Why There Is No “Right” Way to Budget
Think you might be doing things “wrong” with your budgeting? Here’s why you’re probably getting more right than you think.
If you were to Google “budgeting advice”, you’d be forgiven if you found the results confusing, even contradictory in some cases.
There is such an abundance of advice available, it can be easy to feel like no matter what you do, you’ll be doing something wrong according to someone. How can you “pay yourself first” if you’re trying to pay down debt as quickly as possible?
We think that the messaging around budgeting and how to create them often needs to be simplified. You see, if you’re actually paying attention and engaged with where your finances are, you’re doing better than the vast majority of others.
It’s our position that there’s really no one “right” way to budget, here’s why:
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Simply having a budget is good
The statistics paint a bleak picture when it comes to Americans and budgeting. According to Gallup, only around one in three Americans create a detailed budget, and statistically, these people likely already earn $75,000 or more.
Gallup also acknowledges:
“Americans who prepare a detailed household budget are in the minority in the U.S. It is certainly possible that the strain of the recession or that modern banking technology — the ability to check one’s bank account balance or get money at any time — has caused fewer Americans to feel the need to budget. Still, good management of a family’s finances — and the avoidance of financial difficulties — usually involves creating a family budget.”
Does easy access to online banking make us a bit complacent when it comes to managing finances? Perhaps. However, we also know that despite this accessibility to financial information, 63% of Americans don’t have enough savings to cover a $500 emergency.
Of course, a number of factors come into that particular statistic, including the fact that a large number of the population doesn’t earn very much, but there are plenty of others who do earn reasonable amounts yet would fall into that 63%.
Whether it’s complacency, lack of interest, inattention or procrastination in dealing with finances, we do know that there are plenty of people who could benefit from the transparency of a budget, yet don’t have one. Arguably, everyone can benefit by having a budget in place!
Our argument here really is that by having a budget you’re already doing better than the majority of people, so getting caught up in the details of what is “right” or not isn’t necessarily productive. Do you have a handle on your income and spending? If so, this is an excellent start.
Note: If you don’t already have a budget and find yourself in that two-thirds group, please don’t be deterred from continuing! It’s never too late to get started with creating your own household budget. As we talked about in our recent article on the financial habits of successful relationships, if you’re in a relationship, you can begin with baby-steps and having simple conversations with your significant other. If you’re single, take a look at setting up some good habits for yourself, perhaps even with the encouragement of a mentor. You don’t need to be hardcore!
Engagement is the key
We recently wrote about the number #1 rule for achieving financial success based on our observations over the years. Did you catch what it was? That’s right, engagement is the key.
Many people who don’t have a budget have disengaged for various reasons. Perhaps it’s too stressful to open their credit card statement, so they avoid it. Perhaps they’re worried that they just don’t have the means to meet their financial needs or goals, so they take the “ostrich” approach and bury their heads in the sand.
We tend to be wired to try to avoid pain at all costs, so this helps explain why people have difficulty in facing up to the state of their finances. It’s totally normal, but it’s something that needs to be acknowledged if you want to move forward and create a clear financial path.
In our article “The Number One Rule for Achieving Financial Success”, we talked about how people with completely different preferences for budgeting still make it work.. On the one hand, there’s the “sky high” view. A couple has a good conversation about their finances each month without worrying about the nitty-gritty.
On the other hand, there are those who prefer to get down to details, carefully review each expense, and discover whether there are opportunities to save.
These are completely different views, yet each works for the people who hold them. There is no “right” way to budget!
Stepping back, what is a budget? An effective budget means living within our means. We are spending at a sustainable rate given our income, our reserves, and our goals. That looks different for a student versus a retiree versus a young family.
Some people live their budget without actually “budgeting” per se. They don’t even call it budgeting, but it is budgeting. At one extreme, they have an intuitive sense. They might track their net worth month by month to make sure that indeed they’re on track, they might watch their bank balance to make sure there’s enough.
Other’s want to actually “budget” every dollar in and out. This helps them keep track.
There are many of approaches along the spectrum. If you’re spending within your means, congrats, you’re already on a budget and you’re doing well. If you don’t know whether you’re spending within your means, we can help. Here’s what we’d recommend:
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There’s a point we like to make when looking at any form of budgeting, and that’s “money matters because life matters more.” If you’re paying attention to your financial situation, even by just starting those basic conversations with a partner, you’re already creating a winning pattern.
“Money matters because life matters more.”
Building awareness of your financial situation helps you be more present everywhere else. If you’re in a situation where you’re not certain about your finances, it naturally creates extra stress, which takes away from your ability to be present and enjoy life.
Money woes tend to become a focus that permeates your daily life and affects how you interact with others and how you feel about yourself.
Rather than getting over-complicated with rules and “must-dos” for a budget, why not start by simply building that awareness and having one in the first place? If you at least start somewhere, you can build a plan with a clearer head, which will begin to alleviate anxiety about money management.
Tools to build awareness
Just as there are many possible preferences when it comes to money management, there are a range of possible tools out there to help you manage your finances and build that overall awareness.
We personally prefer spreadsheets for financial management, as do some of the most financially engaged folks out there. Of people we surveyed 92% of people who switched from using a personal finance app to a spreadsheet for managing finances believed that the change made them more financially aware.
If spreadsheets aren’t your preference (and you’ve tried them already for financial management), we’d encourage you to find a solution that works for you. If it’s something easy to use, you’re probably much more likely to stick with it and create the habit of building financial awareness.
For emphasis here, there’s no “right” way to budget, just make sure you have one!
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If you know you’re not in a sustainable place, what’s the right method to course correct? We don’t think there’s ONE magic method. There are lots of ways. It’s not about the method, it’s about the result. Stay engaged. Figure out what’s going to work for you. Talk to trusted friends. Try our new budget spreadsheet and adapt it (yes, the power of spreadsheets is that you can adapt it). Or build your own budget in a spreadsheet or with pen and paper.
In a sense, budgets are like diets. We all eat a diet, even if we’re not “on a diet” and counting calories. Eating a diet means we consume food. But if we’re not eating at a sustainable rate given our bodies and our goals, we should figure out a plan. Don’t be dogmatic about one approach. Instead, figure out an approach that works for us individually.
We all live to a budget. Nobody has unlimited spending capacity. If you need help, figure out an approach that works for your situation, your mindset, your habits, your goals. Gain inspiration from others, but know you’re going to come up with something that works for you.
There is no universal budget. But the laws of physics and simple math say we all have a budget. What’s yours?