The Hidden Value of Budgeting

Welcome to the fourth article in our series, Conserving Money. Our budgeting contributor is Jack Engelman. He will convey the benefits he has experienced by developing and adhering to a proper budget.

When it comes to the topic of budgeting, oddly, people usually have an adverse reaction. If you don’t believe me, suggest to a close friend, family member, significant other, or anyone else to should consider a budget! I bet you they immediately take offense! Unfortunately, the term budget is associated with scraping together small amounts of money in order to cover all the bases. People associate it with managing an individual or family through difficult financial circumstances. This connotation causes many individuals to feel stressed and anxious about the process.

Instead, budgeting is what will keep people out of dire financial straights. They would have less stress and worry if they budgeted and handled their money properly. Quite simply, budgeting should be something every person or family does, regardless if their income is $10,000 a year, or $10,000 a month.

Failure to plan is a notorious root of problems of all nature, but especially financially. I can speak from experience on this point, albeit as someone fairly young. I have made a great deal of mistakes with money. However, recently, I have taken the challenge to expand my knowledge, and get control of my financial situation. I expect have a long life ahead of me and I would like money to live it.

Here is what I have found to be true. Two people might have the exact same income. The first person might feel stressed and unsettled because they are constantly spending all of their money. The second person has money left over and they feel relaxed and confident. The good news is there is a surefire way to make sure you are in with the second person. Start a budget and change your whole mindset.

“Facts don’t care about Feelings”

For background, I will share my personal experience. The beginning of my process was simple. I looked through a couple of recent months of bank statements and added up all my spending, and subtracted it from what I earned each month. What did I discover? I didn’t really have an income problem as much as I thought, regardless of being a college student. In reality, my issue was quite simple. I was working off what I felt instead of tangible data. In my instance, after housing was paid, I usually had between $350-$500 dollars left over. Before I began budgeting and assigning spending money to categories, I assumed, based on that number, I would be perfectly fine. This is far from the truth!

I failed to account for EVERY dollar worth of food, school-related purchases, gas, emergencies, etc. When you ‘ballpark’ costs, you are setting yourself up for failure. These estimations allow overspending on things you know you don’t need, and would never buy on a proper budget. It’s such a disservice to yourself to say “$100 bucks for food sounds good!”, and plan according to your own rough calculation. Just because you say something doesn’t make it true. If you really have to spend $225 on food and you estimate $100 will work, in your mind you are telling yourself it is okay to spend that $125 (that you really don’t have) on other things? You can only save money and create a better future for yourselves by living below your means.

The Benefits of Planning

Fast forward to now, my process has given me so much freedom. Ahead of time, I calculate as close as possible to the money I will make in the month. Next, I immediately subtract my fixed expenses from my monthly income. Then, I use past month’s data to allot myself money for gas, groceries, and anything else that is a regular spending category. Once I calculate my required expenses, I have what’s left over. Regardless of how big or small that number, I allow myself a small percentage to go towards spending and entertainment. The remainder goes towards general savings, or an individual saving goal (i.e. a car). Also to note, I grant myself a bit more to my spending account in case of emergencies, or extraordinary events that isn’t a monthly expense, like a birthday gift.

I no longer struggle to know what I can afford to do! That is the greatest benefit. I know if I have $200 a month in ‘fun money’ then I have around $50 a week to spend. If a friend invites me to do something that costs $50, I know the rest of the week/month may be tight if I decide to do it.

Financial Freedom is Closer than it Appears

It comes down to this: Budgeting doesn’t mean you can’t do the fun things you love to do, it means you have to PRIORITIZE the fun things you love to do. For me, I love eating out even though it’s not the best habit. I used to be scared of budgets because I knew they’d tell me I could never eat out again. Rather, it taught me that if I want to eat out, I have to give up something else. I simply can’t have it all. I have practically given up video games, as well as other expensive entertainment like paintball or go-karting. For people with more wealth, budgeting is obviously a totally different process. If you make $200,000 a year, going to Wendy’s isn’t nearly as big an issue as it is for a college student like me. However, the same principles apply. For example, if you have been making $200,000 for 10 years, but still hardly have savings for retirement, it is likely because you feel your income exempts you from having to identify where all your money goes.

If nothing else hits home, the most important thing is to know where your money is going. Whether you are 18 or 99, or anywhere in between, it’s an eye-opener and a great first step to know exactly how your money is being spent. Once you do that, it comes down to identifying personal goals and benchmarks, and the money saves itself!