I have read over Reddit's wiki on budgeting. I rarely pay with cash so I already have a record of transactions I made with payment cards. My pay stubs are e-mailed to me. So what's the point of budgeting? Is the actual benefit from grouping purchases into categories and then seeing which areas you should stop spending as much on?
It is simple: you need budgeting to plan your smaller and bigger future expenses (and savings). Here some examples:
- I planned a budget of $100 per month ($1200 per year) for car maintenance and repairs . This money goes into another bank account. Over the last years i never needed more than this amount for yearly maintenance, new tires and surprise repairs because there is always some money left at the end of the year. This sums up over time which enables me to buy new tires after 5 years when it is necessary.
- If you plan to buy a new or used car in the next 5 years you can look how much it will cost. For a used car costing $15.000 in 5 years you need to save $250 per month until you can buy it. This will give you an idea if you can afford the car or not.
- Same goes for vacation. If you save $200 per month for vacation then you know you can afford a hotel for around $2000 and some local expenses for 400€.
You need to subtract these amounts (also for utilities, food, rent, savings, fun and luxury) from your income to see if you stay within your means (not adding debt).
Simply stopping spending if you reach your limit is a good thing. Planning ahead is even better.
I'm going to provide an answer that is somewhat of a devil's advocate. Disclaimer: I personally don't have a budget beyond some very loose guidelines (e.g. always spend money carefully, and never indulgently).
I believe there are 2 criteria that you can meet that enable you to forego following a budget:
Your expenses are flexible enough, and your income high enough, that you are reasonably able to save for everything you need in your lifestyle, and most things you want. This generally means that over time, you find your savings are growing significantly, and that you can easily reduce spending in arbitrary categories to increase your savings rate.
You have already cut all spending that you can bear to, and you are living in the cheapest way possible. This could be a result of low income, or a strong drive to save against the future. Most people have difficulty reaching this level of asceticism, especially because it requires strong self reflection.
In both of these cases, making a budget would not provide useful information or guidance. This is because people who don't need a budget are either capable of quickly adapting to new financial hazards, or are already doing everything in their power to reduce spending.
If you don't fit in those categories, here are some reasons you might consider following a budget.
- You need to cut spending, but you need help understanding where.
- You are worried about lifestyle creep creating financial issues.
- You do not have a firm grasp on your own finances and spending habits.
- You need structure to help you make decisions on how to spend your money.
Ultimately, budgets help increase the utility of your money so you can make better decisions.
What you described is looking into your spending history, which is not budgeting. Budgeting is planning for future spending, and for reviewing your past plans with your actual spending.
Why do you budget?
- Avoid paycheck-to-paycheck. If you earned 100$ in January for example, you budget the 100$ for February.
- Prepare for the upcoming spending. Need a big money in a year? Divide the money by 12 and budget it for the next 12 months, which is more manageable.
- Don't miss a dollar. Have some extra money after you budgeted for needs and wants? Budget it for your investment account or your goal. If you don't have a budget, you might be afraid to invest in those since you are not sure if you have enough money for the rest of the month.
- Emergency. Sometimes your car needs a repair, or you might lose your job for a period. Maybe the amount can be hard to determine, but you still know emergencies can happen. Budget it with your best guess. 3 ~ 6 months of your spending is a good start.
- Review. After a month, review what categories did you over/underspent and adjust your future plan. This can be hard or vague if you don't have a budget.
- Saving money. You will know why your spending is that much on food, transportation, recreation, and so on if you budget for a few months. You might even learn there were hidden expenses. This makes saving money easier since now you know which spending can be reduced.
Budgeting is the act of setting amounts, allocating money to various activities and keeping tabs on where your money is going, understanding if or where you can make compromises when you have to react to something unexpected.
The mechanics of collecting the spend data (card statements) or income (payslip) is not budgeting as such.
That's like saying "I know where I just came from, so why worry about where I am going or how I got here?" (grin)
Budgeting is figuring out a) how well you managed your spending in the past and, b) what to do with money in the future.
What you've done with money historically has little to do with how you'll spend it going forward. Budgeting is about financial discipline - learning and applying the best practices for controlling your money, or you will find it controlling you!
If you want to buy a new car, having a budget lets you set a weekly/monthly amount to set aside for your down payment and other costs. It also helps you understand what kind of monthly payment you can afford.
