Written by money management contributor Charlie Park of Pear Budget.
Me: “Hey, SimpleMom readers! We’re going to be talking about money.”
You: “Yay, money!”
Me: “We’re going to start off talking about … get excited … budgets!”
I know, I know. Too often, budgets are the boring uncle at the cocktail party of your financial life. But it doesn’t have to be that way. Stick with me on this one. It’ll be worth it.
Most budgeting articles give you a few rules about how to budget, tools to use, and other specifics about managing a budget. There’s something else they heap on, as well: a crushing sense of guilt. They rely on a vague sense of dread you have, that you “should” be budgeting. They build up budgeting as this thing you should slog through — with a mindset of fear and from a standpoint of scarcity.
I want to propose a new approach to budgeting — one of hope and promise, something I call “the warm and fuzzy side of budgeting.” But we’re not going to actually tackle the specifics of setting up a budget (although Tsh is covering that soon).
This post is all about the background of why a budget matters, and why you’d want to spend half an hour of your week looking at a bunch of numbers.
I’m going to lay it all out for you. Right now. And, since you’re reading this on Simple Mom, I’m going to do my best to make this really … simple.
So … what is a budget, anyway?
Good question! We’ll talk about budgets in a second. First, though, let’s talk about you.
You have things that matter to you. Hopes, and goals, and dreams. This is going to sound cheesy, but I think it’s true: Your budget is simply your hopes, and goals, and dreams … on paper. It’s nothing more than you saying “this thing in my life is more important than this other thing,” and then putting money towards the important things.
As Tsh says, you need to find your why. Once you know who you are, you can make a budget. Once you have a budget, you’ll begin to see patterns in your life and the daily decisions you’re making. And once you begin noticing those patterns, you’ll begin to change the way you live, in ways that help you realize the goals you have for yourself and your family.
“That’s nice,” you say, “but I’m still not totally sure what a budget is. Fair enough.
The Three Essential Parts of a Budget
A budget is made up of three things that work together:
- a plan of what you want (or may need) to spend (the future)
- a record of what you’ve already spent (the past)
- a statement of what’s available to spend right now (the present)
That’s it. Pretty simple. There’s more that budgets can do, with spending categories and whatnot, but those three things are the essential bits. Unless your budget has all three parts, it’s not going to do you any real good. You need to have a picture of the future, past, and present in order to make good decisions. And a budget is pointless unless it changes your behavior — the way you’re actually spending money.
Speaking of that… let’s take a non-judgmental look at the way you spend money.
The Three Circles of Spending
Photo by Suzie Tremmel
There’s something I like to call “The Three Circles of Spending” — there’s how you want to spend money, there’s how you think you spend money, and then, sadly, there’s how you actually spend money. And the truth is, they probably don’t line up very well.
Quick (totally hypothetical) example: You want to spend around $100 dining out this month. Before the month begins, you think you’ll actually spend around $120. But at the end of the month, you look back at all of your dining out receipts, and you’ve actually spent close to $200. Yikes!
A budget’s job is to help those three circles overlap more and more over time.
People often shy away from budgeting because “a budget’s just going to tell me that I can’t get my latte at Starbucks every day.” But if that latte matters to you, then you should buy it. Every day. With my blessing. Just recognize that you’ll have to make some compromises to make that work. A budget doesn’t tell you to buy less of the stuff you want. It tells you to buy more of the stuff that matters.
A few final principles to keep in mind
Regardless of how you budget (cash in envelopes, pen and paper, Excel, other computer software), there are some principles you’ll want to follow:
1. Own your priorities.
There are things in your life that matter. To you. These are the things that you should be putting your money towards. And if you find that you don’t have money at the end of the month to put towards them, think back to the Three Circles.
If you aren’t making enough money, there are other issues at work, but you still need to know what your priorities are. Know where you want your money to go.
2. Own your choices.
You get to make decisions every day about where your money’s going to go. Sometimes, you don’t have a lot of control over it. But in many cases, it’s totally up to you. Be intentional about your spending.
3. See your budget as the bridge between your long-term goals and your daily decisions.
You need to have a macro-level vision — your priorities. You need to make micro-level choices on a day-to-day basis. Your budget is the thing that sits squarely between them, allowing you to make easy decisions in your day-to-day spending, with each one getting you closer to those hopes, goals, and dreams.
I know this article’s a bit different from typical budgeting articles. In the comments, I’d love to hear from you — where are the areas where you have the most pressing questions about budgeting? What’s confusing about what I’ve laid out here? Please post anything on your mind, and I’ll respond, either in the comments, or in another post down the road.