize.

So the answer is: Yes, we do need some sort of budget. If we're not mindful of our expenses, sales companies will be mindful on our behalf.

Fortunately, setting a budget can be pretty simple to start with. I recommend having three categories:

Savings: Always budget this one first. Set yourself a dollar amount and stick to it. Some good practices I've seen are to set up automatic transfers on payday so you don't even realize you're saving money.

Necessities: What do you absolutely need to live? Rent, mortgage, utilities, groceries, and transport. Everything else is fun (Yes, even that streaming service with your favorite show)

Fun: This is also an important category, but it comes last. Many people set money aside for this first and that ends up sacrificing savings. Put this one last.

Over time, you might want to have a more granular breakdown of where your money is going. It might lead to some great discoveries about your habits ("I had no idea I was spending so much on mobile games!"). But start out broadly, and work your way there.

With these tips, I hope you're able to start creating a budget that fits your life and also helps you reach your financial goals.

Sincerely,

Your Friend in Finance