Why you don’t need a budget
You are probably thinking right now that I have lost my mind. How dare I say that you should not have a budget? Well, a budget is per definition an estimate of your income and expenses. So why would you want one?
Let me ask you this. If you are not self-employed or a freelancer, you know how much money you earn every month, right? So why do you need to have an estimate of something you already know? Managing your money is not about how much money you earn; it is about managing the money that you have. Most people also close up when they hear the word budget, because it sounds complicated and seems like a tedious task.
Let us talk about managing your spending.
There are many rules of thumb as to what your spending should look like. The bottom line is that your circumstances are unique and so will your spending habits be. You live in a different house, drive a different car, and have a different eating habit. Your habits will dictate how you spend your money, how much debt you will incur, and what type of savings and investments you will have.
So why not have a spending plan?
A spending plan will help you to manage the habits and help you to plan your spending. It will help you realise where your money goes, and from there you can use it to see where you can make changes to achieve your goals.
Types of Spending.
Certain of your expenses will remain the same every month, no matter what. They might increase from time to time, but generally then stays the same for the period. This can be divided in two sections of your needs, basic shelter, i.e. rent or your bond repayment, and then your safety needs. Your safety needs refer to things like home and car insurance, life insurance, savings, and investments. When you make changes to your fixed spending it generally requires a lot more input rather than simply changes a habit. This will often require the assistance of a professional, such as a financial advisor or an estate agent.
Necessary spending refers to the spending that you need to make to survive. This is of your basic needs, such as food, clothing, medicine, and bills such as your water and electricity. Your absolute necessary spending will also be the last place that you will make changes, as this is your bare basics to survive as a human.
Social spending refers to the things you spend on to make your life simpler and better. This will be things like your cell phone, your internet, social expenses, takeout, holidays, and activities. Your social spending is often especially important for your mental well being and helps you to live your life in comfort. This will be your second place to look for cutting your spending when you have a specific goal that you want to achieve. These habits are often not that difficult to change but could pose some challenges when it is more frequent.
Your luxury spending refers to the things you spend on, often unplanned, like the coffee on the way to work. This is often frivolous and are things that can quickly form a habit. This habit is the first thing that you will change when you must plan for a goal. The problem is that this habit is generally a difficult one to change as it becomes a crutch for us to deal with daily challenges in our lives.
You do not need a budget; you need a spending plan.
Your spending plan will help you to realise where your money goes. It can also help you to save more if you have money left at the end of the month, as you can start every month on a new slate. It does not have to be a written one, however, where you have taken the time to write or type your spending plan, you will remember it better and you can refer to it when you need to make decisions.
Keep an eye out for part two, where we will discuss how you should set out and draft your spending plan.