Household Budget

The Single Most Powerful Personal Finance Tool

Friday, January 20th, 2012

If a tool was available that would give you a strong sense of control over your finances and help keep your financial stress low, wouldn’t you use it?

If a tool was available that served as a financial roadmap, showing you clearly how to live within your means, be generous, and save or invest for future goals, wouldn’t you use it?

And if this same tool helped create a sense of financial teamwork and trust in your marriage, wouldn’t you use it?

What is this magical tool?

Why, of course, it’s the lowly, much maligned, much misunderstood budget – or, as I prefer, Cash Flow Plan.

It’s what enables us to live out the third of my 11 principles for simple, meaningful success: Plan to Succeed.

What Rich People Know

When some people think of a budget, they think only certain types need one. People with lots of debt.  People with a low income.

The wealthy?  No way, or so they think.

In fact, one of the most interesting findings from the classic book, “The Millionaire Next Door,” is that over half of all millionaire households use a budget to guide their finances.

As authors Thomas Stanley and Wiliam Danko explain, “Planning and controlling consumption are key factors underlying wealth accumulation…Operating a household without a budget is akin to operating a business without a plan, without goals, and without direction.”

Succeeding to Plan is Planning to Succeed

Haven’t ever used a budget?  You could start today.

I walk through the four steps to setting up and using a budget in the Budget Quick Start Guide that’s available for free on the Resources tab of my site, so I’m not going to repeat them here.  You’ll find my Recommended Spending Guidelines there as well, which will help you develop your plan.

The Guidelines cover four different size households (1-, 2-, 3-, and 4-person households) and nine different incomes, ranging from $30,000 to $150,000.  Just find the one that most closely resembles your circumstances.

You’ll see that these are ideal plans, meaning they assume no debt other than a reasonable mortgage.

If you have other debts, you’ll have to adjust your spending in other categories to allow for the debt payments.

But, But, But…

Whenever someone comes to me with a financial dilemma – they’re deep in debt, can’t find any money to save, can’t stop fighting about money with their spouse – I always ask whether they’re using a Cash Flow Plan to guide their household finances.  The vast majority of the time, the answer is no.

And the “no” is often accompanied by a quizzical look as if I didn’t understand the question.  “But what I was really asking…”

I did understand.  It’s just that I need more information.  Objective, factual information.

To be sure, there’s a ton of emotional stuff involved in managing money – temperaments, moods, stressful circumstances, the emotional imagery used in advertising.  We often get in trouble with money when emotion overrides logic.

A well-designed Cash Flow Plan gives us the logical, factual information we need to live within our means, be generous, save and invest, avoid debt, and spend smart.  Assuming there’s enough income to meet basic needs, that’s true for every income level and household size.

Are You the Type?

I firmly believe everyone would benefit from the use of a budget.  Rich or poor, young or old.  Everyone.

It isn’t drudgery, and it isn’t something you go on like a diet.  It’s simply the single most powerful tool available for successful money management.  Why not start putting this tool to work in your life today?

What questions do you have about using a budget?

Other posts in this series on the 11 principles that lead to simple, meaningful success:

Who else would benefit from this post?  Why not forward a link to my site? And if you haven’t done so already, you can subscribe to this blog by clicking here.  Two or three times a week, you’ll receive ideas and encouragement for using money well.

Categories: Planning

9 Responses to “The Single Most Powerful Personal Finance Tool”

  1. Budgets are good for effectively managing money. Creating a budget is almost as hard as sticking to a New Years resolution. The most difficult part is being honest with yourself and consistency.

    • Matt Bell says:

      It definitely does take some work to set up a budget, and developing the daily habit of tracking takes some getting used to. But the benefits are huge. When you truly know where you money is going, you can be proactive about managing money. And there’s a ton of freedom and satisfaction in that.

  2. Great Post Matt! Budgeting has gotten a bad rap over the years by the broke and down hearted. I like that you call it a cash flow plan. I call it a spending plan. Budget just seems so restrictive. I like knowing how my money flows and how I can spend it wisely! We have a long road to affecting change, but I know we can do it!

  3. Nice way to tell others on importance of budgeting, loved it Matt!

  4. K.C. Knouse says:

    I agree that budgets are a wonderful tool. And I am dismayed that so many who write on the topic of personal finance downplay the need for a detailed budget, or any budget at all. Yes, budgeting requires setting priorities and making spending decisions, but that happens anyway every time a person spends money. Isn’t it better to set priorities and make spending decisions in advance, before the money is spent, using a budget, than it is to do it on the fly when one actual spends the money?

    I believe the main reason people don’t like budgets is because a budget reveals the reality of their financial situation. Often that means that they simply don’t have enough money to do all of the spending they would like to do. People don’t like to hear that. It’s also the reason people think budgets are restrictive. The budget isn’t restrictive, it’s merely a reflection of their financial reality. Many people would rather be in denial.

    From my experience, a budget is actually liberating. With a budget I know what I can spend and still meet my responsibilities, achieve my goals, and stay within my income. Now I can spend up to that amount freely, without worrying if I will come up short at the end of the month. No guilt, no second-guessing, no surprises.

  5. Shawanda says:

    I love budgets. I created my first budget in early 2008, paid off all my debt in late 2008, and I’ve used a budget ever since.

    To me, a budget is nothing more than income and expenses recorded on a piece of paper (or in a Word document or whatever). Once you know what you’re working with, you have a clear picture of what steps you need to take in order to manage your money. Some people are more receiving of budgets when you call them other names. Regardless, it’s still income minus expenses.

  6. Tanya says:

    Hi Matt, I commented on one of your emails, budget-related “some” time ago and you replied to my email address. To make a short story shorter, I just read the most recent column, and thanks to another book by a Catholic author realize that I DO need to start tithing,…. what you could do would be to write a budget guideline smiles, for someone who’s , let me check pay stubs lol,gross income was in the 18,223.00 range and let me see, for taxes, wages was 17403.27.Ten percent, according to what I calculated, would be 110.00 and something cents, which freaked me out, because the “last” time I did this I was sure that I hsd come out with the figure of 50 something, for tithing. Anyways… Giving a 110.00 would mean that Ii would have to reduce my foodbudget of 120 a month, ( single person) and have NO extra moneny to stock up when it was convenient. Yes, I can assure you that after reading this book, wait,Wwhy Enough is Never Enough: Overcoming Worries about Money-A Catholic Perspective by Gregory S. Jeffrey, and your posts, at least today, I can “sense” the struggle, but, but but???? ouch…. do I reaaaaaaally have to give that much to God? I mean I never even thoght of myself as “not being thankful for God’s gifts” by not tithing etc..

    Anyways, sorry for the rambling. But how about coming for budget guidelines for those who earn much less than 30,000 a year smiles? Thanks.

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