The Experts: Is Creating a Personal Budget a Good Idea?

Carl Weins for the Wall St Journal writes: Are personal budgets a good idea? The Wall Street Journal put this question to The Experts, an exclusive group of industry, academic and other thought leaders who engage in in-depth online discussions of topics from the print Report. This question relates to a recent article that discussed the best ways to stick to a budget and formed the basis of a discussion in The Experts stream on Wednesday, June 12.

Gus Sauter: Pay Yourself First

The obvious first step to achieve any financial goal, whether it's retirement, buying a house or financing a child's education, is to save money. It's also probably the hardest part of building a nest egg. In other words, once you saved some money, there is a wealth of information about investing that can be applied. One example of a product that can simplify investing is target date funds that can be a one-stop solution to an effective investment strategy.

Saving is much more difficult though. We're constantly being bombarded with ways to spend, so saving requires a very strict discipline. I find that the best way to ensure that focus is to create a budget. And the very first item in the budget should be your savings. Saving shouldn't be what is left over after you're done spending. As the saying goes, pay yourself first. Then figure out how all of the other pieces of your consumption fit into the puzzle. There will almost always be trade-offs that have to be made. Say spend less on going to restaurants so you can replace an aging car. The trade-offs are difficult, but unless you make these decisions consciously, you aren't likely to reach your financial goals. And that is the major reason that America has such a low savings rate.

George U. "Gus" Sauter is a senior consultant to Vanguard Group Inc. From 2003 through 2012, Mr. Sauter served as Vanguard's chief investment officer.

Eleanor Blayney: Don't Drive Blindfolded

Budgets are essential for financial planning. Managing your financial life without one is like driving into your future blindfolded. You have no idea where you are now, where you'll be later, and the financial distance between those two points. Plus there may be some serious impacts along the way.

Personal budgets should be both realistic and aspirational. First, they should be prepared based on an accurate and comprehensive review of the money flowing in and out of the household. In today's virtual and plastic world, this can be a difficult undertaking: No longer do we use just checks or cash, but also credit and debit cards, automatic payroll deposits and deductions, online payments and PayPal accounts. But taking the time to collect all the statements necessary to create a true picture of existing money flows is imperative to taking financial control.

The budget itself is then created to take you from what is actual to what is achievable. What sources of income might be created or enhanced? What expenditures might be eliminated or decreased? New numbers are thus projected as realistic targets. The key is to create "profits" or excess cash flow that can support overall financial goals, both long-term and short-term.

Eleanor Blayney (@EleanorBlayney) is consumer advocate of the Certified Financial Planner Board of Standards.

Larry Zimpleman: The Sense of Control Is Empowering

I think some form of budget makes sense for everyone. If nothing else, it's helpful to know where your money is being spent. Budgeting can help you set out the priorities that are most important to you—that should certainly include a meaningful amount for long-term savings (8%-12% of income) but might include shorter term priorities, as well, like saving for a vacation, saving for a nicer car or down payment on your first condo or home. What I find is that once people have good habits about living within their means, it creates a real sense of empowerment and positive control that is reinforcing. Even if the notion of a budget gives you a headache—try it for a few months just so you can feel the sense of self-control it can create.

Larry D. Zimpleman is chairman, president and chief executive of Principal Financial Group. PFG +1.68%

Greg McBride: The Benefits Are Clear—Yet So Many People Don't Do It

Setting a budget and tracking your spending is the first tip I give anyone trying to get a handle on their finances. Unfortunately, Bankrate.com has found that only about 60% of Americans actually adhere to a budget. But the benefits are clear—using a budget sets boundaries on your spending so you can maximize your saving and investing.

Greg McBride (@BankrateGreg) is a senior financial analyst and vice president for Bankrate.com, providing analysis and advice on personal finance.

Manisha Thakor: Budgets Are About Happiness

Absolutely! The kicker is that I think people should use budgets to maximize their joy…which isn't the typical feeling a budget evokes.

