- Imagine your take-home pay was $1,900 each week. That’s $7,600 per month or $91,200 per year…
- Let’s reduce that by half to $950 each week ($3,800 per month or $49,400 per year).
- Reduce it by half again to $475 each week ($1,900 per month or $24,700 per year).
Do you think you could you live on $475 per week or $24,700 per year?
What if we go one step further and cut your pay in half once more?
Could you live on $237.50 per week or $12,350 per year?
When things are tight that’s when you must have a budget!
When you need a budget
When your income is small it’s difficult to pay common living expenses. Take for example your house, food, electricity, water, taxes, car repairs, and medical expenses.
It’s difficult to live each day on a small income when your expenses are creeping up.
This is why a budget is perfect to fine tune your income with the expenses you have.
Fine-Tuning Your Personal Finances
Have you ever had a clunky old car that leaked oil?
I had an old beater once the constantly leaked oil. Each month I would have to a container of oil and keep it in my trunk. Each week, I would add oil to my engine to keep it from overheating and making sure my car ran efficiently.
If you have a car that is running perfectly without oil leaks (or any other problems) – then you have a car that runs optimally.
This is exactly what a budget does when it comes to their personal finances! – it allows your money to work optimally and more efficiently in your household.
Optimal Money Performance
If you’re looking for your money to perform the best that it can for you, you will need to tweak things.
This is easier to spot when you’re looking at investments. One investment over one year may have given you a 5% return and another gave you a 2% return on your money. It’s easy to see which investment did better.
It is more difficult to optimize performance in a household because the dynamics keep changing.
We all have lives that keep changing. You decide to have kids, an unexpected medical bill come up, and cars break down. It’s difficult to predict a constant moving target.
When you’re not making a lot of money, it’s important to make sure that the habits you have are consistent.
If you have random things that come up, it reduces reliability and doesn’t allow your personal finances to run optimally. In other words, you’ll be leaking money just like my old car leaked oil.
With consistency and a budget you can see where you can optimize your financial performance – find the leaks and fix them.
A budget will help you:
- recognize where your expenses are going
- show what things are more expensive than what you thought
- mistakes that happen on your bills
- what things you’re willing to get rid of
- prepare for unexpected events
- reach your personal financial goals
- and much more
The downside of a budget is it takes time to find leaks. Then it takes time to patch those leaks.
Do you really want to spend a bunch of time finding leaks and patching leaks? Sometimes a budget is just not worth the time!
When a budget is obsolete and a waste of time
Just like it takes a bit of time to fix an oil leak (at times you can even find it) a budget is no different.
Sometimes it takes multiple months of budgeting for multiple years to really optimize your spending with your income. This can be a huge time waster depending on your personal situation…
If your lifestyle doesn’t change frequently, it’s consistent, and you have a steady income then budgeting may be a waste of time.
Frugal Frank – living below his means (defense)
Frank grew up in a very poor country where the habits he formed allowed him to get used to living a frugal lifestyle, he doesn’t spend much, and he lives a simple lifestyle.
He then moved to the United States where his income is fantastic at $56,000 per year, but the habits in his life have not changed.
He lives in a small house, he buys things on sale, rarely goes out as he values time with family, and he drives a beater car…
The cost of his lifestyle is only $14,000 a year. In this case, his income is 4x his expenses!
- In one year’s income, he can pay for 4 years of your living expenses!
- In 2 years of your income, he can pay for 8 years of your living expenses!
- Take this a step further – in a 5-year working period he could live for 20 years!
In this case, it would be a waste of time to budget since he is playing such great defense (saving on expenses) – he does not need an amazing offense (income).
To master your personal finances and live peacefully you can win in these 3 ways:
- Have a great defense (save a lot on expenses)
- Have a great offense (make a lot of money)
- Have a great defense and offense (reduce expenses and increase your income)
A great offense by the super-rich
The other approach to not having to budget is to look at the offense you are playing and that would be the income that you have coming in.
If you’re a person who enjoys the lavish lifestyle of going out to eat, you like living in a nice house, driving a fancy car, and your lifestyle costs $95,000 per year – that’s not a problem if you have the income coming in.
If you’re spending $95,000 per year to live, there’s no way you’ll be able to afford it making $56,000 per year.
However, if you had a great offense and your income was $190,000/yr then it wouldn’t be a problem.
That’s because you’re making more than your spending!
Your income is still only 2x your expenses which is worse than the frugal Frank example mentioned earlier (who was at 4x their expenses).
Even if you were making more than Frank at $190,000 per year, you are in a higher need of a budget since your expenses are tighter to your income.
Where the tables shift, is if you had a cushiony portfolio of investments of $650,000 then in the long-run you should be fine so long as those investments are generating you some consistent return.
When the budget is needed
Do you think you would need a budget if you had…
- a major portfolio of investments
- huge income coming in
- and barely spent any money
However, most people are weak in their offense or their defense or a combination of both and that is why they need a budget. Take a moment to evaluate yourself and see if you are weak in any of these areas:
- Your income is low
- Expenses are high
- Your income is high, but your spending close to your income
If you fall into any one of these categories then chances are you will need a budget!
The perfect world of not budgeting
The quickest solution to not having to budget is to reduce your expenses… It is instant.
You can stop going out to eat and eat at home. You can turn off your cable TV and play outside instead. This is what you should do instead if you don’t want to budget.
Increasing your income can help you avoid budgeting as well, but many people increase their spending as their income increases – not to mention that increasing your income takes time to build momentum.
A budget is great to make sure your personal finances run efficiently and you don’t have money leaking just like my old beater car leaked oil.
There may be many financial experts that argue against not having a budget, but that is because many people have a poor defense, offense, or a combination of both.
However, the freedom of not having to budget or worry about money creates peace in your life. It also saves you a great deal of time, but to make this happen you’ll need to make sure that your expenses are greatly below the income you’re producing.