A 2007 government study found that only 52% of Australians budget regularly for their day to day finances. There are a number of common misconceptions around budgeting which lead people to not have a budget. Some of the common misconceptions around budgeting:
- I’m not good at math so I can’t manage my money
- I don’t want anything big so I don’t need to save
- I hold a secure job and see no reason to save
- I pay my bills promptly and don’t need budget
- Getting my personal finances under control can wait
We have previously discussed the first misconception on how through the use of the tools available today it does not matter if you are good at math or not to manage your money. Lets have a look at the other misconceptions.
The common theme for the other 4 misconceptions is that nothing is wrong, I have enough money to live off, why do I need a budget now. There is no sense of urgency. Why is because you don’t know what is going to happen tomorrow.
Why these misconceptions are wrong and you do need a budget
My own personal experience was a couple of months ago. I was involved in a minor traffic accident (my fault, and yes I am still kicking myself over it). We have insurance on the car and the damage didn’t look too bad…. oh how I was wrong.
The car ended up being off the road for 4 weeks, between the insurance excess and paying for a hire car (so I could continue to earn a living) we ended up being out of pocket $2,000.
How would your finances look if you had an unexpected $2,000 bill? Were made redundant tomorrow? Your landlord puts your rent up by $50 a week? The banks put the interest rate up by 1% on your home loan?
This is why you should have a budget, to understand what your current expense are and to know if you can afford your next purchase. If your rent is put up by $50 a week, can you cut back somewhere else to balance it all out?
The main reason to have a budget is so that you can make informed decisions about your spending and to plan for the unknown events in our lives. When we know and understand our spending (expenses) we can then plan for the future.
Whether that is putting some money aside for a rainy day, saving for our kids university education (yeah that is not getting any cheaper), putting the deposit together for your dream home or planning a family vacation at Christmas. Having a budget lets you make these decisions.
Next time we will have a look at the 4 elements which make up the budget; Income, Expenses, Debts (or Liabilities) and Savings.
If you are suffering from one of these budgeting misconceptions here is a link to a budget template so that you can start thinking about the elements which will make up your budget.