I know, I know. Budgets just sound like Remedial Personal Finance, don’t they? Everyone knows you’re supposed to budget, so what’s the point of another 800 words or so on the topic, right?
There’s even a vague feeling that once you reach a certain point – either of knowledge, or income, or net worth – budgeting is kind of beneath you. It’s so remedial that the cool kids don’t do it, and I’m here to look over my librarian glasses and tell you that the cool kids are wrong.
But first, in true librarian fashion, let’s define the terms. When I talk about budgeting, or planned spending, or cash flow, I’m really talking about three separate but related things: tracking your transactions, clarifying your limits, and projecting your trends.
Not to get too timey-wimey on you, but that’s the past, the present, and the future, all rolled up in one neat little concept. Nice.
Budgeting is – in this expanded and much more useful definition – not at all about putting limits on yourself, especially not limits that some random stranger on the internet, however wide their readership or juicy their television deal, wagged their finger at you about.
It’s the tool you use to figure out your own limits according to your own values, and – like the proverbial Swiss Army Knife – some people need and use one part of the tool more than the others. (I prefer the corkscrew, but I assume you knew that already.)
Each one of these aspects of budgeting feeds into the next one: tracking your income and expenses helps you clarify your limits, projecting the results of your tracking helps you see where you’re going and what levers you can pull to make the most difference if you don’t like the direction, and knowing where you’re headed gives you the motivation to keep within those agreed-upon limits.
Related: Do budgets allow for overspending?
Now, you can live your whole life without ever looking back on how you’ve spent your money, or worrying about how much you have left to spend at any one time, or wondering what all this spending will look like in the future. Plenty of people do, with varying degrees of success.
Those most successful are those who, by dint of much hard work or incredible good luck, have a very wide margin of error and enjoy the relatively rare situation of more income than their natural spending habits can use. Those with very slim margins are incredibly vulnerable and – no surprise here – least likely to thrive without structured spending.
In fact, I’d venture to say that everyone reading this can be split into one of three broad categories: those of you with a very small difference between what comes in every month and what goes right back out, those of you with a very large difference between your income and your expenses, and those of you in the middle. (Hey, I didn’t say it was going to be rocket science.)
Related: A course in personal financial management
For those with very slim margins, it should be readily apparent that the immediate need is to know how much you have available to spend at any one time. Without a good overview of where your money goes over time and what that means for your future, though, you’ll have a tough time making that margin grow, especially if your circumstances also make it difficult to increase your income.
As margins get bigger, the “how much do I have left” part of budgeting starts to fade in importance compared to using your past and current spending in order to forecast (and shape) your future spending. If you have more than enough money to meet your needs every month, what’s it doing for you other than giving you an excuse to Not Budget?
Here’s the over-arching truth, though, and the number one reason why the cool kids who don’t budget are wrong: margins change. Circumstances change. Jobs, dividend cheques, interest rates, your health, the health of your marriage…there are any number of events or combinations thereof that can turn your financial life around pretty quickly, for good or ill.
Budgeting is a skill that you have to practice, a data set that you have to maintain, and a system that you have to adjust so that it fits you and your circumstances as closely as possible. None of these things happen overnight, and the very worst time to start is in the middle of a crisis. Get cracking.
Sandi Martin is an ex-banker who left the dark side to start Spring Personal Finance, a one woman fee only financial planning practice based in Gravenhurst, Ontario. She and her husband have three kids under six, none of whom are learning the words to “Fidelity Fiduciary Bank” quickly enough. She takes her clients seriously, but not much else.