My thoughts on budgeting

Creating a budget is usually one of the first steps people are advised to take when trying to get a handle on their finances. Write down your bills, allocate amounts, throw in some "fun money" and soon you'll be on your way to financial bliss. If you can't tell by now, I'm not a believer in budgets. Here are some of my problems with them.

1) You have to be precise with your planning and cover all contingencies. Some expenses are easy to predict(rent/mortgage, car payments, insurance, telephone and cable bills). Others can vary widely from month to month( gas, dining out, medical, clothes, gifts given). Plus you have to plan for the unexpected( car repairs, broken household goods, travel expenses etc.). Laying this all out in a workable monthly plan is a difficult task. In quicken I have 21 major categories of spending and probably twice that many subcategories, not to mention 15 other accounts that I transfer money between for various reasons. Making an accurate monthly budget that takes all this into account is a daunting task, especially if you haven't been keeping track of your spending habits. You may think you only spend $100 a month on fast food and sit down restaurants, when in reality it's $399.44 a month ( my average over the last 12 months).

2) If you overspend and bust your budget, how will you handle it? Financially there may not be room for breaking your budget. You may chaff at a low daily spending limit on luxuries like coffee or snacks.  Psychologically, this can demoralize you and cause you to give upon the whole thing. What do you do with any excess cash you have in a category?

So how do you control your finances with out a detailed budget? I believe that financially, people are like gold fish. Just as gold fish grow to the size of their pond, people's spending grows to the size of their paycheck. To live within your means, you must make sure you take care of necessary expenses first. Make sure you have money set aside for fixed expenses like housing and insurance. Necessary expenses include saving some of your income each month for retirement and emergency funds. If you get paid on a regular schedule, you can setup automatic withdrawals for savings and retirement on pay days. It must be on payday(or the day after) so that your necessary expenses are taken out before you can think about using them for other things. Whatever is left is your discretionary income to do with as you please. Trying to make a budget and save whatever is left at the end of the month usually means you save nothing. When you see a true picture of how much money you have at your discretion, you will tailor your spending habit accordingly. It should be fairly obvious that you cannot afford a new toy when you still have a gas and groceries to pay for to make to the end of the month(or maybe you can).

A critical part of this is tracking your spending so that you have a real time view of your financial status. I prefer to use Quicken to track my expenses, but you could use excel for free, or Mint for free as well. if you want to be modern and online about it. This allows you to account for thinks like rent checks that haven't cleared your bank yet or automatic withdrawals you know are coming. When I had my little Zecco snafu I was able to quickly see that my uncleared rent check would cause me to overdraft my checking account unless I moved more cash in quickly. This helps avoid bank charges as well.

Viewing your checking and credit card balances online frequently is also a crucial part of keeping yourself informed about how much money you have at your discretion. If your credit card balance is creeping higher than your available cash you know you need to cut back on spending. If easy credit is to much of a problem for you, do go without the credit cards.

You can start by making small changes to your account. For instance, setup a $50 automatic monthly withdrawal to a savings account. Once you see you can live with that, increase the amount. I'm doing something similar for my retirement program at work. I originally was contributing only about 6% of my salary toward retirement through work. I'm nowhere near maxing  out my contribution and I've got money to spare, so every other month I'm raising the percentage a little bit and seeing how that affects my take home pay. Eventually I'll be able to max out my retirement and have that money grow tax free( and lower my taxes as well)

By making saving a part of your spending habit, you'll grow into a smaller spending mentality more easily.

Comments

[Mel]

An excellent post. I have tried making budgets in the past myself, and it never worked. I always got frustrated because I outspent here or there, and never had money left over, even though the budget showed it should be there.

I have become big on the automatic deductions from my checking account (however, my 401(k) plan from work gets taken out before I even get my paycheck). I now have my mortgage and HOA payment automatically deducted from my checking account on the 5th of every month (although, technically, you are allowed to pay a mortgage anywhere between the 1st & the 15th of the month). I also have automatic savings withdrawals and a Sharebuilder taken out every month. I am even thinking of making automatic deductions for certain bills which are always the same price (e.g. my DSL plan). This just requires vigilance in making sure my bi-weekly paycheck is in the checking account and available.

Personally, I would not feel comfortable doing automatic withdrawals for bills that vary from month to month (e.g. credit cards), because I want to review the statement and make sure that all the charges are accurate.

[Lauren]

Brad and I aren't perfect when it comes to making a budge, but we are working on it and so far our system is doing well. Currently we make a point to sit down sometime during the first week of the month and see where our finances have been spent during the previous month. We put most of our expenses on credit cards (mostly b/c we get cash back for it) and then pay them off at the end of the month because it allows us to easily view everything we buy and how much is going where. (The exception being utility bills, they comes out of our debit account) Brad charts our spending habits each month into general categories, (restaurants, grocery, entertainment, pharmacy etc) and we compare that to previous months to see if we are spending more or less in any given category.

In addition to seeing what we have spent, we make a point to set goals for the upcoming month regarding how much we need to put into savings, how much we need to pay down on our overall debt and what short our term financial benchmarks are as well as long term. Of course we compare last months goals to what we actually ended up spending, and make adjustments accordingly if we see that we've been spending too much in any given category.

We don't set firm rules like 'we only spend over X amount during this month in this category' but we do make a point to pay ourselves first and the rest typically falls the way we need it to.