Tuesday, May 3, 2011

Why Budgeting?

After talking about credit cards to help facilitate spending, budgeting seems like the next logical step.  Budgeting is a critical control technique to try to take out emotions from our purchasing habits so that we don't overspend and put ourselves in debt.  However, people often don't take the initiative to budget because of the limitations it puts on them and it is a little tedious to do.  There are lots of applications to help you budget, and I by no means have tried them all.  I will try to focus on some of the major reasons why you should budget and talk about how to do so easily with basic programs in a later post.

First, why should you budget?  I believe that it is extremely important to know where your money is going.  A lot of people think that the number one reason is to limit their expenditures, but I would argue that the primary reason you should budget is to be aware of what you are spending your money on.  Is most of your money going into rent and groceries or high-end restaurants and shopping malls?  Setting limits is fine, but there isn't any extrinsic force that will punish you for going over your budget limit.  You are in control of your finances; as long as you are aware of what you are spending your money on then budgeting will have been successful regardless if you stayed under your limit or not.  This means though that every time you make a purchase, you will have to record it somewhere.  This can be pretty tedious for some people but I will talk about certain tools you can use in a later post.

The next and more obvious reason to budget is to control your spending.  A lot of people suffer from impulsive shopping and often spend more than they can afford.  This is often overdone in combination with credit cards (a few articles I have written which you can see here) since with a credit card, you don't actually need to have the cash on you to spend it.  And business often try to do everything they can do facilitate consumer spending.  Do you know why milk and eggs are always in the back corner of every grocery store you visit?  It is so that you have to go through the other aisles first, to entice you to see something else you need to buy.  Online shopping has exploded with the internet and now all you need to do is enter a credit card number and click a few buttons to spend as much as you want.  Now, while you are still in control of your spending urges, you can logically plan out how much money you can afford to spend in the next week, month, or year and how much you want to save for future spending.  These limits that you set don't have to be concrete, but they should be a very good guide about how much you are logically willing to spend over a given timeline.

Let's say you budget $200 for food this week.  However, your best friend gets a job offer in the middle of that week and you all decide to go out to a very fancy restaurant to celebrate. You end up going over budget.  Have you failed at budgeting?  No, you had a general idea of how much you were going to spend and you know what circumstances led to you going over budget.  Obviously, this example is a little different from setting a budget of $200 for clothes and then getting so excited over a sale at the mall that you spend $400, but in either case you can look back and see how your actions measured up to your expectations.  In the shopping case, maybe it would be good to total up your purchases before going into the check-out line.  Or maybe you should increase the size of your shopping budget if you are okay with spending that amount.  However, given a limited pay check, whatever you move into shopping will have to come out of something else and if it turns out that you would have to cut food or rent, you may end up rethinking your spending habits.

Again, you are in control of your finances.  Hopefully, this post has been able to show you how useful a tool budgeting can be in order to meet your goals and expectations.  My next post will be about how to specifically budget by using excel, apps, or other programs.  Combined with later posts about savings and investing, hopefully you will be able to create a comprehensive idea about how you can maximize the value of your money in the present and for the future.

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