“A budget is telling your money where to go instead of wondering where it went.” — John C. Maxwell
I've had more one-on-one money coaching meetings during the past year than my previous twelve years writing about money combined. I used to claim that I'd never do money coaching. Apparently, I was wrong.
As I meet with folks, certain common themes stand out.
For one, most folks have no idea how much they're actually earning and spending. Their finances are like a black box. They get paid, put the money in the bank, then spend it until it's gone. Almost nobody actively tracks what they earn and spend. “Do I have money in my checking account? I can buy something!”
Because people don't track what they spend, it's tough for them to plan what they spend. Frequently, I suggest that the people I meet with make a budget. Because budgets have been demonized for so long, there's a lot of resistance to this idea. That's too bad. Budgets don't have to be a bother. When used correctly, they're an excellent way to take control of your money.
If you pick a budget that fits the way you live, it can help you meet your goals more quickly. The key? Don’t think of a budget as a constraint. Real Life is a constraint; a budget helps you break free so that you can spend on what’s important to you, on the things that bring you joy.
Why Budgets Fail
A lot of people get frustrated with budgeting because it never seems to work. They never reach their spending targets. Or emergencies break the budget. Or it seems like so much work for so little reward. I hear you. I've been there. But if you follow a few rules (or maybe “guidelines”, if you prefer), budgeting can be less stressful and more useful.
Based on my own experience — and based on comments of GRS readers like you — I believe there are a handful of reasons most budgets fail. You may encounter trouble with your budget if:
- It's too complicated. People have a tendency to make budgets more complex than they need to be. A simple budget is usually more useful.
- It doesn't reflect your values. A budget should help you achieve your goals, so make it personal. If you try to use somebody else's budget, you're going to have a tough time.
- It doesn't reflect reality. When you build a budget, base it on your actual income and behavior — not on some imaginary ideal you.
- It seems like a chore. Don't let your system bog you down. Your goal is to have a budget that works, so keep looking until you find one that works for you.
To summarize: To minimize the risk of failure, a budget should be simple and easy to use while reflecting both current realities and your future goals.
That's all rather esoteric, though. What does a simple, easy budget look like? There are a lot of approaches that work. While some people do manage to make detailed budgets work, I've found that “budget frameworks” are more effective for me and the people I coach.
Today, we're going to take a deep dive into the world of budgeting. Based on my thirteen years of reading and writing about money, here are my thoughts on how to budget effectively. [Read more…]