I should lead by example. But I don't. Certainly, I know our family income and keep a running estimate of our fixed expenses and discretionary spending. Once a year I print out a report of all the bills I paid (thank you online bill pay!) and look for places that need cutting. But I'm far from precise and do not have any preset caps for, say, concerts or vacations.
Why not? Well, it's a lot of work. Besides, we make ends meet every month and manage to grow savings as well. In other words: it's not an emergency. But it turns out that I'm a perfect candidate for a budget -- precisely because it's not an emergency. Let me explain.
The most common triggers for starting a budget are:
Â· Birth of a child
Â· Move to a new home
Â· Major medical expense
Â· Loss of income
These major life changes are all emergencies of a sort and typically call for a personal spending response. Yet being pro-active is almost always smarter than being reactive. A real budget, unlike my method, does more than ensure you'll have enough cash to pay your way each month. Even if you don't absolutely need one, a formal budget:
- Helps you reach your goals quicker A budget forces you to think about money, and when you do that you will naturally find more ways to save -- beyond the annual review that I undertake. With greater savings maybe major life events wouldn't be an emergency.
- Makes talking about money easier Discussing household finances with a spouse, or kids when appropriate, is never easy. A formal budget gives you something concrete to build a conversation around. Do you really want that trip to Africa? Let's see how we can make that happen?
- Reduces stress My system occasionally leaves me agitated, especially when unexpected expenses occur. With a formal budget I'd understand the damage right away and know how long it would take to recover, and I'd sleep better.
- Lets you fine-tune plans When you know exactly what is coming in and going out there is no need for guesswork. You may be able to skip a costly car repair if you know for certain that you will replace the clunker in three months.
- Organizes your life Details matter in your financial life. With a real budget you'll be more likely to keep records in one easy-to-find drawer.
Photo courtesy Flickr user e7sassoos
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