Thursday, December 23, 2010

No Need to Budget!

“I have never made enough money to need a budget.” I heard a variant of this comment at least three times this month. I want to dispel this myth. If you are ever to get ahead in life, EVERYONE needs some sort of budget. Before my daughter went away to school this fall I sat down with her and we looked at the money she had saved, what other sources of income (i.e. jobs) she might have coming in, and developed a budget for her to follow. Since her finances are simple, we set her up on so that she could easily track her spending versus budget.
Tracking expenses and budgeting needs to be done at EVERY level of income in order to get ahead in life. I have seen people not able to make ends meet on $20,000 of income, on $50,000 of income, and on $100,000 of income.
The discussion of setting a budget for small businesses often leads to the discussion about personal budgets as so many micro entrepreneurs’ personal and business financial positions are intertwined. People don’t track personal spending and don’t set personal budgets and therefore they rebel against these tools for their business as well.
If you are ever going to succeed, you need to be purposeful in what you do. Planning and budgeting is a tool for being purposeful and not just letting your financial position unfold. It is the difference between controlling your destiny and letting it happen to you. This is true in both the personal and the business realm.
People don’t track expenses and use budgets because it is not a FUN activity. It requires self-discipline. I am a financial analyst and have utilized these tools my entire life and I still grumble every time I sit down to work on my family finances. The feeling is universal! However, the rewards are great!
People don’t like budgets because they fail to account for surprise expenditures and they don’t have savings to fall back on. The key is to make savings a priority with each paycheck so there is an emergency fund to dip into if necessary. Be creative if necessary to come up with the extra. My husband always empties the change out of his pockets at night and does not put it back in his pockets in the morning. Early in our marriage I used to scoop up that change and that was the beginning of our savings.
So here’s the quick technique in a nutshell. It is nothing that you haven’t heard before, but it is a dose of common sense and perhaps brutal reality.
1.       Discuss as a family your goals and priorities for this year, for five years, for long-term.
2.       Stop using credit cards to pick up your extras. Credit cards should only be used with careful foresight and should be paid off in full every month. Using them to shore up your lack of income only leads to worse financial problems.
3.       Track all of your expenses so that you understand what each member of your family is spending money on.
4.       Write down your monthly income.
5.       Decide what portion of your income needs to be put into savings (emergency fund first, then short-term and long-term goals) and make that happen. This is a key point to your budgeting success!  There MUST be some surplus somewhere to cover the unexpected. You CANNOT say that there is nothing left for savings. Savings must come BEFORE your expenses.
6.       Make sure that your savings + expenses are not greater than your income. You will only continue to dig a deeper hole if you spend more than you earn. If savings plus expenses are greater than income then  you need to make some changes (and the answer is NOT to cut out savings):
a.       Take on a temporary second job until you reach your goals of paying off old debt or building up the initial emergency fund.
b.      Cut your expenses. This could simply mean cutting out your daily coffee or cigarettes, but if things are really tight it could mean making tough choices about where you can afford to live and what you have and what activities your kids participate in.
Make the changes necessary to live within your means, to manage your finances with purpose, and to get ahead in life. 2011 is your year!

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