The pros and cons of budgeting
Ugh… budgeting.
No one wants to, we all know we “should”, and if you read any personal finance blog you’ll be told you must, because it’s the foundation of good financial management. There will probably be the classic quote from Mr Micawber, the literary patron saint of debtors:
‘My other piece of advice, Copperfield,’ said Mr. Micawber, ‘you know. Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”
David Copperfield (1850) by Charles Dickens
This is true enough. Money out must be less than money in, or it all goes horribly wrong.
Even so. Ugh…. Budgeting.
One reason, I think, why the personal finance experts who urge us all to budget can come across a bit… dare I say, preachy, is because they only acknowledge the upsides to planning and tracking your expenses. Many don’t like to mention the reality that there are downsides too.
Now in my opinion the downsides are more than outweighed by the upsides, but it’s disingenuous to pretend they don’t exist.
So I’m going to be really frank and give you the pros and cons and you can decide for yourself.
First the downsides.
It’s boring. Simple really. There are lots more exciting and interesting things we could be doing with our time than tracking our spending. Some people get really into it and good for them, but, in general, it’s a chore. Most of us don’t want to make admin our hobby.
It takes time. Related to 1. is the fact that there are only so many hours in the day and many other activities, not to mention people and pets, that want our attention. You may also have planned to spend quality time with kids, partners and friends, stay hydrated, exercise, meditate, keep up with hobbies, read enough of the news to have semi-informed opinions about the world and maybe, I dunno, do whatever your employer or customers pay you to do. Adding in time to plan and track your spending can feel like the final straw for an overloaded schedule.
It can be depressing. If you’re used to just crossing your fingers and getting by on hope, reality can bite hard when you finally face it, and creating a spending plan means you do have to face reality. There’s no point in writing a plan that isn’t based in fact. This is one of the biggest hurdles to a lot of people’s budgeting. They just don’t want to know how bad things are.
It can cause regret. There’s nothing like making a positive change, to make you regret not having changed sooner. Especially when it comes to stopping overspending and starting to save and invest. It brings you up short against all the ways you’ve wasted money that could have gone on a better financial future.
No spending plan, no need to feel those pesky regrets today. Ta da! (never mind that they’re waiting around the corner.)
Maths. (I mean, it’s only basic arithmetic and there are lots of apps and spreadsheets that will do it for you but still… I know anything to do with numbers bothers a lot of people.)
You may have to give up on some of your pleasures. This is another big one. It’s easy for us to convince ourselves that things we want are in fact “necessities” or that we just can’t save “this month” but we will next month when we’re magically better people who don’t shop so much and buy fewer takeaways.
A spending plan makes it clear how much we can actually afford to spend on shopping and takeaways (or e-books and in-game purchases or whatever tends to tempt you). There’s no getting away from it, something will have to give and it’s probably some of your fun money. Do. Not. Want.
OK, that’s enough downsides. If I’ve forgotten any, tell me in the comments.
Let’s look at the upsides
You know exactly where you are. This is key. Knowledge, as they say, is power. Without a plan you’re constantly guessing about whether you can afford the things you need or want. The truth is you’re probably making mistakes all the time.
Do you have enough money for that day trip? …maybe… If you go, will you have enough for your friend’s birthday present at the end of the month? … you hope so…
With a spending plan you can answer those questions. You can go on the day trip as long as it doesn’t cost more than £45, that way you’ll still have £20 for your friend’s present.
You can find relatively painless ways to save. A spending plan can be a great motivator to switch up your utility, credit and insurance providers so you can find more money for fun and savings. With a plan you can see straight away how doing this will benefit you.
You can get greater value from your spending. It may be that you’re spending on non-essentials in ways that are costing more than you realised and don’t actually bring you joy. Having a plan will show you what’s really going on and help you focus your spending on what you value most and away from the trivial.
You can spot frauds, errors, and price increases straight away. If you’re tracking your spending and bills every month against your plan, then you’ll notice if something doesn’t add up. The minute your mobile phone company increases your bill, you can find a new plan. If there’s a payment you don’t recognise, you can query it. If you’re charged twice for the same thing you can request a refund. Giving money away for no reason? No thanks!
You can plan to pay occasional expenses out of savings, not credit. Household repairs? You can put the money aside for that. Birthday and other celebrations? They’re in the plan. School uniforms? Covered. A nice meal on your anniversary? Heck, yeah!
Even if something essential is more than you thought ("New brakes to go with that MOT, Madam?") and you have to shuffle money out of, say, your holiday fund, or even put the difference on a credit card, you’re still better off than if you had no plan at all and needed to find the whole sum out of nowhere.
If you need to say “no” to a pushy salesperson or a whining child, you can do so assertively, because you’re clear about what you can afford and what you can’t. You can also say “not yet” if you will have the money later on, which brings us to the next upside.
If you have children, you can set a good example and help them learn positive money habits. By telling your children “we don’t have the money for this yet, but we’re saving up” you’re encouraging them to do the same for the things that they want.
You can build an Emergency/Rainy Day/ F*** Off Fund. Start with saving one month’s basic expenses, then build up to three months and eventually between six months to a year’s worth. Then if you can’t work or you have a sudden big expense, you’ll know you’ll be ok.
You’ll be surprised what you can afford. Remember the day trip in point 1? Without a spending plan you might assume you couldn’t afford to go because of your friend’s birthday and then you’d miss out.
What’s more, planning spending allows you to save for goals that may previously have seemed completely out of reach. These could be things like a good camera and a set of fancy lenses, a really gorgeous winter coat, a high-powered laptop, or a super-comfortable new sofa.
You can give more. When you know what you have and you’re confident you can afford what you need, then it’s nothing to give some of your non-essential spending money to a cause you believe in. I personally love Money A + E, a black-owned community organisation helping BAME and vulnerable groups to improve their financial wellbeing through advice and education. You can hear an interview with their founders here.
You can start to invest more for the long term. Once you are in the habit of using your plan to find ways to save, you can put some of those savings into investments, whether through an ISA or pension to grow your wealth and make your future self richer.
You’ll have peace of mind. It’s stressful not knowing what’s happening with your money. You constantly carry the fear of not knowing what you’d do if your income dropped or you faced a sudden expense. A spending plan gives you clarity. You know where you are so you can see what actions you need to take and nothing is more reassuring than that.
So there you have it, the pros and cons of creating a spending plan. I definitely think it’s worth the effort, and I believe me I had to get over every one of these downsides to feel it. The last upside is the kicker.
Peace of mind is, frankly, priceless.
The question is how to make a spending plan that actually works for you. I’ll be writing more blogs about that, and you can also listen to Alex and me discuss it on my podcast, Squanderlust.