There are basically two schools of thought in the personal finance world when it comes to budgets.
School number one
Touts traditional budgeting. That is, using spreadsheets, or envelopes, or jars, or paper cups, or shoeboxes, or old coffee cans, or old rubber boots to divide up and allocate how much money you can spend in each of the many spending areas of your life. Money allocated must not exceed money earned and any good budget includes allotments for saving too. If you overspend in one area, you need to cut back in another in order to balance your budget. Makes sense to me.
School number two
The “pay-yourself-first” camp. This school says that you should automatically save for the long-term first, as soon as you get paid. Second, pay your mortgage (or rent) along with the rest of your bills. Then, do whatever you want with whatever is left over, as long as you don’t go into debt.
Can’t argue with that.
Teachers at school number one say that school number two sucks because there will never be enough money unless you make and stick to a written, detailed budget. Teachers at school number two argue that traditional budgets don’t work in the real world and that long-term saving almost always suffers as a result.
So, which school is better?
That’s easy. Whichever one works best for you.
We human beings are incredibly complex creatures and what works for one of us doesn’t necessarily work for someone else. Some people like coffee, others prefer tea. Some folks are party animals, others more sedate. There are early risers and there are night owls. Leafs fans—Habs fans. Smart people—Habs fans.
I know people who are remarkably passionate about their traditional budgets. For them, the process is freeing, even comforting. They don’t worry about how much money they can spend each month because their budgets determine that for them in advance. They don’t worry about how much they can spend on groceries this week because they budgeted $175 a week for groceries. So that’s what they spend, and if they go over that amount they know to cut back in another area. Traditional budgeters are empowered by the detail, structure, and spending awareness that their budget provides for them.
I also know people who are incredibly disciplined about paying themselves first, paying their bills second, and getting by comfortably with whatever’s left over without going into debt. These folks take great comfort in knowing they have taken the right steps to ensure that they will enjoy a very comfortable future, and they also understand that they need to keep a grip on their “after-paying-themselves” spending in order to secure that comfortable future.
Personally, I am a strident advocate of the “pay-yourself-first” school of budgeting. However, my endorsement is not as exclusive as you might think. I actually prefer more of a hybrid approach to budgeting, one that employs the best of both worlds. While I firmly believe that paying yourself first is a cornerstone of any serious financial plan, I also believe that a lot of pay-yourself-firsters could accomplish more with their money if they took a more structured approach to managing whatever’s left over after they’ve paid themselves. Conversely, I also think that a lot of traditional budgeters would be better off over the long-term if the first thing they budgeted for was an aggressive, non-negotiable savings amount and then they built the rest of their budget around that.
Pay yourself first and budget the rest. I think I’ll open a school of my own.
Whatever budgeting system you decide to use, always remember that the most important part of any budget is to balance the fundamentals of responsible personal finance. Save for your future. Spend less than you earn. Spend smarter. Live within your means. Stay out of excessive consumer debt.
Do that and you’ll be fine.