Do You Really Need a Budget?

Let’s say your next vacation is to Mogadishu. There’s tons of history and lots to see. You could tour a mosque or two, shop the Bakaara Market, and maybe even do a Black Hawk Down walking tour. Your Facebook friends would be jealous.

Your thrill seeking wouldn’t come free, though. There’d be a pretty reasonable risk of kidnapping or death, so your first step would be to devise a very strategic plan. You’d need to study the map carefully to chart the safest route and precisely lay out every step of your journey.

Initially, your plan would tell you what you should expect on your trip, but that’d last about 10 seconds. Once you started, you’d need to keep your eyes open and your wits about you to see what’s ahead. Unplanned challenges and threats could arise in an instant. If your plan said to go a certain way but a militia group was blocking it and shooting at you, you might want to change course.

We can contrast the Mogadishu trip with a visit to a local park’s playground. Less planning would be required. You and your kids (you have kids in this scenario – congrats) could just head out and have some fun, but you’d still need to keep your eyes open and your wits about you for what’s ahead. You might show up and see there’s lots of kids on the swingsets, a swarm of killer bees, and a dodgy stranger lurking behind a tree. You probably don’t need to plan for those (“Dodge any and all swings” / “Bring a bee suit” / “Prepare to tackle guy in overcoat if he approaches kids”) – you could just be ready to react as needed.

Not every trip needs a plan. But every trip – even a walk in the park – requires you to observe what’s ahead.

It’s the same with finance. Your “plan” is your budget – it’s the path you’ve actively charted to get where you need to go. It’s your attempt to control the journey. “What’s ahead” is your forecast – it’s more passive and is just your best guess of what’s going to happen. And finally there’s the actuals (income and spending) – what actually happened on the trip.

In business finance, these three components are inextricably linked. You need the budget to set expectations and goals. You need the forecast to capture surprises and changing conditions. And you need actuals because people tend to really care about them for some reason.

In personal finance, I’d argue that everyone needs to track actuals (income and spending) and everyone needs a forecast. Not everyone needs a budget.

Actuals / How Was the Trip?

While I don’t currently budget, and I’m cavalier about forecasting, I do keep a careful eye on our spending and cash flow.

Once in a blue moon, I’ve noticed a expense category running a little high. It’s easy to investigate what happened and make a change if needed.

This is a luxury, though. We live below our means and have a reasonable pile. If either weren’t true, actual results of a problem could be too late.

Who Needs a Forecast?

You need a forecast if there’s any chance of surprises (especially the negative kind) in your cash flow. I think that includes just about everyone.

If your cash flow is highly variable, and/or you have limited ready cash reserves, and/or you need some advance notice to float unplanned expenses, a forecast is critical. In finance, “things are going to be tight next month” is much better than “we’re screwed”.

My own forecasts are pretty basic. I know our monthly run rate, and I’m happy to allow a lot of noise around it. I’ve got a good calendar sense of big ticket items (e.g., annual property taxes), and I quickly include any new items that pop up (e.g., my shiny new HVAC unit this week – yay!). I’d say the missus and I talk in advance of major discretionary items, but we haven’t had any in a long while.

Since we do live below our means and can tap assets as needed, forecasting for us is just cash flow management. And cash flow management is downright fun.

Who Needs a Budget?

You need a budget if you’re not sure you can make ends meet or achieve your goals. Your ability to complete the journey is in doubt.

You also need a budget if you need help with spending decisions. Your long-term desires (as planned in a budget) and short-term impulses aren’t always aligned. Your instincts may lead to bad decisions, so you need the roadmap to keep yourself in check.

I’ve always lived below my means (sometimes way below), so that’s limited how much I’ve actively budgeted. I did some quick napkin math for my MBA, but it checked out quick. I also made a quick-and-dirty budget before I quit the Man to confirm we’d still be in the black. It wasn’t really a Mogadishu-level plan – more like a visit to Detroit – and was quickly obsolete with my first client.

I get more than enough information and control from tracking spending and keeping a forecast. A budget might make me relax more when I’m struggling over a minor purchase, but where’s the fun in that?

Sometimes You Don’t Need a Map

Going without tracking actuals (spending) is like a permanent state of amnesia. You have no idea where you’ve been. Good luck.

Going without a forecast is like walking blindfolded. Whether you’re in Mogadishu or the local park, that’s dangerous.

Going without a budget is like traveling without a map. That sounds a bit crazy, but don’t we often travel without maps? If:

• You’re headed somewhere pleasant and every turn you can make is nice
  (You live way below your means and/or have a lot of assets)
• You keep your eyes open and your wits about you
  (You have a good financial forecast and can see surprises coming)

…do you really need a map?

Budgets can be incredibly valuable for people who need them. But not everyone does.

 

Do you track spending / use a forecast / keep a budget? Have you experienced the majesty of  budget v. forecast v. actual reporting? Where is the most dangerous place you’ve visited? Let me know in the comments.

Picture courtesy of Pexels