If you’ve ever read many personal finance advice books, you’ll find that the vast majority of them encourage the reader to make up a formal budget and write it down (in fact, I even wrote a guide along those lines myself). Without a doubt, making up a formal budget is a very good exercise for getting a clear picture of your spending and setting some goals, but formal budgets are notoriously hard to continually follow.
This begs the question: if traditional budgets are so hard to follow, why do books keep encouraging people to make them? If you go through all of this trouble of setting up a budget, only to discover that it’s very difficult to follow, why go through all the trouble in the first place? After all, it’s much like starting a strict diet: you try so hard to follow it, but eventually you binge and you’re right back where you started – or worse. A grid on a paper can never truly contain the complexities of a human’s life, nor is it meant to – that’s why strictly following a paper budget (for most people) is doomed to failure in the long run.
Given that, there is a compelling reason for constructing a budget, but it’s not the reason that most people think of when they think of a budget. The truth is that a well-constructed personal budget is a psychological tool, not a financial one.
If you actually go through the appropriate steps of building a budget for your own life, which includes tallying up all of your spending in various categories, seeing where the fat is, and determining what you can spend in each category, you’ll discover quite a bit about your true financial state. This picture of your financial health, in black and white, should scare you a little. Are you really spending $600 a month eating out? Is it really necessary to drop $750 a month in entertainment expenses? Did you really spend $360 this month on music concerts and CDs?
This is the part of the process that has power for everyone. Are you really spending your money in a healthy way? For almost all Americans, the honest answer to this question is “no,” and a budget is just a detailed image of this fact.
This is not to say that a budget in the traditional sense doesn’t work; it can and does work for some people, just not everyone. The important thing to remember is that the construction of a budget is the part that can really have a great impact on anyone if it’s done right, with a lot of care and thought.
If you’re in a situation where you really need to turn things around, but you don’t know where to start, one of the smartest moves you can do is properly construct a budget and think about what it really means. Actually following the budget to the letter may not be the best path for some people (it wasn’t for me), but the process of actually constructing one can be valuable for everyone.