A budget is also backward-looking too - you compare your credit/debit statements against what you planned (budgeted) to see how well you did and adjust accordingly. It also helps you realize just what (in terms of "eating out", "travel", etc.) categories you spend on and what you may need to control better.
If you plan to invest, you'll need a budget to understand your household spending so you can plan what to change in order to achieve your goals.
I hope this helps. Good luck!
Budgeting is almost entirely psychological. If you are the sort of person who basically spends every paycheck as soon as it's deposited (if not before), and you want to accumulate some savings, then you need budgeting to see where you've been spending the money. That's where the grouping into categories comes in. Then, as others have said, you need to budget going forward, setting allowable amounts that you'll spend.
OTOH, if you're the sort of person who automatically lives below their income, then you really don't need budgeting, beyond the obvious "I make $X per month, I can't afford a $X/2 car payment" sort of thing.
Is the actual benefit from grouping purchases into categories and then seeing which areas you should stop spending as much on?
Maybe, though it may help to instead think about which categories you should spend more on. If you use a double-entry accounting method, every dollar is accounted for, and so conceptually it's the same, since you are shifting which categories get the funds. If you wish to increase your monthly savings by $40, and savings is a higher priority than your daily coffee, after increasing your savings by $40, you may be forced to reduce your monthly coffee spend by $40. Mathematically, these statements are equivalent:
- I'm spending $40/month less on coffee.
- I'm spending $40/month more on my savings (or emergency) fund.
Oftentimes it's easier to think about spending more on higher priority items (such as savings or debt payments), rather than the other way around.
Pardon the nitpick, but the semantics of your question are a bit confused. The definition of "budget" (as a noun and verb respectively) is (emphasis mine):
an estimate, often itemized, of expected income and expense for a given period in the future.
to plan allotment of (funds, time, etc.).
Features like statements and recent transaction histories do not accomplish this. They do accomplish another task, "bookkeeping":
the work or skill of keeping account books or systematic records of money transactions (distinguished from accounting).
We can therefore rephrase your question as:
What is the purpose of budgeting when bookkeeping is automated?
Which makes the answer plain - the purpose of budgeting is to plan your expenditure and come up with rules that govern how you will spend. This is wholly unrelated to how you do bookkeeping. In fact, there are techniques to budget without doing any bookkeeping at all. By and large, good bookkeeping facilitates budgeting by providing data, so if anything the automation enhances your ability to budget by reducing unimportant busywork.
Credit cards do provide tools for budgeting also. For example, you can set spending limits on your cards, set up balance alerts, and so on. However, these still do not do budgeting for you - you must decide on what limits to set. They merely make it easier to enforce your budget.
What is the purpose of budgeting if all I need to do is look at my bank/credit card statement?
Economy is about using scarse resources wisely. If your projected income is way above your projected costs for all future, there is less reason for budgeting.
Plan your future costs by dividing planned costs into categories. Evaluate if your income will cover all future costs (including perhaps retirements savings). Add a bit of savings for unplanned things. You might find that this is enough, no further action is necessary. The resulting plan is your budget. The plan could include future targets and goals in various aspects, not necessarily only for the financial situation. Write down the plan and save it. One experience is to not make it too detailed and too complicated. Simple often is better.
Do the plan by spending and saving according to your plan. When it comes to spending the experience is that is a good idea to both leave a little leaway in the budget for unplanned extras as well as to save a bit for future unexpected events. It is your life though and you can control parts of it.
Check the actual spendings against the plan (budget) and identify any differences. By checking you also gather experience to make your next budgets more accurate.
Act on the difference. Either by modifying your behaviour, or by modifying your plan. This is a good time to look back on your targets or goals. The general experience is that if you have a plan or goal it increases your probability of achieving the things that matter to you. But expect to modify the plan over time as you keep on checking.
We tend to make budgets for a limited future, say for a year. There is nothing wrong with that but you should work out what works for you. It can be a good idea to make a "life plan", thinking about what will happen in the next 5, 10, 20 and 40 years or so. The further ahead in time the less detailed and less accurate. Are you planning to have children, are you planning to retire early are the types of questions to ask. Update your life plan -- plans seldom survive the reality.
A budget is a set of buckets which you (plan to, typically via a pay check) pour sand (aka money) into on a periodic basis, and (plan to) shovel sand (aka money) out of at other times.
The purpose of a budget is to ensure that you have enough "sand" in each bucket when it's time to shovel the sand out, without having to borrow sand from someone else.