Budgeting: What it is, what it’s not and how to approach it
For most people, the word ‘budgeting’ brings to mind less than positive emotions. Traditional budgeting advice involves trawling through bank statements, saving your receipts and feeling guilty for spending money on anything that isn’t absolutely essential.
There will always be a certain degree of discomfort because you’re making changes to spending habits that you have built up over a long time. The good news is that, thanks to technology, a lot of the grunt work can be done for you. Plus, the benefits of good budgeting habits are so great that it’s more than worth the effort.
This guide is a friendly introduction to thinking about budgeting. It covers some of the main misconceptions that people have about budgeting, and walks you through an action plan to get you on the path to controlling your spending.
What is budgeting?
In essence, budgeting is about taking control of your money and prioritising what matters most. The most important thing to understand about budgeting is that it’s not about keeping track of where your money goes for the sake of it.
The only thing that matters is whether you are managing to spend less than you earn each month, while at the same time putting enough aside each month to achieve your long term financial goals. If you’re not, then the best case scenario is that you won’t be able to afford the goals you’ve planned for in the longer term. The worst case scenario is that you’re starting to build up debts that could cause you major headaches down the road.
Either way, budgeting is the process of taking control of your spending habits. That means working out how much you have to spend, and then building good spending habits over time. Everyone manages their money slightly differently. Sadly, there’s no magic budgeting app that solves the problem overnight.
Clearing misconceptions about budgeting
Guilt is not the goal
One of the biggest misconceptions around budgeting is that it is designed to make you feel guilty about treating yourself and suggesting you live as frugally as possible. Of course, this doesn’t sound very appealing, which is why so many people put off thinking about it.
The goal is not to make you feel guilty for spending money on things you enjoy, or to try and shame you into changing your behaviour. The real goal is to only spend your money on things that bring you happiness or are really valuable to you. This will naturally include contributing to things like a pension because a comfortable retirement is really important to most people!
If you are reducing the chance of a comfortable retirement because you can’t resist impulse purchases that you later regret – then something needs to be done! If you’re digging yourself into deeper debt because you don’t have a clear strategy for getting in control – then a money coach might be able to help.
It’s an ongoing process, not a one time solution
Like all good habits, good spending habits are built over the course of time, not in a single afternoon. You can’t simply write down your ideal budget and expect it to translate into reality, any more than you can write out a food plan and expect to lose 10lbs.
Again, this is good and bad news. The good news is that you can focus on changing one small thing at a time, rather than having to overhaul your entire life in one go. The bad news is that you most likely won’t get it all right the first time. You will have to spend some time trying different things before you figure out what works best for you.
How important is budgeting for you?
It’s most likely that you already have an idea of how good you are at managing your money. Some people are naturals in the sense that they don’t struggle to put aside savings each month and still avoid having to rely on their overdraft or credit card at the end of the month.
For others, a deep dive into their spending habits is a more urgent priority. Some signs that you should spend a bit more time focusing on your spending habits are:
- You’re frequently surprised to find that you have less in your spending account than you thought.
- You are unable to put enough money aside each month to contribute to your long term financial goals.
- You have some short term credit card debts and you’re not sure how long it will be before you have paid it off in full.
- If you had a sudden £100 bill, you would have to borrow money to pay it.
What good budgeting looks like
If none of the statements above sound like you, then you’re most likely doing quite well on the budgeting front!
The most important thing is that you are not spending more each month than you earn. Even if you overspend a small amount each month, over the long term you’ll eventually find yourself draining your savings and getting yourself into trouble. On the other hand, someone who spends less than they earn is at least putting something aside for the future and is growing their overall wealth (even if slowly at first).
Once you are living within your means, the next step is to focus on increasing your savings/investments/pensions contributions to as much as you reasonably can. It will be up to you to find the right balance between putting enough aside to achieve your goals and enjoying your day to day life.
Most importantly, a good budgeter is someone who is in control. They understand their situation, they know where their money is going and they could make changes if they chose to do so.