Debunking Common Budgeting Tips
Date: May 24, 2016
Budgeting comes in many shapes, sizes and philosophies, each with the purpose of getting finances on track. From skipping that daily cup of coffee to stuffing cash under your mattress, the personal finance world is rife with ideas, tips, suggestions and pearls of wisdom, many guaranteeing success if you follow just a few simple steps. There's a wealth of good and bad advice out there, some of it common knowledge. Here are four tips that require deeper examination.
Budget With A Purpose
Simply having a budget doesn't guarantee success unless you know what success means. Covering day-to-day bills and expenses might make it seem like you're managing your money, but without goals, it's just another way of living from paycheck to paycheck. Investment professional Wes Beharrell gives this example using a common budget goal: "Retirement is often overlooked in budgeting. People focus on mortgage payments, taxes, daycare, groceries — the here and now," he says. "But their largest and often longest expense or debt will be funding their retirement."
Eliminate Budget Loopholes
Many budget methods recommend rewarding yourself to keep budgeting from feeling too restrictive. They essentially equate those spending extras with small cheats on a diet, but without addressing how to incorporate reward purchases in the budget itself. After all, money spent is spent money, and many people may not be able to increase their incomes accordingly — the financial equivalent of burning off those extra calories. "The reality is that an extra dollar a day just might not fit into your allowance of available dollars," says Beharrell. That's not to say everything fun should be cut. On the contrary, an effective budget reflects the lifestyles of a family and incorporates rewards into the plan.
The Envelope Budget
Some budget advice actually advocates using envelopes to list your income and expenses for the month, perhaps posting it on the refrigerator for easy reference. The point of that method is that a budget need not be complex to be effective. And that's true. But even the simplest household budget can get a little less simple when you're trying to account for everything (including unexpected expenses). That's why using personal finance software can be a better, and ultimately easier, option. Receipts can get lost, bills misplaced, so it's good to have all of your expenses and beyond managed in one place.
Dated Budget Advice
A cycle of low interest rates permits you to borrow money inexpensively, but at the same time, your savings will grow slowly. “Saving 10 percent of your net income annually is an adage that no longer works," says certified financial planner David Somerville. "With low interest rates, a better target today is 15 to 20 percent to take advantage of compounding over time.”
"Paying yourself first will never go out of style," Beharrell adds. "However, 10 cents of every dollar doesn't necessarily hold true. Current age, life expectancy, desired retirement age, and desired retirement lifestyle are all significant factors in how much someone should be budgeting toward savings."