Do I Need A Budget?

By firebynumbers

It is a big question that a lot of people will ask themselves, “do I need a budget?”, and well the answer is basically “No”, you do not NEED a budget, but rather, should you make a budget….well then the answer is a resounding “Yes.”

So what are the benefits of having a budget? Well there are a multitude, but the main ones are the following:

It helps to ensure you don’t spend money you don’t have
It helps you prepare for emergencies
It helps highlight poor spending habits
It will help you reach and define your financial goals
It will help you reach your FIRE target

Benefits of a Budget

Help you not to spend money you don’t have

It might not sound possible to be able spend money you don’t have, I mean you don’t physically have the money, so how can you possibly afford to pay for it? Well that is when it comes down to the “magic” of credit cards. Wonderful isn’t it, you can buy it now but pay for it later, as well as a heap of interest on top of it! But the thing is, if you cannot afford it now, then good chances are you won’t be able to afford it later.

Now, I know a lot of people use credit cards for convenience and pay their full balance before they accrue any (or a little) interest, and if you are someone like this, then that is great and do what you do. But we all know people who keep putting more and more into their credit cards, increasing their debt and then end up in an all encompassing pit of debt. These sorts of people would gain the most benefit out of a budget, and sticking to it, but it doesn’t mean that others cannot still get significant benefits out of a budget themselves.

If you create (and more importantly, stick to) a budget, you will never find yourself in a position of buying something you cannot afford. You will know how much money you will earn, and how much you can afford to spend. It might not be as much fun as a no strings attached shopping spree, but it will definitely be better than staring at red figures in your bank balance for years on end.

Helps you Prepare for Emergencies

When you first start the journey to FIRE, it is important to have some sort of Emergency Fund to be able to fund unexpected costs that come out of nowhere. This is why your budget should include an emergency fund, so when something unexpected does arise then there is no need to worry and your forward thinking will cover you in the times of need.

Your emergency fund is keeping away a portion of money that will cover your living expenses for a duration time, if the worst does happen.

The size of your emergency fund will depend on your own personal circumstances and what you feel is a good number. Ideally, I would recommend at least 3 months for singles or couples, and at least 6 months for a family.

It Helps Highlight Poor Spending Habits

When you build a budget, you will need to take a close look at your spending habits. You may find out that you spend $80 per month on subscription services when you only occasionally watch Netflix, or you regularly have big nights out which end up in the hundreds of dollars. When you see these numbers on your costs tracking, you will be able to see some areas where you can cut costs back without significantly affecting your quality of life.

It Will Help You Reach and Define Your Financial Goals

Without knowing how much you are spending; it becomes almost impossible to set any realistic financial goals. Financial goals need to be SMART (Specific, Measurable, Attainable, Relevant and Time-Bound). If you set a financial goal without knowing realistically how much you are able to save per week, then it will be almost impossible to set a SMART goal.

Example of a SMART Goal –

Reach $10,000 in your emergency fund in 6 months’ time. With your budget, you know you can save $1,800 per month, so let’s check the requirements of a SMART goal.

Specific – Yes, definitely
Measurable – easily
Attainable – yes, with a little extra buffer just in case there is a little hiccup along the way
Relevant – definitely
Time-Bound – definitely

Perfect, we have set our own SMART goal, and with a budget we can help track our progress to ensure we are on our way to reaching this goal.

It Will Help You Reach Your FIRE Target

This is the ultimate financial goal for a lot of people in the FIRE community. With a budget, we will now realistically how much we can save and invest regularly. And by being able to forecast our future positions we can see how long it should hope to take us. We have this lofty goal of reaching FIRE and our budget is a crucial tool to helping us reach this goal.

So How Do I Set a Budget?

This is a bit easier than it sounds generally, there are plenty of online resources for budgets and they are definitely good starting off points. But I have always found it is difficult to immediately capture all your expenses right from the start. This is not an issue however! Because your budget is not fixed, in fact, it is the opposite, it needs to change over time. Our lives change, our expenses and change, and hence our budget will need to be adaptable to these changes.

Typically, I try to only set a budget for a 12-month period, and at the start of each year I will have a look at my expenses from the previous year and see if I can modify any of my budget items to be more realistic. If I look back and realise, I spent significantly more than I budgeted for on car expenses, then I can either look at cutting back the costs, or if this is not feasible, I can look at increasing the budget item.

Tracking Expenses

Tracking expenses is not for everyone, but it really does not need to be as painstaking as it might seem from the outset. Not to mention it is critical to be able to set a realistic budget and also to track against it over long periods of time.

To help with tracking expenses, I tend to use my Debit Card wherever I can so all my expenses come up on my bank statements. Then roughly once every couple of weeks, I will go through and update all my expenses and categorise accordingly, the process typically takes about 10 minutes. Once you have streamlined this process you realise how little time really needs to be spent on it but you can still gain all the benefits out of having your expenses accurately tracked.

Example Budgets

There are a multiple of budget spreadsheets available online, not to mention programs or apps which are also available. Just do a quick Google and you will have a multitude of free resources available. If you wanted something a bit more developed than a free version, then there would always be paid versions available.

For me personally, I have just developed my own spreadsheet, I do this mainly because I can adapt it exactly to suit what information I want to get out of it, and what data I feel is important to import into it. I have uploaded a template spreadsheet which is similar to the one I use on my spreadsheets page located HERE if anyone is interested.

Conclusion

Creating and sticking to a budget is one of the most important steps to reaching FIRE. Getting to grips with your money, both coming in and going out, is crucial to understanding realistically how much you are able to invest and what are some attainable goals you can set for yourself.

A budget can be as detailed or as basic as you want, but in my opinion you should go for as detailed as you are comfortable with. There is no point using a budget spreadsheet which you find overly convoluted and tiresome to use, that will not be encouraging and will instead be a deterrent to budgeting at all.