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Why Budgets: 1. Awareness and Analysis

There seems to be a basic truth of human nature that anyone, no matter how talented and successful,  will spend themselves broke unless it occurs to them to consciously decide not to.  At the same time, conscious spenders, no matter how limited their income, are able to get by and ultimately accumulate more wealth than you’d expect.  Compounding (on both debt and investments) probably has a lot to do with this as financial planning software readily illustrates, but the first step to being a conscious spender and ending up on the right side of this truth is to create and maintain a budget or even budgets.

budgets, retirement planner and personal finance blog
Conscious spenders accumulate money.

I talked about what a Budget really needs to be in a prior post.  Now lets talk in more detail about some compelling reasons to create a personal or family budget either on-line or manually, that go beyond guilt and feeling like it is supposed to be something you do. 

Awareness

As long as you choose to be bluntly honest with yourself (and why not, nobody else needs to see it) simply sitting down and thinking through where the money goes by category and committing it to budget software or a spreadsheet or even a piece of paper can be a real eye opener.  There really aren’t a lot of opportunities in day to day to life to contemplate (or document) your overall spending big picture.  The very act of working on a budget creates that opportunity for you and helps you question the value your really getting for your dollars.

Analysis

Analysis is awareness on steroids.  If you take the time to lay out all of your spending into a household budget, using categories that make sense to you and capturing the time periods involved (weekly, monthly, annually), a little bit of number crunching can go a long way to providing you with insights into how to spend for better effect.

One great step is to annualize all of your spending.  In other words multiply the weekly line items by 52 and the monthly line items by 12 so everything is apples-to-apples for the purpose of comparison.  Sum the annual amounts by category as well.

Most of the time when people do this they learn two surprising things.  First,where their money is really going.  More often than not the surprise is in learning that a lot of it is going to frequent, small and what they consider relatively unimportant expenditures. Second, just how much of a difference small changes to frequent expenses can make in overall spending.

Good household budget software will make this kind of analysis simple so that the best savings opportunities become immediately obvious.

Next:  Why Budgets:  2. Confidence and Achieving Long Term Goals

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