That Dirty "B" Word - Budgeting
I frequently refer to “budgeting” as the most boring word in the English language. It’s part humor, part admission that the vast majority of us associate that term with a very tedious activity resulting in a restrictive and binding “budget” which tells us what we can and can’t spend. Who likes that?
At its most basic, budgeting is just an accounting of expenses. How much money do you actually spend for your orange mocha frappuccinos each month? Could you be spending that $7 per day, 5 days a week, 52 weeks per year ($1,820) better? You’re the only one who can decide that, but you first need to know it’s an option.
I would argue that the single most important aspect of budgeting is that right there – the accounting of expenses. Little expenses can add up to substantial sums without you even knowing. If you don’t believe that, take a class or buy a book on pricing strategy. It is generally accepted in business that if you can dissociate the cost of a purchase from the true dollar figure, you will be more successful in selling your products.
In order to combat an entire consumer-driven world trying to slip the true costs of your purchases past your conscious mind, you must exert effort to keep track of them. The cost of ignoring them is to have hundreds if not thousands of dollars leaking out of your personal wealth each month. If you ever wonder why between 50 and 75% of Americans live paycheck to paycheck, look for no further reason.
If we can accept the premise that keeping track of your expenses is important, the next question becomes “how to do so?” Like many things in life, you will get out of budgeting what you put into it.
The most thorough way would be to review all of your credit card and bank statements for an entire year, assigning each specific transaction to an expense category. This would allow you to show your total cash flow each month, accounting for variations in seasons, etc.
A less involved method involves extrapolating. Take this last week’s expenses. Factoring in the once- or twice- a month expenses to your weekly expenses multiplied by 4 should give you an average month’s expenses. You can stop there or add semi-annual, annual, and 12 times the monthly expenses for a more exact figure.
On the income side, I would recommend always looking at your take-home pay, ie your income AFTER taxes. Why? Because if your salary is $5,000 per month ($60,000/year), you’ll only take home about $3,800 per month (not taking into account possible state taxation) after federal withholding and payroll taxes. So living on average expenses of $4,000 per month will leave you scratching your head and wondering where all your money went if you’re using the $5,000 pre-tax figure.
The final part that ties this whole exercise together is to critically look at your expenses. Do you want to be spending all that money on catered lunches at work, take-out because you don’t feel like cooking, paying individually for something you can buy cheaper at a bulk rate, weekly car washes, shopping splurges, and your streaming service subscriptions?
Getting your cash flow into the positive will help you avoid ever having your options dictated to you by a creditor. What you do beyond that, is the topic for another time.
Originally posted 6/22/2018 at www.practicalfinancialed.com