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How Important is a Budget?
By JLP | January 19, 2012
The first thing we did when we decided to get out of debt was reevaluate our budget. We knew that we had to change the way we spent our money before our financial situation could change.
The amount of information out there on budgeting is overwhelming. There are lots of trite and obvious articles out there (like this one) that give such groundbreaking (and condescending) advice as “Incurring debt is easy but getting out of debt is not.” or “Reducing the luxuries will always be the best place to start for you to make some real savings with the least impact on your lifestyle.”
I’ve even read articles recently discouraging people from budgeting because, “You know you should budget, but you also know you’re not really going to do it.”
I vehemently disagree with this logic. The NUMBER ONE reason people are in so much financial trouble right now is that they are not willing to put in the work and sacrifice needed to save money, wait for purchases, or do without some things altogether. The simple act of budgeting is like an athlete training and developing discipline. At some point you have to be willing to do the hard and boring things if you want to make changes and improve your situation.
I will say that, in the previously mentioned article, the author goes on to talk about the idea of an “Anti-Budget” – a worksheet listing all the things you have to pay subtracted from your income, leaving you with what he calls a spending allowance. In my mind, that is a budget, so what he’s really doing is just trying to present the idea of budgeting in a different way. That’s good.
Back to our family’s budget. When we started reevaluating our finances, we had two assumptions:
- There’s no way we can decrease our current expenses – we’re already at rock bottom.
- There’s no way we can increase our income – that’s beyond our control.
Expenses
“Rock bottom” for us still meant spending more than we earned, so we knew something had to change. When we decided to get this debt taken care of – whatever the cost – we started cutting mercilessly: turning off cable, selling a car (only paying for gas and maintenance on one vehicle has saved us more than we imaginged it would!), even cutting a few important things – like piano lessons for the kids – for a short time. A lot of these changes won’t be permanent, but paying off our debt is more important to us (short- and long-term) than having these luxuries that just a few months ago seemed like necessities.
Income
When I realized that “income” did not have to equal “salary,” that was a game-changer for me. Instead of relying solely on the salary from mine and my husband’s jobs, we started trying to think of other ways we could earn money during the month. Clothing that we normally would have (tried to) sell in a garage sale, we started putting up on eBay (and getting three times a garage-sale price). We sold over half of the Wii games that our kids no longer played. Things that had been lying around the house, taking up space, now became valuable.
My point in saying all of this: If you want to badly enough, you can always find something to do to make more money. Whether it’s selling stuff or teaching an instrument or a hundred other possibilities, don’t wait for someone to give you the money you “deserve” – go out and get it.
I’ve written more about our family’s budgeting philosophy. When we dealt with these two areas, budgeting because a lot less overwhelming. It’s still hard – and it takes discipline to stick to it. When financial crises come, the single best first step in tackling them is to have a written budget that will show you where your money is going. If money isn’t tight, your budget can probably be a lot less formal than ours is, but even then it’s still important to, as Dave Ramsey says, “Tell your money where to go, so you don’t have to wonder where it went.”
Topics: Budgeting | 6 Comments »
January 19th, 2012 at 5:43 pm
Looks like you are on the right track. Good luck!
January 20th, 2012 at 8:27 am
Lindsay, I’d certainly agree that budgeting is the cornerstone of fiscal responsibility. I grew up in a “hand to mouth” household and never learned anything about budgeting (or saving for that matter) until I met my wife (20 years ago). She, on the other hand was from a household of strict frugality (perhaps too strict in some ways). The early years of our relationship involved quite a bit of “animated discussion” over budgets – I saw them as a loosey goosely guideline, she saw them as carved in stone.
Over time, we moved closer to each others point of view. We now budget for the major items – all the big fixed expenses such as housing, insurance, taxes, etc., and all the nice to have big-ticket luxuries such as vacations, clothing, gifts, etc. But, now that we have been faced with sharp reductions in income over the past couple of years, we are thinking about a more holistic approach. We’ve been trying to figure out where to cut back, and realizing there is still a large component of our expenditures going un-tracked…. namely the small stuff that adds up… what you’d call the “latte factor”.
Tracking is a big challenge, though I am discovering that there are apps out there to help track and catalog credit/debit card usage into helpful budget categories. I am going to experiment with some of them and get back to AFM readers if I discover something that really works well.
If anyone out there has any ideas on how best to track and budget the little stuff electronically, I’d love to hear about it!
January 20th, 2012 at 9:46 am
My favorite book on personal finances and staying out of debt is “Your Money or Your Life”. If gives you a whole new vantage point on life and money.
January 20th, 2012 at 5:09 pm
Jon, that book is my favorite, too!
Miguel, I used Microsoft Money for years until they turned their backs on their loyal users. Fortunately I was able to convert my years of history over to Quicken. We try to use our credit or debit card for everything so there is a trail. However, any atm withdrawals we do I code to “Cash Withdrawal” then as we spend the cash, I run a Spending Report, select my cash withdrawal account and then code how the money was used, ie. drycleaning. Your debit and credit card info (if you set it up by supplying your passwords) will be downloaded to your Quicken file. It “logically” assigns categories that you may have to change, i.e. you bought pop and candy at the gas station and Quicken codes it to gas, not food. Anyway, since I’m an accountant, no big deal to change the category. Quicken also tracks your investments, making it easy to see your current market value, or calculate your gain or loss when you sell.
It may not be a “perfect” software, but it clearly will provide a snapshot of the infamous black hole of spending.
PS Quicken downloads into TurboTax, too, so theoretically could make tax time easier, but review what it dumps. For example, I code rebate income to Other Income…they are not taxable, but Quicken likely would pick it up as income for the 1040.
January 22nd, 2012 at 11:48 am
Here is my budget:
Step #1) Total all income for the period, which is normally twice a month.
Step #2) Pay all bills. The trick here is that our savings is treated like a bill. So, retirement savings, 529 education account savings, and emergency fund savings are all “paid” on this step. Also, yearly expenditures are paid into a savings account on this step (like yearly home-owners insurance, property taxes, etc) which is doubled with our online savings “emergency fund” account.
Step #3) Whatever that is left over can be spent on whatever the wife (or I) desire. None of this spending is tracked, but it is recorded on a paper ledger for record keeping. If there is some big (non-emergency) item, it is paid out of this money (in cash) and we go without until the next payday.
Note: Any tax-related expenses are tallied, recorded, and, in the case of medical expenses: receipts are filed in a paper folder for HSA tax accounting purposes.
We don’t bother ourselves with tracking how much money is spent on coffee, or eating out, etc, etc. It takes too much time and would only be a source of arguments if one of us were nit-picking every purchase.
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HOWEVER, when we were in debt up to our eyeballs, we tracked everything and consolidated efforts to paying off debt. Our budgeting process, today, reflects how we handle things now that we have no credit card debt, student debt, etc. We do still owe on the house though.
January 22nd, 2012 at 12:32 pm
I’d like to thank everyone here for subsidizing my HSA account for me. The HSA account allows me to avoid the 32.65% in federal taxes I’d otherwise have to pay on the contributions (7.65% in FICA/Medicare taxes and 25% in income taxes).
For the record: I think all tax loopholes should be closed (including the HSA, 529, and 401k account loopholes that I use heavily).