A few years ago, one of our advisors wrote about the “B” word, but for those of you that missed it, I too believe that budget should be considered one of the “curse-words” of financial planning.
I know that sounds a bit strange coming from a financial advisor, but hear me out. So often I have prospective clients walk into my office and state, “We need a budget.” At which point I ask, “Why do you need a budget?” Often seeming shocked I would ask such a question, the common reply (accompanied by guilt ridden faces) is, “Because we don’t have one.”
So?
It seems there is this universal belief that in order to have a successful financial household you must have a budget in place. The problem with this belief is the word “budget” tends to conjure up ideas of strict guidelines for how to live your life. It’s like creating a personal contract with yourself to spend only $xx per month on coffee, $xx per month on clothes, and if you spend more, you fail.
These negative and restrictive feelings around how to spend money often make people bristle and put off what I believe is an important and extremely beneficial exercise — the exercise of getting a general sense of what you are earning versus what you are spending. It’s called a cash flow…without restrictions, without judgment. Gaining a high-level understanding of your overall cash flow is the first step in taking control of your finances. If the word budget stops you from getting there, don’t use it.
So we’ve established having an understanding of your household cash flow is important. But then what? How do you translate that into financial success? Achieving financial goals means creating a plan to save toward those goals. If you want to retire in 25 years, you have to know what that means in terms of saving. If you want to make sure you have a cushion for when life throws you an expensive curveball, you need an emergency plan in place to support any rough transitions.
Now you could start figuring out how much you can save by restricting what you spend. But if the idea of tracking your every penny to determine how much is too much when it comes to your weekly lattes makes you want to scream, I propose you flip the idea on its head.
Take a look at that hard earned cash coming in and start giving it a purpose. This portion is for my retirement, this portion is for my goal of have $xx in emergency cash, this portion is for that future house. The rest you spend where you will. Now that’s my kind of budget. (Sorry, I didn’t mean to swear.)
