Cover image credit: 3D Budget Pie Chart by ccPixs.com is licensed under CC BY 2.0.

If you make a substantial amount of money in your life, can you ever end up broke?

Indeed, you can! Clearly, a high income is no guarantee of financial stability.

So what else is needed for financial stability? We’ll argue below that all you need is the simple practice of budgeting¹.

Is avoiding being broke the only reason you should budget though? As we’ll show below, there’s more to budgeting than just avoiding being broke – or keeping track of income and expenses, as is conventionally believed.

Needs

No matter how different we think humans are from all other species of animals, just looking at how we spend most of our lives you may be surprised to see how similar we all are to other animals. For example, like all animals we need certain things for our survival, e.g., food and water. Furthermore whether you realize it or not, you too spend most of your time in pursuit of satisfying your needs.

“But”, you may object, “I spend most of my time doing my job or running my business! How is that the same thing as hunting or foraging for food, which animals spend most of their day doing?”

Well you see, one of the reasons you’re doing your gig (i.e., job or business) is to earn money², which you can then use to buy things like food. So in effect, you’re spending most of your day on activities that will allow you to meet your needs (directly or indirectly), just like other animals!

Also like some animals, we not only try to satisfy our needs in the present, but also want to satisfy our future needs³.

Reqs spectrum

By the way when we refer to the term “need”, we’re including not only those things that are essential for survival, e.g., food, but also those that are more colloquially referred to as “wants” or “luxuries”. We believe that this distinction between needs and wants is a false dichotomy. To illustrate this point, consider that when you’re starving, food is a “need”, whereas if you’re fully-fed⁴, the same food becomes a “want”.

Instead, it’s much better to think of your “needs” and “wants” as lying on a spectrum, ranging from those that are “must-have” to those that are “nice-to-have”.

To avoid any confusion, we’ll henceforth use the term “reqs” (short for “requirements”) to include both “needs” and “wants” in both time-frames, present and future.

Ultimately, whether a req is a “need” or “want” is personal to a large extent. Instead of categorizing your reqs into the distinct buckets of needs and wants, we think it’s better to think of your reqs as falling somewhere on the must-have to nice-to-have spectrum⁵.

The quality of your life is critically dependent on how well you’re able to meet your reqs. In fact, a fundamental prerequisite for a happy life is being able to meet your reqs comfortably. How well you meet your reqs depends on how much remuneration, henceforth called “rem” for brevity, you’re earning in exchange for your most valuable resources, viz., time, effort, skills, etc. that you put into your job or business.

Fundamentally, the practice of budgeting is nothing more than an exercise to determine how best to allocate the fruits of your labor, i.e., your rem, among your reqs.

Allocating between reqs

When allocating your rem towards satisfying your various reqs, the first priority is always present-day must-have reqs, a.k.a., “needs”, as those are essential for your survival now⁶ and into the future. Beyond that, how you allocate your rem is up to you. On the one hand, you have your nice-to-have present reqs, a.k.a., “wants”, and on the other hand, you have your future reqs (both “needs” and “wants”). The amount of rem allocated to the former (together with the amount for present “needs”) becomes your expenses, whereas that for the latter becomes your investment (or savings⁷).

How much weight you give to present wants vs. future reqs is an entirely subjective matter. At one extreme, you have the hedonist, who would allocate all their rem remaining after meeting their present must-have reqs to satisfying present nice-to-have reqs, a.k.a., wants, and nothing for their future reqs. At the other extreme, you have the ascetic planner, who would do the exact opposite. For each of us, there is an optimum allocation (or to be more precise, a range of allocations) somewhere in between these two extremes that would be most satisfying, depending on our individual personality and preferences.

Ultimately, this is the crux of budgeting: to determine the right allocation of your rem between present “wants” and future reqs that works best for your own individual circumstance at a given point in time.

Thus, the practice of budgeting is essentially an approach to foster awareness of all the items you are channeling your hard-earned rem into. Developing this awareness is the first step in taking control of the most precious resources at your disposal, viz., your lifetime capital and directing it in ways that would enable you to live a personally satisfactory life.