Are you an A+ budgeter that knows exactly where every dollar goes? Or are you more of a free spirit who doesn’t like the restrictions of a budget. Truth-be-told, I sit perfectly in the middle of both scenarios – I possess qualities from both personalities. However, given the critical role a budget plays in meeting my financial goals, I have learned to leverage off the limitations of budgeting and use it to my advantage.
Regardless of which camp you fall in, the more you know about the advantages and limits to budgeting, the better you’ll be able to exploit a budget to bring out the best in your dollars.
Below we’ll discuss the top advantages and limitations to personal budgeting.
Advantages of a Budget
You know exactly where your money went
Have you ever received a lump sum of money through a bonus or a tax refund? You felt empowered by the influx of cash and planned to treat yourself to a new Macbook and put the rest in savings. A few weeks later, you go to transfer some money, but it’s gone. Where did it go?
Using a budget as a tool for your finances improves visibility in the path your money takes as it leaves your wallet. Without a budget, your brain will always lean towards thoughts of plenty. Meaning you’ll trick yourself into thinking your spending less than you are.
Gives you the big picture of your financial situation
A budget tells you exactly how much cash came and went, along with what’s leftover. A budget allows you to understand where you need to flex your muscles with regards to earning, spending, and saving.
I like the freedom to spend on eating out because I hate to cook. Budgeting allows me to see what fixed and variable expenses my family has, so I know where I can save on in order to splurge. I can also consider whether I want to take on more freelance work to boost my income, then I don’t have to cut any expenses at all. The latter is my preference.
Without a budget, I would be flying blind with these decisions. And likely crashing as a result of it.
Drives motivation as you pursue your financial goals
We’ve all set a goal and failed to meet it. Sometimes it because it wasn’t the right goal or needed to be an extended effort. But most of the time, it’s because we failed to track progress towards that goal, and once the level of effort became heavy, we moved on to shinier objects.
A budget allows you to keep track of your progress towards meeting your goal. Ultimately, it motivates you to keep making wise decisions and choices aligned with your goals, or at a minimum, insight into any additional actions required to keep you on the right path.
Limits to Budgeting
They can feel restricting and limiting
There is a specific psychological reaction we all take when we’re told “no.” Immediately we feel the need to do precisely what we’ve been denied. This holds true as much in finances as it does in dieting. Think about it. You don’t think about how much you love sugar until you have to cut it from your diet. Then it’s all you think about.
When you decide you’re going to limit eating out to one night a week, you’re suddenly hit with a desire to go out every night. It’s a natural reaction.
However, life is more free with rules. It seems contradictory but think about budgeting like a traffic light. Imagine how difficult and dangerous it would be to drive without traffic lights. Can you imagine how chaotic life would be? Similar to a red light, following a budget allows you more freedom with spending.
You have to stick to them
It’s super easy to set a budget. Good intentions and all. It’s sticking to it that’s the hard part. Forget resorting to sheer willpower and resisting the urge to spend above your budget. Instead, plan for obstacles. Know what your triggers are and either avoid them or find alternatives to work around them.
Additionally, build buffers in your budget by creating emergency funds and sinking funds. Keep a minimum balance in your checking account. Finally, keep track of your actuals regularly, so you don’t fall prey to the “ignorance is bliss” syndrome. Personally, I download my daily spending from my bank into my excel budget every morning. It takes less than 5 minutes and motivates me to spend with intention every day.
What’s your budgeting personality? Do the limitations of budgeting negatively impact you? Or do you use the positives to their full advantage? Let us know in the comments below.