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When done properly, budgeting can help you control your spending, identify gaps, and (hopefully) increase your savings rate. But it’s not all dollar signs and fat wallets. Indeed, there are both advantages and disadvantages of budgeting.
To be clear: budgeting is a valuable tool and can be essential if you are struggling financially. But while it comes with distinct advantages, it can sometimes cause headache, too.
In this post, we will cover the advantages and disadvantages of budgeting. We’ll also discuss how you can use its advantages to your benefit and how you can lessen the disadvantages.
Do I Need a Budget?
Although budgeting is a valuable tool, it’s not necessarily the case that everyone needs one. Understanding your individual needs is a vital part of determining whether you need a budget. If you don’t have very many variable expenses, it’s possible you don’t need a budget.
Conversely, if you have a large family and your expenses tend to vary a lot from week to week, a budget may be a good idea. So, the first thing you should do is take inventory of all of your expenses. Do they vary significantly, or do they mostly stay the same?
If you aren’t sure, you can take a look at your bank statement and/or credit card statement(s).
While you might not need a budget, it’s important to keep your expenses under control in some cases. If your consumer debt is excessive, it will make it difficult, if not impossible to retire. And that means financial independence retire early is out of the question as well.
It all comes down to how much your expenses vary and whether you have a lot of debt. If either one of these is true, a budget would probably benefit you.
Now that you’ve determined whether you need a budget, what are the advantages of budgeting?
Advantages of Budgeting
The first thing we’ll discuss are the advantages of budgeting. These are the things you may already be thinking about related to budgeting.
They probably more obvious, but we will expound upon them just to lay the groundwork.
If you are in fact deep in debt, you may not think retiring early is even possible. But almost anyone can do say with the right planning and perhaps some behavior changes.
While budgeting won’t do all of this for you – investing is necessary – in many cases, it’s the first step. Let’s review some of the advantages and disadvantages of budgeting.
In doing so, you will see why budgeting is necessary, even if it isn’t always perfect.
Getting Expenses Under Control
If you have a spending problem, budgeting is probably the first thing you should do in response. Considering the average credit card debt per cardholder was $5,700 at the end of 2018, it’s safe to say many people could benefit in this way.
Setting up a budget helps you understand where your money is going. Of course, if your expenses are significantly more than your income, you will need to make some changes. And those changes will be easier for some than for others.
In many cases, though, creating a budget will allow you to identify expenses you can do without. Hopefully, by trimming the fat, you’ll be able to get your spending more in line with your income.
And that is the first advantage of budgeting: getting your expenses under control. You want them to line up with your budget so that at most, you are spending as much as you earn.
Ideally, you should be spending less than you earn. And that leads us to the next advantage of budgeting.
Increasing Your Savings Rate
If you have spent any amount of time in the financial independence (FI) community, you may already know that increasing your savings rate is a key part of FI. That may seem like a pipe dream if you haven’t even started budgeting, but it’s true.
So, how does it work? It’s quite simple (at least in theory). As you decrease your expenses thanks to budgeting, you should have more money left over each month.
Sure, you could go on a nice trip or buy the new iPhone you’ve been wanting, but that’s not the approach we’re taking. See, the goal of budgeting is not to spend that extra money, but to save it instead.
The further you run with it, the more you increase your savings rate. If it sounds impossible, it really isn’t.
Understanding Your Spending Habits
Another advantage of budgeting is understanding your spending habits. I hinted at this earlier. If you aren’t keeping a budget and you simply spend money as you see fit, you may not even know where your money is going.
Budgeting forces you to change that. Instead of all your money disappearing into the abyss, you know exactly where it’s all going.
It may not sound like a big deal, but having that sense of clarity can be hugely beneficial in getting your expenses under control.
Disadvantages of Budgeting
Now that we’ve discussed some of the advantages of budgeting, we’ll go over some of the disadvantages of budgeting.
Everyone is different. Some of us think of budgeting in a positive way. It keeps us responsible and organized. Others may think of budgeting as a boring task that prevents us from having fun.
Regardless of any assumptions you have about budgeting (if any), it’s true that budgeting has its disadvantages. Even though I would consider it a positive exercise overall, let’s look at some of the disadvantages.
Finding the Right Budgeting Method
Even after you’ve determined a budget is necessary, making it work for you won’t just happen automatically. There are actually numerous types of budgeting so it may take some trial and error.
Finding the right type of budgeting will depend on a variety of factors including your spending habits and income. In particular, if your expenses are very different every month, that will affect your budgeting style. The same applies if your income fluctuates greatly.
If that sounds like you, the budgeting method you need might be weekly budgeting.
Stress When Your Budget Gets Tight
Adapting to a lifestyle guided by a budget means you inevitably run of out discretionary funds at some point. Thus, even if you still have money, it might be allocated for something else.
That can often happen if you use budget envelopes which have you use cash for your entire budget. Each envelope corresponds to a category (i.e. entertainment) and if you run out of cash in an envelope, you can’t spend any more on that category.
Or, in some cases, you might just plain run out of money. Hopefully this doesn’t happen, but if it does, it’s a clear sign you should budget for a shorter time period.
If you find yourself stressed because of these challenges, I recommend doing something for fun that is cheap – or better yet, free. Depending on what you enjoy, that could be board games with friends, a hike on your local trail, or having a picnic in the park.
Being More Deliberate
Let’s say you eagerly await getting paid so you can buy a bunch of stuff you’ve been wanting. Sound familiar? If so, you aren’t alone, but that behavior isn’t very frugal.
If you start a budgeting having never done so before, you are going to have to change this behavior. You won’t be able to spend your money as soon as you receive it anymore.
That is not to say you can never spend money on wants, of course. But you will have to be more deliberate with your spending. This means planning ahead – in other words, budgeting.
It might be a bit of a mindset shift, but it will be worth it in the long run.
Conclusion on Advantages and Disadvantages of Budgeting
There are both advantages and disadvantages of budgeting. If you are just starting to get you finances in order, it’s likely that budgeting is the first step.
Thus, budgeting is advantageous because it can set you on the right path to financial freedom. And financial freedom (or financial independence) allows us to do many things we couldn’t do before. Whether it’s retiring early, pursuing a passion, or taking some time off, getting your finances under control is the first step.
But that doesn’t mean budgeting is all fun and games. It can require some trial and error to find the right type of budgeting. It can also stress you out when money gets tight. Lastly, it can force you to live your life differently.
While these seem like difficult challenges, your life will likely be better as a result. Once you really get the hang of it, you can save more money and grow your net worth.
That means getting richer rather than poorer.
And, at the end of the day, isn’t that the ultimate goal? Indeed, you may have to make sacrifices in the short term. But the long term will be that much better for it.
Indeed, there are both advantages and disadvantages of budgeting, but at the end of the day, it’s worth it.
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