Many money ‘gurus’ say you need to budget.
But is it really worth it? I get this question in many of the financial planning webinars I host. The answer is yes… if you budget correctly.
In this article, I’m going to lay out the advantages and disadvantages of budgeting.
Remember, the goal is to make money complement your life not dictate it.
Advantages Of Budgeting
Budgeting has two primary advantages.
Advantage #1: Learn Where Your Hard Earned Dollars Are Going
Often times I hear young professionals say they don’t have enough money each month. For example, they can’t to do things like pay extra on their student loans or save for retirement.
Case in point, I spoke to a person earlier this week and they were dumbfounded. They started building their financial plan using FitBUX’s technology and literally could not account for $1,150 a month in spending. They know they spend it but they couldn’t figure out where!
Organizing is the purpose of budgeting and the primary advantage of it. It allows you to get an idea of where your hard earned dollars are going each month, quarter, and year.
Advantage #2: Understand How You’re Allocating
When you budget correctly, you can see what percentage of your total income is going where. Therefore, you can easily see where your focus is and where you should focus in the future. Obviously, this is an advantage relative to having a chaos of numbers in your head.
The disadvantages of budgeting primarily stem from misconceptions regarding what a budget does. I will address those below but I’ll first address the biggest disadvantage of budgeting.
Disadvantage #1: It Used To Be Time-Consuming
In the past, budgeting took a lot of time and effort which is an obvious disadvantage. People used to do it by hand on paper. Then individuals started using Excel and some still do.
This takes a lot of time. Worse yet, it doesn’t help reduce money-related stress. In short, money is still dictating the individual’s life.
Nowadays, there is technology that reduces the time and effort to organize your budget. For example, FitBUX’s technology allows you to build and track your expenses in a matter of minutes.
Therefore, if you are stressed about budgeting or spending a lot of time on it, technology can address this.
Disadvantage #2: Budgeting Is Misunderstood
There are a lot of misconceptions about budgeting which, it turn, make budgeting sub-optimal. I explain each below:
- Some believe that budgeting gives you control of where you spend your dollars. No budgeting doesn’t do that. If you didn’t have control prior to budgeting, you aren’t going to have it after. All budgeting does is show you were you are overspending. That is why close to 80% of people with a budget don’t follow it. This is a behavior issue. I highly suggest trying my 40 day and 40 night technique to develop good behaviors. If you want to learn more about this technique, download the podcast below.
- It makes it easier to understand your financial situation. No, budgeting that most people do via excel or apps do not do that. Instead, of having the chaos in your head, you now have it in Excel or an app. In order to have an understanding you must budget within a framework. That framework helps give meaning to your money and allows you to understand your financial situation holistically.
- A budget prevents you from living above your means. Nope! If you live above your means already, probability says you are going to do the same after you start budgeting. Again, this is a behavioral issue not a budgeting issue.
- Budgeting helps prevent stress. Still a No. As I mentioned previously, taking the chaos from your head and putting in Excel or an app doesn’t reduce stress. You have to have the right framework. From there you can build a good financial plan. The financial plan is what will reduce your stress.
- Budgeting helps you work towards achieving your goals. Nope again. A good financial plan does that. A plan involves a budget to get started but once your are implementing it, there is a good chance your budget does not matter anymore!
Budgeting has its role in financial planning. Doing it right as well as having the right expectations on what a budget will give you a major advantage. However, if used incorrectly, the disadvantages will make it extremely hard to achieve financial independence.
By Joseph Reinke, CFA