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Money Matters

Budgets and Budget Busters

Are you a person who just never gets around to preparing a budget for your income?  If so, you are not alone. Because it takes work, lots of people treat it like a birthday wish. They blow out the budget candles and the wish never materializes. And if two people are involved, creating and using a budget is prone to contention, even angry disagreements.

With a proper approach to the task, you can develop a personal budget gradually over time. If there are two you doing it, you can minimize or avoid stress over competing needs and perspective as well. In subsequent articles, I’ll be showing and explaining how to accomplish both. For now, let’s just look at the make-up of effective budget format.

A budget is a tabulated plan specifying how some particular amount of money will be allocated or spent during a particular period time. For household budgeting that particular money is typically the monthly take home pay. The time period for expending it is a month. The particular money can also be the annual net salary (annual gross salary minus withholdings for taxes etc.) and the time period is a year. Ideally, both monthly and annual budgets are used.

Without a budget in place, spending money becomes an aimless, haphazard activity. Such spending leads to buying unnecessary things. Some things are bought simply because you either want to have it or to do it (e.g. a boat, a golfing excursion). That’s called impulsive spending. You act despite not knowing if it is affordable within your income.

Credit card usage is so readily available for one to access that it is the main nemesis for making so called impulsive frivolous purchases. An impulsive frivolous purchase might best be defined as something you buy that sooner or later you regret having bought. What those specifically might be will differ for each reader.

Frivolous or not, Impulsive purchases are budget busters. Regret surfaces when you read the outstanding balance on your credit card statement and then feel surprised (or shocked, or even stunned) by the amount due. You realize you let the credit card burn a hole in your pocket. You scan the individual entries and find several moderately high cost impulsive purchases and many smaller impulsive purchases have led to that surprise setback.

You forgot you bought that small portable television for when you go camping but only go camping once per year at best. You forgot you bought a brand new driver and/or putter sure to improve your golf game, which you play twice per year. Gosh you dined out at “affordable places” twelve times and collectively spent $600.00, not including tips. You rented twelve movies to save on going to the movie theater once for $20.00, but spent $60.00. You have eight pairs of shoes but just had to have those cute blue ones that only match a particular outfit you have but only wear “occasionally”. Oh yes, you had the guys over to watch the BIG GAME and, oops, you spent $100.00 on food and beer. We all do it now and then. The key is the “now and then” part. Not all of us do it only now and then.

People who are only frivolous now and thenand plan for (save for) the expenses greatly enhance their ability to consistently save money and accumulate more and more savings over time. Those savings allow them to worry less about paying ongoing necessary bills and unexpected surprise bills, and enjoy life. Otherwise, frivolous overspending creeps in and can become a habit. You don’t have an organized record of how your money is being spent and how much of it is being spent in total. Preparing a budget and following it overcomes that. So let’s discuss budgeting. The author assumes you do not have a budget in place. In that context, the following overview provides a solid start on a path to develop an effective beginner’s budget. If you do have a budget then the overview might offer a path to improve it.

All of expenses fall into three types: fixed expenses (necessary things which are fixed in amount, such as rent; variable expenses (necessary things which change in amount, such as groceries); and discretionary expenses (optional things one can live without, such as tickets to a concert). In a proper monthly budget, you list all of the categories in which you currently plan to spend your monthly take home money and group them into the preceding types of expenses. Include the fixed category Savings and the variable category 1/2 EOM to Savings for which you plan intend to transfer money to your Primary Savings Account. Include a variable expense category 1/2 EOM to Rainy for which you plan to transfer money to your Rainy Day Savings Account. Next to each category name you list the monthly budgeted amount, i.e. the amount in dollars of your monthly take home money that you will allocate to it. The total of these is your total monthly budget and it must equal your monthly take home money.

After the end of the month, next to each category you list the monthly expenditure, i.e. the amount of money you actually spent on it. Wait until your checking account and credit card statements are available with that information. The total of this is the total monthly expenditure for the particular month. If the total monthly expenditure is equal to the monthly take home money then you have “matched” your budget. If the total monthly expenditure is less than the monthly take home money then you have “underspent” or “met” your budget. If the total monthly expenditure is more than the monthly take home money ,then you have “overspent” or “not met” your budget.

If you have underspent your monthly budget the effect will surface in your checking account EOM money at the end of the next month. If you have overspent your monthly budget, logically you need funds for the extra amount you will need to pay on your credit card statement. You borrow half the amount each from your Primary Savings Account and Rainy Day Savings Account. That assumes you have not overspent your checking account. If you did then you take some funds to fix that too. Then you move on to the next month and act to spend less so as to underspend for that month by at least the amount you had taken out of your bank accounts. The two 1/2 EOM transfers then return the borrowed funds properly to each savings account. A strict self-accountant would charge a little interest for the loan, but I don’t do that.

The preceding approach is good for getting one’s feet on the ground. However, your variable expenditures are not identical each month. So what do you do in succeeding months?  Next time, I’ll cover that and Creating an Accurate Monthly Budget – On the fly!

 

Article written by:

Richard M. Gutkowski is a caring parent. His work experience includes four decades of teaching and advising college students. He involved many of them in research projects and their associated budgets. Globally he managed numerous workshops and conferences. In those capacities he managed budgets totaling millions of dollars. He transferred his highly developed professional fiscal skills into managing his family’s home finances. Over time discipline, wise financial decision-making, astute financing principles and strategic borrowing methods became his forte. He earned B.S and M.S. degrees in civil engineering from Worcester Polytechnic Institute, a Ph.D. from the University of Wisconsin, Madison and is an Emeritus Professor at Colorado State University. He wrote STRUCTURES: Fundamental Theory and Behavior and 167 refereed technical papers and reports. He reviews journal articles and grant applications in his field for publishers and agencies world-wide. He resides in Fort Collins, Colorado.