Let me explain. Back in 1992 I read "Your Money or Your Life" by Joe Dominguez and Vicki Robin. That book changed my life. It made the argument that since most of us earn money by doing some type of work, when we spend money we are in essence spending our life's energy. Viewed through this lens, the point of budgeting isn't to deprive ourselves but rather to make sure that our hard-earned dollars are going to the experiences and items that most make our hearts sing.

My recommendation when creating a budget for the first time isn't to look backward through piles of receipts and credit-card statements. Rather I suggest writing down everything you purchase—for a week or a month—on a slip of paper that you carry around in your wallet or purse. At the end of the time period, take out a highlighter and mark anything you spent money on that really put a smile on your face.

Now you are ready to start budgeting…for you can see clearly what areas of spending aren't enhancing your enjoyment of life. It may be eating out with friends you don't even like or a gym membership that you never use. Whatever the item, the point is this exercise helps highlight why you are budgeting.

After this step I find people are often much more motivated to sit down and think through what items they need to spend money on and what items they want to spend money on—and what adjustments if any need to be made to both enhance joy and increase savings to meet future goals.

Manisha Thakor (@ManishaThakor) is founder and chief executive of Santa Fe, N.M.-based MoneyZen Wealth Management LLC.

Charles Rotblut: Start Small

Anything that causes a person to be more conscious about how they spend money, including a budget, helps. It is human nature to be impulsive and not consider opportunity costs (the cost of doing something else with the resource). Having a budget can help make a person more carefully consider how he or she is spending money.

The key to any budget is to know how the money is being spent and allotting for a fudge factor. Anyone can write a budget; the problem is sticking to it. So I would advise first tracking how the money is being spent and then start making small, but gradual changes. For example, a person who goes to Starbucks every morning can start by having coffee at the office instead. I would also pay attention to what spending habits are hard to break and account for them. For example, if you have to have that grande latte at Starbucks, then factor the expense into your budget.

For those with families, get everyone involved in the budget, including the kids. Explain your goals and ask everyone what they are willing to do to reach those goals. Then regularly follow up with everybody on the family's progress. And be prepared to reward kids with something of their choosing for going along with the broader financial plan.

Charles Rotblut (@charlesrotblut) is a vice president with the American Association of Individual Investors.

Terrance Odean: Build in Some Slack

Creating and adhering to a budget can help a person or household gain a sense of control over their spending and save for large purchases, emergencies and retirement. A budget can be thought of as consisting of expenses you have to make—for example, rent or mortgage payments, utilities—and expenses you'd like to make but could cut back on if necessary—for example, dinners out, movies, vacations, new clothes and savings. Some people will prefer very detailed categories, some not. When planning a budget, remember to consider seasonal expenses such as Christmas gifts, winter heating and vacations, as well as episodic expenses such as car repairs. In addition to having savings for emergencies, one should build some slack into one's budget so that one can better deal with unexpected expenses or loss of income.

Terrance Odean is the Rudd Family Foundation professor and chair of the finance group at the Haas School of Business at the University of California, Berkeley.

George Papadopoulos: Make a 'Spending Plan,' Not a Budget

I don't like the word budget. It has a restrictive connotation to it, like New Year's resolutions, which most people don't keep. I prefer the term "spending plan" as less threatening, more user-friendly, and therefore more likely for people to stick to than a budget.

I recommend that clients create a spending plan at the beginning of every engagement and when a major life change (entering retirement, buying a new home, having a baby) is approaching. I advise them to first review and identify their continuing expenses. With this knowledge, they can determine what amount from their remaining funds they can earmark for regular contributions to investment accounts.

I then advise that the agreed-upon funding target be met automatically before clients get their hands on the money. As long as they keep up their end of the deal by reaching their agreed-upon funding targets and keeping their overall financial plans on track, they are free to do what they want with their excess cash flow, always secure in the knowledge that they are maximizing their investment capital. I tell prospective clients I don't hammer them incessantly with the mantra of the latte police, "If you save the money instead of buying a latte at Starbucks you can have X dollar amount when you retire."

George Papadopoulos (@feeonlyplanner) is a fee-only wealth manager in Novi, Mich., serving affluent individuals and families.

