Budgeting is the foundation of successfully managing your money. It is difficult to achieve any lasting financial success, regardless of how much you make, if you don’t use some kind of budget to help you control spending. So to help you better manage your money here are the ten smartest things ever said about budgets.
(1) No Choice: “Whether you like it or not, you are a money manager.” – William Bernstein
You don’t have a choice. If you live in the modern world you are a money manager. You can choose to do it well or poorly, but you can’t choose whether or not to do it. A budget will help you do it well.
(2) Vital Math: “The most important math that we will ever do throughout our lives is managing our cash flow.” – Will VanderToolen, director of counseling services at AAA Fair Credit Foundation in Salt Lake City, Utah.
Another name for “managing our cash flow” is budgeting. Budgeting is a truly vital life skill and we need to do a better job of modeling it for our children and teaching it in our schools.
(3) The Micawber Principle: “Annual income twenty pounds, annual expenditure nineteen, nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” – Wilkins Micawber in the book David Copperfield by Charles Dickens. This timeless advice has come to be known as The Micawber Principle.
The goal of money management is simple – spend less than you earn. Spending less than you earn – consistently over time – will lead to at least some degree of financial freedom. Spending more than you earn will lead to financial bondage and misery. A budget is the best way to ensure you live the Micawber Principle.
(4) Keep Score: “It is a fact of life that those who keep score, whether they are winning or losing, win more over the long run. These are the people who accept personal responsibility for their own actions. They would rather know the score while losing than not know the score. The people who achieve financial independence do so by knowing the score….I have never met a winner who didn’t know the score.” – Charles Coonradt
“When performance is measured, performance improves. Where performance is measured and reported, the rate of improvement accelerates. – Thomas S. Monson
Keeping score is an essential component of achievement and a budget is the fundamental scoreboard of money management. Keeping score through a budget will lead to improved financial performance.
Further Reading: If You’re Not Keeping Score It’s Just Practice
(5) A Budget Makeover: Budgets have an undeserved bad reputation and are in need of a makeover. Many see budgets as restrictive, old-fashioned, and think the only reason they exist is to prevent them from having fun. Therefore, I appreciate the efforts of Ramit Sethi to re-brand budgets. In his personal finance book aimed at young adults, I Will Teach You to be Rich, Sethi re-brands budgets as conscious spending plans. Not bad. The purpose of a budget is not to prevent you from spending money, just to keep you from spending more than you earn (something we used to call common sense) and to help you spend what you do have on things that are important to you. Budgets don’t tell you not to spend your money, just to spend it consciously and as part of a plan.
(6) Money & Values:“We can tell our values by looking at our checkbooks.” – Andy Grove, CEO of Intel
Grove’s point is that if we didn’t value something we wouldn’t have spent the money on it in the first place. Point taken. However, all of us have looked back at past purchases and wondered, “What was I thinking?” The value of a budget is that it allows us to align our purchases with our long-term values and not our short-term whims. It gives us the chance to consciously determine what we value and plan our spending accordingly.
(7) Desires Exceed Means: “Now I will tell thee an unusual thing about men and the sons of men. It is this: That what each of us calls our ‘necessary expenses’ will always grow to equal our incomes unless we protest to the contrary…All men are burdened with more desires than they can gratify.” George S. Clason in his classic book The Richest Man in Babylon
True! And the only proven way to protest to the contrary is with a budget.
(8) Where Did it Go? “A budget is people telling their money where to go instead of wondering where it went.” – John C. Maxwell
Budgeting is all about control. Do you control your money or does your money control you?
(9) Financial Defense: “The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning.” – Thomas J. Stanley and William D. Danko in their landmark book The Millionaire Next Door
Defense wins championships – in sports and money; and the key to good financial defense is a budget.
(10) Keep it Simple: Destroy all your credit cards. Deposit the first 20% of each paycheck in one or more investment accounts that you never, ever touch….Put the remaining 80% in a single checking account and make do, no matter what, with the balance in that account. It’s an unconventional financial discipline, but better than the Visa budget system most people use.” – Andrew Tobias in his book The Only Investment Guide You’ll Ever Need
The method described above is a budget. Not a traditional budget, but a budget nonetheless. A budget is any tool, method, or process you use to ensure you spend less than you earn, prepare for the future, and deploy your resources on things that are important to you. There is no right or wrong way to budget and it shouldn’t be complicated, time consuming, or difficult to use. In fact, you should use the simplest budgeting method that meets your objectives as this will give you the best chance of sticking with it over time.
I have used Quicken personal finance software for over 30 years as my primary budgeting tool. I love it and would be lost without it. That doesn’t mean you should use Quicken. You should discover what works for you. Other popular budgeting tools include Mint.com, You Need a Budget (YNAB), Every Dollar by Dave Ramsey, the cash and envelope method, a spreadsheet, a simple budget similar to the one described above, or any other method you can come up with.
Experiment and find something that works for you. How you budget is your choice but you must find a way to manage you cash flow so that you spend less than you earn. The 10 smartest things ever said about budgeting are smart indeed, but useless if you don’t put them into practice. So determine what kind of budget works best for you and begin the process today of using a budget to help you rewrite your financial story.