That’s right, stop the budget insanity! If you think I am talking about what is going on in Washington, you would be wrong. I am a lifelong planner and made a career out of budgeting, long range and strategic planning and financial management. A budget is a structure to help you achieve your financial goals. You can go through the motions or make it count!
How to Budget?
Most people approach budgeting as the answer to out of control spending. It can give you the discipline to control your spending, but most people miss an important point of the budgeting process. If all you do is take your annual expenditures and add them up and divide by 12 to arrive at an average monthly expense, you missed the point. Some may even adjust the monthly amounts for seasonality, but you too missed the point. Just averaging last year’s expenses is saying you are happy with what you spent for that category.
My approach is a little different; it is called zero based budgeting. It is a method of budgeting where all expenses must be justified for each new period. I start with my goal and determine what I need to achieve my goal. I start with zero and it must not exceed my earnings after I take out the amount of my goal. For example, if my net pay was six (6) thousand dollars per month and I wanted to contribute two (2) thousand dollars per month to my retirement accounts, I would set up a payroll deduction. Next I would create a budget for my expenses that would not exceed four (4) thousand dollars.
Normally, you would just take last year’s expenses, add them up and create an average. That presumes that your expenses are performing at an appropriate level. In the business world, you are always looking for efficient solutions, but in your personal life it is a little different. If you perform well in your personal life your have more money, but you may not know because no one tells you are inefficient. For example, I replaced all my light bulbs with Compact Fluorescent Bulbs. It cost me around eighty (80) dollars. The savings in utilities repaid my investment in just three to four months. In addition, the bulbs last considerably longer which make them a better choice.
If you approach all your expenses this way, you will achieve efficiency and savings. In addition to replacing light bulbs, I bought a programmable thermostat and lowered my water heater temperature. I did not stop there either! I decided to use a cold water wash exclusively. My utilities include electricity and gas for lights, cooking, hot water and heating. My savings were approximately twenty (20) dollars per month. Remember, I did not change my lifestyle to fit my utilities, but instead made changes how I used my utilities. How can you use my approach with your other expenses?
Let’s apply this approach to your housing expense. Housing is usually one of your largest expenses. It generally ranges from twenty-five (25) percent to sometimes as much as forty (40) percent of your income. Whether it is rent or a mortgage payment, you can do something to reduce your expenses. You can take in a roommate, downsize to a smaller apartment or home or move to a less expensive place. If you have a mortgage that has an interest rate that higher than the current rate, you should investigate refinancing to get a lower payment. If you refinance a $200K mortgage from 4.5% to 3.5%, you will save $115 per month. You still need to qualify for the loan, but you can save some money every month!
Expenses like groceries and dining out can drain a budget too. You can make some changes to what you buy and save a lot of money. The cost of groceries increases as you choose prepared foods or making other expensive choices. Do you have to give up steak or other things to achieve savings? Maybe! Using a percentage is misleading because it is based on income versus what you should spend on food. If I said you should spend 10% of your net earnings on food and you spend less, you will think you are doing great. I think it would be better to approach your food budget as if it is important.
I love food and it is an important part of my life. In fact, whenever we travel or go out, everything revolves around food as an important experience. How about you? My wife and I create a weekly menu of the foods we enjoy. We prefer good healthy food which includes mostly seafood, chicken and vegetarian meals. Some of our menu choices may be soup, salads breakfast items as an entrée My wife prepares enough so we have leftovers for lunches. My wife is very good at finding low prices and we use coupons too. I also purchase some of the food at Costco too. Our food budget ranges from $250-350 per month for two (2) people. We still dine out twice a week and keep our dining out budget between $200-250 per month.
Our entertainment budget includes cable TV and movies. Since I am unwilling to give up cable TV, I negotiated with my cable company to keep my expenses as low as possible. I buy discount movie tickets which save me as much as 50% if I were purchasing an adult ticket. My discount is lower because I qualify for a senior ticket, but it it is still a net savings. My transportation costs are low because I keep my cars for a very long time. I just replaced a seventeen (17) year old car and my other car is seventeen (17) year sold. We do not drive a great deal and buy our gas at Costco which receives a 3% rebate and is lower than the market price in the area.
My employer (school district) provides health insurance for my family for no cost. I contribute to a Flexible Spending Account (FSA) to use pretax dollars to pay for my medical expenses. My wife and I have term life insurance and Long Term Care insurance to protect us against financial risks. My only debt payments are a small mortgage and a car loan. Both loans will be paid off before I retire in less than five (5) years.
Budgeting is personal because it is supposed to help you achieve your financial goals. Unless you are willing to really analyze your expenses, budgets are a waste of time! You should never go halfway, it is all or nothing! This approach worked in business and in my personal life! It helped me achieve all my financial goals and still does. I don’t use budgets to control my spending; instead I use it to achieve lower expenses and my financial goals. Let me know what your think in your comments. How do you use your budget?
Photo by: StockMonkeys
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How do you use your budget?