Friday, April 4, 2008

Why Budget Is Not A Dirty Word

It's interesting how people feel about budgets. They either love them or hate them. Even some of the most wallet-conscious people I've come across won't admit they are on a budget. "Oh, we just keep track of how much we spend, and put our savings in automatically" they say airily.

Um, so that's not a budget?


I think budgeting is so touchy because it feels like deprivation. "What do you mean, I can only have $100 of fun money each month? You can't put a price on fun! And don't even think about taking away my_____"

You get the picture. Most people see a budget as setting limits, and who wants more limits in their life?

But a budget can be a great tool, and it doesn't have to deprive you. It can also free you. Here's how it works:

Let's say you take home $3000.00 a month. After paying attention to what you've spent for a bit - and you should, I recommend tracking every dime for a month and seeing where it goes - you come to the conclusion that you spend $2100.00 on fixed expenses such as housing, transportation, utilities, and so on.

That leaves you $900.00 each month to buy groceries, clothes, gas up your car, and anything else you need.

But after a few months you realize that you are cutting it pretty close, what with rising gas prices, the increased cost of groceries and eating out, and a few surprises here and there.

So you take your handy-dandy list of tracked expenses and you think " to squeeze out more dough?" And you make some choices, because you want to save more, or you have too much month at the end of the money, or whatever. The key here is you choose, you decide. And if, after a while you decided that you don't like the changes, you can change it back, or make different choices. It's not locked in stone.

That, my friend, is a budget.

It's really that simple. A budget is a tool. If you decide you want to buy a house in 3 years, and the average home in your area costs $200k, and you need 10% down, you need to save $20k. That comes out to about $556 a month going to the house fund.

Too much? Okay, save less. Or lengthen the window to 4 years. At 48 months, that's $418 a month. Maybe that's better.

The more you track and learn about how you spend, the more you may want to track and learn. Or not, this is also up to you.

But the end result is this: knowing what comes in and what goes out gives you what I like to think of as 'daylight'. It allows you to know your situation. Sometimes that's hard - no one likes to see their warts. But once you know, you can choose what to do next. Even if that choice is nothing.

Much research has gone into proving that people who write down their goals consistently acheive them - at a much higher rate than those who don't. A budget is just a tool to get you to your goals, whatever they are - a second home, private school for your children, early retirement, or just a cash cushion so that you don't have to play 'bill roulette' when your car breaks down.

A budget doesn't have to limit you. It can actually make you more free- because it puts all your choices in front of you.

And then you, and only you, can choose to put a price on fun.

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