Your Money_ The Missing Manual - J. D. Roth [19]
One thing more than any other can help you achieve your financial goals: action. If you want to pay off your debt, own your home, or retire early, the best thing you can possibly do is start today. Commit to your goal and take the first step. The sooner you start, the sooner you'll be living the life of your dreams.
Chapter 3. "Budget" Is Not a Four-Letter Word
"A budget is telling your money where to go instead of wondering where it went."
—John C. Maxwell
As you learned in the last chapter, your financial goals are your destinations. But to get from here to there, you need a map to show the way. In other words, you need a budget.
To most people, budgeting sounds about as much fun as a trip to the dentist. But creating and sticking to a budget doesn't have to be a giant chore, and it can have huge benefits. You probably think of a budget as a restrictive, tedious accounting of every penny you earn or spend. Turns out budgets don't need to be super detailed to be helpful.
For a lot of people, a broad, general budget gives them the guidance they need to reach their financial goals without making them feel like they're in a straightjacket. But some people prefer a detailed budget with lots of categories. If you pick a budget that fits the way you live, it can help you meet your goals more quickly than you ever imagined.
This chapter will give you some basic budget frameworks that lots of people have road-tested and found helpful. You can use them as is, or build on them to create a more detailed budget. You'll also learn why many budgets fail, and find out how to avoid common pitfalls. Finally, you'll get a rundown of some of the best computer programs for tracking your budget.
Mapping Your Financial Future
You may have the wrong idea about budgets—lots of folks do. Budgets aren't meant to control you, and they shouldn't prevent you from enjoying life. In fact, when done properly, budgeting doesn't make you spend less on the stuff you want; it helps you spend more on the stuff that matters.
In their classic The Millionaire Next Door, Thomas Stanley and William Danko write, "Operating a household without a budget is akin to operating a business without a plan, without goals, without direction." In Chapter 2, you learned how to set meaningful goals. A budget is simply a plan that helps you reach those goals; it's a way to specify how and where you want to spend your money.
Your budget can show you where you've already spent your money (expense tracking), what you have available to spend now, and where you want to spend your money in the future (expense planning).
If you don't look at what you've spent in the past, you have no way of knowing how your current spending relates to your habits; in other words, you can't know what your "typical" spending looks like. And if you don't look at the future, you're not taking an active role in directing your money, which makes it hard to reach your goals. A good budget helps you look at the past, present, and future so you can evaluate your spending decisions in relation to your past choices and future plans.
Many budget skeptics turn into budget evangelists once they discover that budgeting can take them from deficit spending (spending more than they earn) to actually having a cash surplus (earning more than they spend); see the box on Simple Budget Frameworks for a real-life example. In this way, rather than making you feel confined, a budget can actually be liberating. Keep reading to learn more about the joys of budgeting.
Building a Budget That Works
As mentioned earlier, your budget is your roadmap to success. It should help you take charge of your financial situation and steer you toward your goals. The key is choosing the right map. Maps are designed to make your journey easier, and the same is true of budgets. Yet when