Home      Intro      Education Series      Advanced Topics      Blog      Giving Back     Services

Lesson 2b: Budgeting - How to Succeed

Objective: Learn how to have a successful budget.

Some key recommendations for keeping a budget:

1) Start from the bottom up.

Unfortunately, many people do not sit down to do a budget until there is a problem.  At this point, many of the budget items are fixed (mortgage payments, car payments, food, utilities, etc.).  It is better to do a budget before you make any large purchases to see what you can comfortably afford.  Unfortunately, many buy a house and stretch themselves too thin because they did not review their budget before hand, thinking about what if scenarios.  What if the price for heating the house goes up?  What if we decide to have children?  What if I do not get the raise or bonus that I was counting on? 

When doing a budget it is best to determine how much the large fixed payments will take of the budget.  It is easier to save by analyzing these purchases.  Many are forced to focus on small savings (e.g., the $5 cup of coffee) because that is the only thing they are able to cut.

There should be room in the budget for expenses increasing unexpectedly.

2) Be realistic and budget for the unexpected items (e.g., car repairs, furnace breaks down, etc.).

When creating a budget, I usually factor in $500 or more for unexpected items that I do not know will happen, such as the furnace breaking down or the roof needing repair.  This, of course, is dependent on the age and value of your house or car - older or more expensive houses and cars should have a higher budgeted amount.  This is above and beyond the normal car repairs that are relatively common like oil changes, new tires or brakes. 

I am typically a little conservative in planning for non-routine items.  These items are harder to predict and if they are underestimated, then you will need to tap into savings (or go in debt).  This should be viewed as a contingency fund.  You have it if you need it.  Or, if the unexpected repairs do not happen, then you have extra savings for your retirement or children's education.

3) Understand small amounts can add up.

For budget purposes, the first step is to understand how much you are spending in each area.  Then you can consciously know if you want to continue to spend the money for these small purchases.  In addition, spending $100 more for a special piece of furniture that you did not plan for may seem small when compared to you total budget, however, a few of these types of purchases will probably break your budget unless you are able to cut back somewhere else.  Some financial planners focus on the small items as a place to cut your spending because saving a few dollars a day can go a long way to becoming a millionaire.  Likewise, spending over your budget can quickly eat away at your savings goal.

4) Plan for future purchases.

Plan for the down payment for that house, that car, or that special vacation.  If you don't, then these items will keep on being just outside your grasp.

5) Be happy now!

There is a mentality in our society that we will be happy if we have more money.  This can be seen at all income levels regardless of whether one is making $20,000 or $1,000,000.  We believe that we need just a little bit more to be happy.  It is a scenario of a dog chasing its tail.

So, let's be realistic on what you really need, and many will find that we already have what we need and more.   Look at items that you have today that were not around when your parents were children, like cable TV (or even just a TV), eating out fund, cell phones, etc.  As a Sheryl Crow's song says, "It's not getting what you want but wanting what you have."  Think about what you desire and then challenge yourself about whether you really need it or if it is just a want?  And, decide will it really make you happy or are you trying to have what others have?

6) Eliminate emotional spending.

When you are upset, do you go to the shopping mall or Amazon.com?  For some, shopping is similar to an addiction such as alcoholism - it is habitual and impulsive.  Purchases should be planned and budgeted for rather than decided at the spur of the moment.  This is why infomercials encourage you to call "in the next 30 minutes" by offering free products or additional discounts.  They know you are more likely to buy their product if you act quickly before you've had time to think.  Yet, it is best to back off of an unplanned purchase for 24 hours.  Often, taking that extra time to think helps to distinguish the true needs from the unnecessary wants, and consequently eliminates unnecessary spending.

Emotional spending also includes buying your child a toy to stop his tantrum in the middle of the mall.  What lesson are we teaching kids?  When you are upset, material things will make you happy. For children it may only be a $5 toy, but as adults it becomes a $50 pair of shoes or a new sports car to overcome the mid-life crisis.  Yet, what do you tell a child who is having a tantrum in the middle of the mall.  Some options are "It is not in our family budget" or "I choose to spend our money on other things" rather than, "We do not have the money for it."  While the latter statement conveys a sense of poverty or lack, the former statements indicates that spending is a conscious choice.

7) Take time to follow-up on your budget.

A budget is not useful unless you test it.  The key is not to track each item (especially if you do not have the time), but to look at how well you did at accomplishing your savings goal.  Savings is usually the area that we raid first when we blow our budget.  If you did not meet your goal, then you need to see if your budget was set properly - are you accounting for all the little purchases you are making.  If there was a one-time expense that was truly a once in a 10+ year event (e.g., both cars broke down and roof started to leak at the same time) that caused you to go over budget, then you do not need to change your budget.  Yet, if it was a reoccurring expense (like a normal car repair or child needing braces), this should be something that you budget for.  This is why I normally add an additional $500+ for unexpected expenses to my budget (see item #1).   I do not know what the exact expense will be (e.g., needing a new dishwasher or lawn mower), but I know that I will normally have at least one large unknown expense per year that should be budgeted for. 

Note, in comparing your actual savings to your savings target, you should reduce the actual amount saved by any new credit card debt.

Personal Topic : Belief Basics
Educational Menu

The material on this website is provided for educational purposes only.  We make no guarantees regarding the accuracy, completeness, or applicability of any material presented on this website.  This website is not a substitute for individual financial or counseling advice.  You should seek the advice of a professional regarding your particular situation.  My Financial Awareness is not responsible for any losses, damages or claims that may result from your financial decisions.

Copyright © 2008 by My Financial Awareness, L.L.C.
E-mail questions and comments to pete @ myfinancialawareness.com