Joel Wagoner, CPA, CMA, CFM, Assistant Professor of Accounting, discusses why and how people should budget their money in “Personal Budgeting: What Are We Trying to Do?” published in this month’s issue of the Journal of Financial Service Professionals.
“We may share a general consensus that personal budgeting is crucial to successfully managing one’s money, but there is a remarkable lack of consensus on how best to go about budgeting one’s money,” says Wagoner. “Perhaps the lack of consensus is merely due to different people in different stages of their lives having different needs. The retiree who is budgeting to provide for necessities on a fixed income does not have quite the same purpose for budgeting as the professional at the peak of his/her career.”
So why should people budget their money? Wagoner relates two main purposes of budgeting for business—planning and control—to personal budgeting with three interrelated steps that enable businesses to plan and control their expenditures.
Step 1: Estimate in advance what your expenditures will be during a certain period of time.
Step 2: Record your actual expenditures during that period of time.
Step 3: Compare your actual expenses to what you estimated you would spend.
“In personal budgeting, as well as in budgeting in business, the first step accomplishes the purpose of planning,” explains Wagoner. “The third step accomplishes the purpose of control. The second step collects the necessary data to accomplish the third step.”
But why don’t people budget? Wagoner speculates why many people do not keep track of or plan what they spend.
It takes too much time.
Wagoner notes that it takes time to develop a process to budget and record expenses, then additional time to actually use and implement that process. Although the budgeting process can be cumbersome and time consuming, Wagoner says it can also be made simple with the use of resources such as free budgeting spreadsheets available for download online, computer programs such as Microsoft Excel, and personal finance software available for purchase.
Budgeting is generally perceived as a setting of limits on spending.
“In a consumption-based society where spending money is a pleasurable activity that is encouraged both by one’s peers and advertising, budgeting becomes a constraint on pleasure.” Wagoner compares budgeting to dieting in that dieting is generally accomplished not by abstaining from eating the foods we enjoy, but by enjoying them in moderation. In the same way, budgeting does not need to be seen as abstaining from or limiting what we enjoy.
Those who do not budget and record their expenses have other informal strategies for money management, such as distinguishing between routine and non-routine expenditures and managing the two separately. Wagoner’s research uncovered many people who are unable to plan and budget successfully due to continuous unexpected expenses. “It is often easier to define what we hope to accomplish in terms of what we hope to prevent,” says Wagoner.