Michelle Perry Higgins: Track, Evaluate and Adjust

If you were to ask my clients, "Does Michelle recommend budgets?" you would hear a unanimous "YES!" I am very firm and insistent on this topic. It is unfortunate, that the word "budget" is like a four-letter word in some homes and conjures up negative emotions. I understand that many people are averse to having restrictions or a continual focus on spending within limits. However, if you are serious about improving your financial situation, then creating a budget is a must! A household budget is an exceptional tool for tracking, evaluating, and adjusting one's cash flow.

1. Tracking—Find a method of tracking expenses that works for you. There are dozens of great programs available for purchase or you can simply build a spreadsheet. The goal is to begin documenting every dollar that goes in or out. In addition, set a monthly target for each category. For ease of tracking, I would recommend only two methods of payment, i.e. cash and credit card.

2. Evaluating—This is a critical step. Once you have successfully tracked your expenses for several months, start the review process. Assess each category's goal versus the actual spending amount. Highlight the areas where you are overspending and can cut back. Also, make sure your goals are reasonable.

3. Adjustment—Now that you have tracked and evaluated, identify the categories you can modify. If you are spending $2,500 monthly for dining out but your budget is $2,000, make the necessary change and redirect the difference. The extra $500 monthly cash flow can be used to pay down debt, increase retirement, go into college savings or your emergency funds. It is important that the funds are reallocated immediately, or they may easily be funneled into another spending category.

Michelle Perry Higgins (@RetirementMPH) is a financial planner and principal at California Financial Advisors.

Rafael Pardo: A Budget Is an Essential Aid to Navigation

In thinking about the importance and role of a budget, consider the analogy of the Ten Essentials—that is, the 10-category checklist that any responsible hiker uses to evaluate the contents of his or her backpack before venturing out into the backcountry. One of the categories is navigation, which prompts the hiker to verify that the backpack contains, at a minimum, a topographic map and compass. These items will increase the odds of safe travel to and from the destination. The frequency with which the hiker will use the map and compass will depend on the complexity of and familiarity with the trip. Regardless, these navigation aids can either prevent straying off course or finding the route if lost.

A budget is an indispensable tool for charting a safe and successful financial life plan. Whatever your money-management goals, in order to get from point A to point B, it is crucial to have a basic understanding of your monthly income and expenses and how they may fluctuate over time. With this knowledge, you can react intelligently to anticipated and unanticipated changes in your circumstances, thereby increasing the chances that you will ultimately achieve your goals.

Rafael Pardo is the Robert T. Thompson professor of Law at Emory University, where he specializes in bankruptcy and commercial law.

Sheryl Garrett: Set Your Expenditures on Autopilot

Budgeting is a four-letter word. It's all about deprivation and not empowerment. I seek to focus on a cash-flow spending plan that starts out with answering the question, "Can I afford to spend at the current rate and achieve the goals that I would like to achieve?" If the answer is no, we will determine how much can be spent each and every month to achieve those goals. With that kind of clarity and motivation, staying on course with a cash flow spending plan is much more likely.

I also want all the expenditures possible to be set on autopilot. All investments, savings, bills, tax payments, mortgages and so on, should all be withdrawn automatically from the paycheck or the checking account. Everything that is left over is yours to spend anyway that provides you the most enjoyment. I find this to be the most satisfying and least time-consuming way to track your discretionary expenditures, ugh, budget.

Sheryl Garrett (@SherylGarrett) is founder of the Garrett Planning Network Inc.

Rick Ferri: Track Every Dollar You Spend for a Year

I can't imagine not having a budget. I've been creating one every year since I graduated from college 35 years ago. It's the reason I was able to buy my first home, start a business, put three children through college and ensure I'll have enough money in retirement.

The key to saving is budgeting. All budgets should be cash-flow positive. If you're still working, start by paying yourself first. Save at least 10% of your pretax income each year.

So, how do you budget? Start by keeping track of every dollar you spend for one year. I know this sounds silly, but it isn't difficult and it works! You'll learn a lot about yourself.

Forecasting a budget in the years leading up to retirement is also critical. You'll want to save about 25 times your annual spending that isn't covered by Social Security, pensions and other passive income. If you stay disciplined to your budget, then it will happen.