“A part of all you earn is yours to keep… pay yourself first.”
A few years back I read the above quote in The Richest Man in Babylon, a short collection of parables set 4,000 years ago. It’s one of my favourite financial books, epitomising timeless advice on how to generate financial prosperity.
At that time I didn’t get the value of money. I didn’t feel it in my bones.
When it came to knowing how much I spent each month, I was living in a haze.
The simple act of tracking what goes in and out of my accounts changed that. It made me see how I was only saving money sporadically and haphazardly. If you don’t strap on your own oxygen, how can you expect to thrive?
Budgeting has quickly become an indispensable tool in allowing that to happen, removing the friction of saving for my future.
But there are powerful benefits of budgeting, beyond just saving. Let’s look at six.
1. The Big Picture
Budgeting keeps you one step ahead. Without it, you become reactionary. You get mired in day-to-day ‘demands’ on your money, forgetting you have a choice much of the time.
Taking stock at regular intervals will keep 2 crucial questions front of mind:
a) “Do I Spend More Than I Earn?” This will be obvious if you’re racking up mountains of debt, but quantifying the problem on a spreadsheet can lead to insights. You can answer the question very easily by logging ingoings and outgoings every month and tallying up the difference.
b) “What Can I Afford to Spend?” Seeing a breakdown of your expenses naturally feeds your financial acumen. It allows you to answer the crucial question: “is this transaction appropriate for me at this point in time?”
2. Financial Superpowers
Okay, maybe that’s an overclaim.
But with the big picture in place, and armed with data, what follows is the tendency to make wiser spending choices.
Your compulsive spending will drop off, with unexpected benefits (more on that shortly).
You’ll start to intuitively sense which transactions are a form of investment versus a drain on your resources.
Budgeting primes you for setting realistic financial goals and then following through. It’s the basis of more advanced calculations, because it connects up all the dots. Without it, knowing whether you’re on target is so much harder.
3. Less Rumination About Money
The feeling of increased control alone is worth it. Trust me when I say that knowledge of your financial situation in itself can dissolve away anxieties.
For one, the big picture enables you to spot and act on any upcoming cash flow issues in good time.
Just be wary not to get hung up on the numbers each month and to understand that fluctuations are to be expected. Things don’t move in straight lines. Maybe you have to replace the boiler one month, but next month you get an unexpected windfall. Ride the highs and lows without getting attached.
4. Distinguishing ‘What I Want’ from ‘What I Need’
It’s a line which gets blurred in today’s consumerist society.
The list of stuff we’re told we ‘need’ grows and grows. Visualising how much money goes out the window will make you ask: “do I truly need a Lamborghini for my 4-mile commute to work?” (No judgement here, the answer might be yes).
Experiment and you may find out how little you need to live a comfortable, fulfilling life. The trouble is, even when we do go after what we want, it doesn’t bring us the joy we anticipate. Such is the extent to which our expectations are skewed by society.
Here’s an interesting exercise to reconnect with what you truly need. Think about what you enjoyed doing as a child, when (presumably) you had little access to money. What are your fondest memories of that time? Did they involve large expenses?
5. Stronger Relationships
It’s no secret that money disagreements can pervade relationship issues.
Whilst by no means a silver bullet, budgeting as a couple can be used to facilitate more open discussions and create shared goals.
Since my partner and I started budgeting, we’ve only found our relationship get stronger. We’ve learnt to trust each other’s decisions, because we’re on the same page – literally.
If you find yourself in tricky financial terrain with your significant other, a budget may help you to dig yourselves out.
Budgeting is a Keystone Habit – one that sparks positive, transformative chain reactions in a person’s life. Keystone habits make positive changes contagious. This is why you cannot lose by making budgeting a central habit.
After all, what do so many of our bad habits – like drinking, smoking and eating junk food – have in common? They’re all surprisingly expensive (at least in aggregate).
I’m not hailing budgeting as a miracle health cure, but instead a potent instrument for self-development.
When I first began budgeting, I noticed a striking contrast between my expenditure on takeaways vs the gym. I also came to realise the perversion of happily splashing out money on the latest video game, while feeling reluctant to spend money on a book 1/10th the price!
Ever since, I’ve been rectifying the imbalance. I’ve started making it normal to invest in myself.
Budgeting can give you the ability to see in plain numbers how little you’re investing in your greatest resource – yourself. What you do with that information, of course, is up to you.
If you choose to set saving targets when you have a tracking system in place, try following the Pareto Rule to keep things simple:
“Where in my expenses will 20% of the efforts to cut down lead to 80% of results?”
The point is not to apply a blanket rule to cutting down expenses. Investing in your health, prosperity and relationships with others will pay you back many times over. Don’t target them. Frugality is a virtue to strive for, but remember to have fun.
Ask yourself this question every month when tallying up the budget:
“What’s the single biggest unnecessary drain on my resources this month?”
Then plug that hole. Don’t let your financial situation be leaky, like filling up a bath without the plug in.
In the end, it all comes down to focus. Budgeting won’t fix everything, but it will focus you on spending with more care and purpose. And even more importantly, it will reorient your mindset towards one of financial prosperity rather than scarcity.