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Budgeting is critical to your financial health, especially when you are just getting started handling your own money. A budget will help you figure out whether you can afford to make big purchases – a car, a home – whether you can afford a nice vacation and whether you need to find a way to make more money. However, not everyone needs to make and stick to a budget.
In this post, I’ll talk about the characteristics of people who will benefit most and least from making a budget and will provide a questionnaire you can use to help figure out by how much your financial health could be improved by making and following a budget.
Characteristics of People Who Don’t Need to Budget
True confessions time – it has been many years since I tracked my expenses or made a detailed budget! I tracked my actual expenses and made budgets to figure out how much money I needed to retire, but that was a once-in-a-while exercise. So, what characteristics might people have that give them flexibility in the level of effort they put into budgeting and tracking their expenses?
- Having enough money to cover the cost of any emergencies.
- Not having any debt, including paying off their credit card bills every month in full.
- Having enough money at the end of every month to pay all the bills.
- Contributing to retirement savings accounts and setting aside money for large purchases, such as vacations and replacing their car.
- Knowing their retirement savings target whether by a detailed analysis, a reliable retirement calculator or one of the rules of thumb and being on track to have that amount.
- Understanding the risks of their investments.
Characteristics of People Who Would Benefit Most from a Budget
What are the characteristics of people who would benefit most from making a budget?
- They struggle making ends meet every month.
- Their debt payments (including mortgage, student loans, credit cards, cars, etc.) are a high percentage of their take-home pay, especially if they are only able to make the minimum payments or less on their loans.
- They can’t afford to buy more than the legal minimum amount of insurance on their cars.
- They could lose their place to live or have to borrow money from friends if they have an emergency, such as a health issue, death in the family or large car repair bill.
- Their spending habits could cause them to live beyond their means, such as impulse buying or gambling.
Score Yourself – Do You Need a Budget?
Use the questionnaire below to find out where you are on the budgeting spectrum. The table below the questions will give you guidance based on your score.
1. Are you an impulse shopper?
- I’m good about buying only things I can afford – 1 points
- When I go to the store, I buy things that catch my eye – 0 points
2. Do you know your credit score?
- Yes and I’m comfortable with it – 2 points
- Yes, but it is too low for my financial goals – 1 point
- No – 0 points
3. Do you have enough money at the end of each pay period?
- Always – 2 points
- Sometimes – 1 point
- No, I’m always squeezed just before I get paid – 0 points
4. Do you have credit card debt (i.e., is your credit card balance more than your current month’s charges)?
- No – 2 points
- Yes, but I have a plan to re-pay it and am sticking to it – 1 point
- Yes and I haven’t figured out to get it paid off – 0 points
5. Do you have any other balances overdue, such as bills, mortgage or other loan payments?
- No – 2 points
- Yes, but I have a plan to re-pay it and am sticking to it – 1 point
- Yes and I haven’t figured out to get it paid off – 0 points
6. What percentage of your take home pay is needed to cover the sum of your mortgage payment/rent, insurance and debt payments (excluding current month credit card charges but including car loans, student loans and other loans)?
- <25% – 2 points
- 25% – 50% – 1 point
- > 50% – 0 points
7. How many months of expenses do you have in cash or cash equivalent for emergency savings?
- > 1 year – 2 points
- 25-1 year – 1 point
- < 3 months – 0 points
8. How much do you have in assets you could sell within 3 months that you could use for a major purchase such as replacing your car?
- At least $10,000 – 2 points
- $2,000 to $10,000 – 1 point
- Less than $2,000 – 0 points
9. How well insured are you?
- I have at least $1 million of liability limit on my vehicles and residence and can afford to cover my deductibles – 2 points
- I have at least $300,000 of limit on my vehicles and residence and covering a deductible won’t be too painful – 1 point
- I have only the insurance coverage I have to buy and will be in financial trouble if my residence or car were damaged – 0 points
10. Have you set a target retirement date and savings amount?
- Yes, I have a target retirement date and know how much I need to have – 1 point
- No clue – 0 points
11. How are you progressing on saving for your retirement?
- I know how much I need to save each year and am on track – 2 points
- I know how much I need to save each year but am not saving that much – 1 point
- No clue – 0 points
Tally Your Score
The maximum score on this assessment is 20. The higher your score, the more financially responsible you are and the less value you are likely to get from creating a budget. The table below provides some thresholds and my thoughts on how much you could benefit from creating a budget and tracking of your actual expenses against your budget.
| Score | Will a Budget Help You? |
|---|---|
| 17+ | You are quite financially responsible. No need to strengthen your current budgeting process. It seems to be working, though it is always informative to make a budget and then track your actual expenses against it. |
| 13 – 16 | You have some weaknesses in managing your finances. You probably just need to focus on the low-scoring questions. A budget might help if some of those weaknesses are expensive. |
| 9-12 | You have clearly made a good start on learning to manage your finances, but a budget will likely help you reduce debt, increase emergency savings and/or save for retirement. |
| <9 | I’m glad you are reading this post as it shows you are interested in moving in the right direction. Even a crude budget and watching your expenses will help you become more financially secure. |
Want to get started with budgeting? Check out my series of posts with week-by-week steps for creating your first budget.
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Susie Q
Susie Q is blogger on financial literacy topics targeting young professionals and others interested in better understanding their finances. She is a retired property-casualty actuary who prepared and interpreted analyses to help senior management make better financial decisions. Her posts can be found here .
