“Budget” Is Not a 4
Letter Word
By
It is often said, “If you fail to plan, you plan to fail.” Nothing could be truer when it comes to the topic of budgeting. Even if you have a handle on your finances, a budget is a comforting roadmap.
The first thing that I ask a person complaining of financial troubles is whether they have a budget. The typical reply, “I can’t afford to budget. I don’t have enough money to go around.” My typical reply, of course, is that they can’t afford not to budget. Financial problems ignored generally get worse, not better.
You can afford a budget because you can sit down and do it for free! There is no secret here. In its simplest form your budget has three steps. You simply identify all your regular income; you identify all your regular expenses; and you compare the two components. Since most people come to budgets out of need, they typically find that the expenses exceed the income. Not good – but at least a start.
The two biggest blunders people make with their finances is, first, not knowing how they spend their money and, second, not prioritizing their goals. If you prepare this simple budget you have accomplished the first item and you have a list for starting the second item. Good start.
You haven’t remedied the problem yet but I suspect you feel better already. You are taking some action that will help and you are gaining some control of the problem.
The first problem to be resolved for many people is identifying their expenses. You may be surprised at how much money “disappears.” Become aware of your expenditures. Carry a notepad for a while and write down everything you spend. Everything – from the 25 cents in the parking meter to the few dollars spent at the convenience store. You will be surprised at the amount of “miscellaneous” spending you do. Once you have your list of expenses you have a starting point for trimming a runaway cash flow.
Sometimes income is the problem and more income generally resolves problems. If you are unemployed or underemployed then emphasize that area of the budget and seek better income. As a temporary solution even a part-time job can ease the problem. But generally speaking, expenses – too much spending – are the problem.
This is where we start separating our needs from our wants, as our parents would have probably put it. You need a car to get to work; you want a nice car to do it in style. Start by eliminating the wants that you can do without. This is often the painful part that makes the budgeting process blow up. Just as in exercising, budgeting is often a case of, “no pain, no gain.”
Along with excessive spending, debt is often the straw that breaks the camel’s back. The heaviest straw of them all is often the credit card, or several of them. If you can’t pay your balance off each month, or at least in the short term when unusual situations arise, you are living above your means and you shouldn’t use the cards. You won’t succeed in mastering your debt unless you break the cycle. Go cold turkey – stop using your cards. If you start paying cash for everything you purchase two good things will happen. You will get a better sense of the amount you are spending and you won’t be adding any more debt to your card. It’s amazing how determined you can be in not spending cash as opposed to not charging on the card! Your mind can focus on the fact that, yes, it really is money, and yes, it is yours and if you spend it you have less.
Let me repeat. It is your money and if you spend it you will have less. That is the focus of your real goal for budgeting. It is your money, pay yourself first. You probably will never be effective at saving money unless you adopt this outlook. The number one prioritized expenditure on your budget goal should be to put a set minimum into some type of savings for yourself.
For starters, try a simple monthly budget. As you gain experience expand that budget to project the year ahead. At that point you can be aware of expenses, and hopefully income, that does not occur on a regular monthly basis. Did someone say car taxes?
Make a simple budget. Identify and prioritize your spending. Eliminate everything that is not a necessity until you get your budget under control. Pay yourself first. Although resolving most financial problems is just a disciplined long-term approach to attacking these points, many people fail to start.
Jim W. Norman, CPA is a principal with Norman, Johnson & Co., PA, a
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