If you frequent personal finance sites, you probably have run across an article or two advocating the development of an annual budget to manage your personal finances. After reflecting about the topic and thinking about my own personal finances, I don’t think the focus on a full fledged budgeting process is the best method.
Here’s what I’ve come to believe…Most people will not dedicate the time to developing a budget and sticking with the budget set. Typically, the budgeting process and the up-keep to track actual activity versus the original budget is more than your average person is willing to deal with. So, if budgeting is beyond what most people want to do in terms of personal finances, then what alternative exists that will help promote and maintain fiscal control?
The alternative I’ve used for many years looks at budgeting as a secondary consideration and savings as the primary. Let me explain…When you get paid, you take home say $4,000 per month or $48,000 annually. Based on what you’re bringing home you need to set a savings percentage. If you’re only looking at retirement and have 30+ years ahead of yourself, then a savings rate of 10% is a decent minimum. In dollars that’s $400 per month or $4,800 annually.
Side note: If you save $400 a month and are able to average a rate of return around 7% annually, over a 30 year period, you’d end up with around $500,000 in savings.
What placing savings at the paramount of your personal finance decisions does is it creates a hierarchy in which all other activity must adhere. Everything is seen through your savings lens. If you want a new car you must ask yourself how will it fit within the goal of saving for retirement or some other goal you have. You will still need to “budget” for the expense, but you won’t have to incorporate it into some grand budget.
I understand that the idea posed above might sound a little too simplistic. It’s not. Take a look at your bills over the past month or two. Have you been able to save anything? What costs can you adjust? What costs cant you adjust within the next month or next quarter? The costs you can adjust are variable and they are you biggest asset to crafting a saving percentage into your personal finance regimen.
To help you determine where you are and where you want to be, I have available a Monthly Budget Worksheet. It identifies what your fixed and variable expenses are and shows graphically how the items measure compared to your monthly income. (It’s completely free, you don’t have to sign up for anything)
To conclude, putting your savings goal at the pinnacle of your personal finances (That means the piggy bank eats before any other need…) makes the rest of your personal finance choices take a subservient role. If you’re able to keep your focus on your savings goal and not falter, then the act of creating a full scale annual budget is not something you need.