1. What is a budget? When I put that search term into Google, the first hit was a list of “web definitions” for budget. The definitions included:
• A sum of money allocated for a particular purpose;
• A summary of intended expenditures along with proposals for how to meet them;
• Budget generally refers to a list of all planned expenses;
• An itemized listing of the money a person (or company) will take in, and how much will be paid out (expense), over a specified period of time (usually monthly);
• A detailed record of all income earned and spent during a specific period of time;
• A detailed plan of income and expenses expected over a certain period of time. A budget can provide guidelines for managing future investments and expenses.
• An itemized forecast of an individual's or company's income and expenses expected for some period in the future.
Finally, Wikipedia defines a budget as “a plan for managing income and expenses in personal finance.” It goes on to state, “[a] comprehensive personal budget provides a clear understanding of an individual's expenses, encouraging informed financial decisions.”
In all different ways, then, a budget has the same fundamental characteristics: it tracks income and expenses, and, more importantly, creates a plan for how the income will be used in a given period of time. While tracking income and expenses is a necessary component toward fixing up your personal finances, a budget that simply tracks income and expenses in the past will not help you to achieve personal financial goals. If you have not yet done so, you must start to figure out the financial goals you hope to achieve if you want to use a budget as a financial tool.
2. What are your financial goals? In the past, I have felt no need to budget because my husband and I never really set financial goals. That is a huge mistake: if you do not know what it is you want out of the money you work hard to earn, you cannot take control over that money. Instead, a whim may define your goals, until you have no real choices about what to spend money on because you owe too much debt to have what you would like to have. Your personal goals for your money will change over time as you both age and as your life circumstances change. However, setting goals today will help you to move toward those goals; as time goes on, you may want to reevaluate your goals.
To set goals requires a lot of thinking on your part, but, for the most part, does not take a tremendous amount of work. Each person has different values about what they would like to spend their money on, but very few of us have no idea what is important to us. The problem is we tend not to think about exactly what it is that we really do want our money to do and that leads to our money controlling us rather than us controlling our money.
Often when I teach a lesson, I ask my students to brainstorm ideas without editing themselves. One way to set goals might be to do the same thing. If you are married, you and your husband might sit down and each write down the hopes you have for your financial life. Then, you can work together to prioritize the main goals and leave everything else as goals that might be achievable after you have met your main goals.
Thus, you might write a long list that includes everything such as the very important items like saving for a house, car, retirement, college educations, emergencies; paying off debts, living debt free; paying all your bills on time, having a high credit score; doing needed repairs to your home or car, etc. Your list also might include items you would like to have but could live without: a new television, renovating your home, a boat, a second home, vacations, etc. You might even go to more fundamental types of items: paying people to do the work that you take care of such as home cleaning or lawn maintenance, new clothes and shoes for everyone whenever you want, going out to eat or the movies or other entertainment whenever you want, even indulging a passion to learn a new skill or engage in a hobby.
The possibilities are endless: you can write until you run out of what you want to do with your money assuming you had an endless supply of money. Then, you need to get real: assuming you cannot do everything, you need to decide what goals are most important, what you can live without altogether and what you can reach a compromise about. Some of your goals can be brought to a more reasonable level i.e., maybe you cannot take a vacation every year, but you can every other year, or you can take mini-vacations; maybe you cannot pay for someone to clean your house every week, but you want to try to fit in at least every other week, maybe you cannot save for all the items you want to save for right now, but you can save for one or two or of them. Whatever you decide to do, though, the point is that you are making a decision about how you want to live within your means (hopefully). If you do not prioritize, you will live above your means, and, at some point, the debt you accumulate will take away from many of the things that you really did want. Your priorities will make clear what is most important for you.
When my husband and I sat down with the facts of our financial situation and our list of priorities, we decided what was most important to us: to get out of debt, save for retirement, and save for emergencies. To do that, we have had to take out many of the fun “extras” for now. By accomplishing those goals, we will have enough money left over from our current income to allow us to pay for extras without using debt. That leads to the third question: will a budget help you achieve your financial goals?
3. Will a budget help you achieve your financial goals? Once your priorities are in place, having a budget tends to make a lot more sense. As I have already noted in “Organizing Your Finances” and “What Do You Spend Money On?”: taking control over your money means taking a good hard look at what you do with all your money. If you do not track your major expenses (and, even your “minor” ones), and compare them to your take-home revenues, then you will continue to face the same problems that you have faced in the past. If you want to meet your financial goals, then you must at least do the tracking portion of creating a budget: looking at income and spending and figuring out how you are spending what you are making. While sometimes people do not want to face up to even those facts, you have to if you want to control your finances.
Moreover, using a budget to plan for the future is another essential tool in meeting your financial goals. I have looked at many of the reasons people do not want to create a budget, and, generally, it boils down to a few things. First, many people do not want to know that they simply cannot afford to keep living the way they have been living because they do not want to change their lifestyles. Second, many people feel that a budget will be confining: it will somehow force them to change their lifestyle in ways in which they do not choose to change their lifestyle. Third, some people feel a budget is for the money-compulsive: those people who are obsessed with figuring out every little penny and where it is spent and trying to save every bit of money they can. Somehow, that “type” of person is anti-social and downright un-American. They are conservative and tight, and no one wants to be seen as a “tightwad.” Finally, some people feel there is no point: a budget is like a diet or exercise plan, if you make one, you will not follow it anyone, so why bother.
In the past, I myself felt all of the above things about budgets. That was before we prioritized our goals for our finances. Once we did so, we had to make choices: the money only goes so far and some of our expenses were fixed. Everything else had to be decided about; otherwise, we could not meet our goals. A budget forces you to think about what you need to spend your money on and the ways you spend your money on what you do not need. Thus, you can decide, before the money is spent, what you plan to do with the money that is “left over” after your fixed expenses are met. First, you will want to work on moving toward your financial goals. Then, you might be able to have money for the “extras – things you would like to spend money on but do not help you meet your financial goals. It is a simple proposition: if you wish to meet your goals you must decide where you choose to spend your money before you spend it.
Wikipedia gives a very concise reason for creating a budget. It says that a “comprehensive personal budget provides a clear understanding of an individual’s expenses, encouraging informed financial decisions. The main objective for any budget is for income to meet or exceed expenses. Predicting and accommodating future expenses and sacrificing discretionary spending in favor of obligatory spending or a savings goal can achieve this objective.”
Those are the reasons to have a budget: to plan your spending so that you will be able to meet your financial goals.
Coming soon: Creating a budget.