Clients often ask, “Do I need to budget?”
When I reply, “Maybe, maybe not,” they look at me like I’m a weight loss guru who just offered them a cheese Danish.
“Wait—you’re a financial planner! Aren’t you supposed to tell me to budget?”
My experience is that only about 10% of my clients budget. And most of that group came out of the womb clutching a spreadsheet. It’s genetic. They love budgeting. It excites them. They simply can’t imagine anyone living a complete life apart from keeping a budget.
The other 90% have no interest. And some of them have no need.
Here’s why: A budget is just a planning tool used to achieve a certain result. And it’s that result that matters, not the route taken to get there.
A budget’s primary function is to help us avoid two dangers: Under saving and overspending
1. Under saving. We under save when we fail to set aside enough money now for our retirement income needs later. Ideally you want to have the same income (adjusted for inflation) when you stop working as you do now in pre-retirement. Your lifestyle should not have to go down.
Once upon a time saving was effortless for American workers. About 80% of an employee’s compensation was paid out as salary, and the rest was deposited into a pension fund. Under that model a worker could retire and continue receiving a paycheck (roughly the same size) for life. Sweet deal!
But in 1978, corporate America saw a way to reduce costs. The 401(k) plan was introduced, and this turned retirement planning on its head. Suddenly, the huge business expense of funding a lifetime pension for a massive workforce got shifted to individual workers.
Today the math is about the same—workers need to save between 15% and 20% of their incomes in order to make a smooth transition into retirement without a big downshift.
2. Overspending. Let’s make this simple. If you are saving 15% to 20% of your income and not running up credit card (or other consumer) debt to fund your life, you are not overspending. Period.
Unfortunately, that’s not true for most people. We live life to the hilt, spending every last penny of our paychecks and charging even more to our credit cards. Then a medical bill, an auto repair or a leaking roof happens and we shake our fist at the sky moaning, “Why me, God?”
If you are overspending, I don’t care if you’re earning air miles or stockpiling reward points. In the same way that people with a drinking problem shouldn’t be going to bars, those with a spending problem shouldn’t be walking around with a pocket full of plastic. Cancel those cards. Then go back and read my column from last week on how to start saving money.
So back to the original question: Should you create a budget? If you’re already saving adequately and spending wisely, no.
But if you’re under saving and overspending, creating a budget is a smart first step. A budget can be a helpful tool. But it’s not magic. If it doesn’t help you develop good spending and savings habits it’s actually a waste of time.
A budget that doesn’t lead to these important habits isn’t worth the paper it’s printed on.
I discuss spending, saving and other wealth building strategies in my new e-book “How to Put Money Worries in Your Rear-View Mirror – The Financial Freedom Roadmap.” It’s free—and a quick read. Email me at firstname.lastname@example.org and I’ll get it to you right away.
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