I’ll be quick here, because no one likes budgets, and they don’t work.
Where they can be helpful is if you’re having trouble hitting your 10 percent of gross income savings target—by helping you identify areas where you are overspending.
If this is you, a temporary budget can be helpful by shining the light on your spending.
Once you’re aware of where money is slipping through the cracks, you can discard the budget, and get back to life.
I suggest, even if you’re hitting your 10 percent of gross income target, to track your expenses for a month or two. Look at what goes out the window on various large categories of expenses. How much of your gross income goes towards:
Shelter
Food
Transportation
Entertainment
Travel
Recreation
Miscellaneous items
Income Tax
What is left is what you can save. The amount that’s left, divided by your gross income, is your savings rate. The goal is to get it up to at least 10 percent.
You’ll pretty quickly get an idea of which categories consume most of your income. Income tax will be 15 to 20 percent for most people. Shelter should be no more than 40 or 50 percent. The rest should take you no higher than 90 percent of your gross income. If it does, this is where you can identify areas where you can potentially cut down your spending.
The main benefit of a budget is to simply open your eyes. To identify what’s going on. You can see a lot just by looking. I am in no way suggesting you adopt using a budget permanently. Because, human nature being what it is, you won’t follow it. None of us will. It just isn’t practical. The purpose of it is to make you aware of your spending habits. And that’s it.
Even if you’re at your 10 percent of gross income savings target, it could potentially help you identify how you could bring that savings rate up. Perhaps, without any impact to the quality of your life, you could bring that rate up to 15 or 20 percent, which can have a dramatic impact on your finances over time. Allowing you to retire earlier, or have hundreds of thousands of dollars more in retirement, compound interest being what it is.
The goal isn’t to simply cut back spending. You should spend money on things that you like. Things that bring you joy. The goal is to make you a wiser spender. To get more joy units from your hard-earned money. To spend it only on things that bring you comparable value. That’s it. That’s what a budget—a temporary one—is good for.
The most effective strategy in saving your money is to pay yourself first. Have the 10 percent (or more) come directly off your paycheck, into an investment account, to be invested.
Use a budget to open your eyes.
Then throw it in the garbage, where it belongs.