Why budgets work (and don’t)
Some financial experts will argue budgets don’t work because you can’t possibly predict the future. You can’t possibly set aside an accurate amount of money for various expenses that may or may not happen. You can’t possibly know how much you might earn or spend in any given week, month or year.
Then again, you don’t know what the weather will accurately be tomorrow. That doesn’t mean you don’t listen or look for a weather update on your phone so you don’t get stuck in the rain. You probably need to arrive at work on time now and then. (I do.) So, to do so, you’ll likely listen to the odd traffic report to avoid hang ups. If not, at least you’ll consider leaving the house early for any important meeting.
If you’re like me, you generally want good things to happen to you (and your family) and you typically want to avoid negative things from happening to you as much as possible as well. To help with this, this means you plan to some degree.
Planning is a life skill. Yet the older I get, I recognize this is a skill many people either don’t have or care to practice or worse still, they expect other people to plan for them.
I’ve often wondered why that is – why some people don’t plan? Surely they got a least one hunting or gathering gene from the start but maybe this skill was nurtured out of them by strong, environmental don’t-give-a-$hit-forces? Anything is possible and plausible these days…
While some financial experts might also argue many financial mistakes are a result of following conventional wisdom – following the herd too often – I’m one that happens to believe embracing at least some time-tested financial practices are both a) good and b) certainly better than nothing at all.
This means I believe:
- Saving some money (heck even $5 for something) is better than no savings at all. Doesn’t matter how much.
- Putting some money into short-term savings is a good thing.
- Putting some money into investments, for long-term savings, is generally an excellent habit to start and maintain when you’re young. I could argue it doesn’t matter really what the investments are.
- Spending less than you make is always smart.
- Paying off debt and avoiding leveraged investing is, for most people, usually very smart.
- Owning insurance for events you cannot predict, for items you cannot afford to pay for in a financial catastrophe is extremely smart.
Embracing these financial practices, our budget can be largely categorized into the following five equally important simple buckets:
- Money I need now, every day, to live (e.g., I need to buy food, I need hydro, I need internet).
- Money I need to insure what I cannot afford to lose (e.g., my house).
- Money I need in the short-term, for future expenses that will occur (e.g., I need to pay my property taxes in June).
- Money I need should something go wrong – that-sucks-but-thankfully-I-have-some-money-money (e.g., our fridge died (yes, this just happened)).
- Money I need eventually (e.g., in semi-retirement or retirement).
These are simple, rational facts about where our money needs to go. Yet money is a very emotional thing. People get excited, frustrated, and overwhelmed by it from time to time. I’m guilty of these emotions as well. Our lizard brains are often clouded with powerful emotions – we’re not human without them. Our judgments in life (and with money) are often compromised by the forces around us. I make bad decisions too.
However with some awareness of our fragile mind, top of mind, I think if you can start looking at budgets through the lens of facts and choices you need to make based on those facts (as part of a rational decision making model) then you’ll have an opportunity to strengthen some long-lost cognitive muscles. That means you’ll be able to manage a budget. In doing so, you’ll be far more prepared for expenses that do, will and could happen and you’ll be wealthier with your money long-term.
You don’t need to be perfect. You just need to plan more often than not.
What’s your take on budgets? Do they work? Or are they a complete waste of time promoted by the financial industry? Tell me your take below.