The How and Why of Budgeting, Part II

Hawaiian waterfallIn my first article about budgeting, The How and Why of Budgeting, Part I, I said that people generally avoid preparing budgets because they don’t want to be depressed by knowing the details of their finances, since they don’t have enough – or they don’t believe they have enough – financial resources. This was stated by well-known financial advisor Suze Orman on the Oprah Winfrey show in October 2008.

In fact, adhering to a budget is one of the best ways to ensure that you have a financial cushion to sustain you in difficult times. Putting aside money in a savings account or fund out of what you earn, in an amount you can afford periodically, will accomplish that. In that way a budget can be very similar to a savings plan or a retirement plan like an IRA or 401K plan.

The Importance of Incentives When Budgeting

More people would maintain budgets if their accountants help them do it, such as by notifying them when they exceed their budget spending limits, or receive less than what they anticipated receiving. The client would have to report accurately to the accountant for the accountant’s help to be of any value.

An Enrolled Agent I met recently shared with me her experience performing that service for a client. She said the client became upset when having to account to her for spending too much, and she had to discontinue helping the client. I then discussed this topic with a CPA friend of mine, who is knowledgeable and wise, albeit sometimes irascible. He told me my idea to serve as a budget coach is excellent, but that for many years he tried that with several clients, but was unsuccessful. The reason, he explained, was that those clients lacked discipline. They didn’t want to be told by anyone how they should spend their money, not even by their spouses or accountants.

The How and Why of Budgeting, Part I

gold piggy bank on pixabay.comHere’s my version of why you need a budget, unless you’re independently wealthy and your tastes are inexpensive, and how to prepare and maintain one.

Budget psychology

Maintaining a budget is a very good financial practice to get into. It helps you make sure that your expenditures don’t exceed your income. Yet, according to financial advisor Suze Orman, who appeared on the Oprah Winfrey show on October 13, 2008, organizations and individuals usually don’t prepare or maintain budgets because they don’t want to know the details of their finances. They believe that a budget will reveal to them how little money they have and depress them. A few years ago I offered to prepare a tax return for free for anyone who answered a questionnaire consisting of sixteen straightforward questions. I had hoped to use the answers to help me market my services better. One of the questions was about budgeting:

“Do you actively maintain a budget?” The answer given by almost all of the thirty or so people who responded was “no”.

Why is it so important that you maintain a budget?

A budget helps you control your spending so that you can have the money needed to pay for what you ultimately want, like a new car, a new house or a college education. You wouldn’t simply deposit a sum of money each month into a bank account to have the funds available for your desired item, because first you’d have to know how much you can afford to deposit each month. To know that, you’d have to have a budget, as it would tell you how much you can afford for the desired item.