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The Why, When & How of Budgets

Prosperity and financial wellbeing self help articles:

1) Why Budget? Seven Things a Budget can do for YOU!

2) When to Begin Budgeting

3) How to Begin Budgeting

4) Finding A Budget You’ll Stick With: 9 Things to Look For


Why Budget? Seven Things a Budget can do for YOU! by Jane Chidester

A budget is the most fundamental and most effective financial management tool available to anyone–yes, anyone, whether you are earning thousands of dollars a year, or hundreds of thousands of dollars.

It is extremely important to know how much money you have to spend and where you are spending it.

Some of your “spending” might be for investments, but there is an important distinction between creating a personal budget and deciding where to invest your extra income.

A budget is the first and most important step towards maximizing the power of your money.

What is in it for you?

Just about everything. A carpenter would never start work on a new house without a blueprint. An aerospace firm would never begin construction on a new rocket booster without a detailed set of design specifications.

Yet many of us find ourselves in the circumstance of getting out on our own and making, spending, and investing money without a plan to guide us. Budgeting is about planning. And planning is crucial to produce a desired result.

What is a budget?

A budget is a money plan. With it, you can organize and control your financial resources, set and realize goals, and decide in advance how your money will work for you.

A budget can be as simple as it is powerful. The basic idea behind budgeting is to save money up front for both known and unknown expenses.

Seven Benefits of Budgeting

Know what is going on. Personal budgeting allows you to know exactly how much money you have-even down to the penny, if you so desire.

Furthermore, a budget is a self-education tool that shows you how your funds are allocated, how they are working for you, what your plans are for them, and how far along you are toward reaching your goals.

“Knowledge is power,” as the oft-quoted saying of George Eliot goes, and knowing about your money is the first step toward controlling it.

That leads us to our next benefit: control. A budget is the key to enabling you to take charge of your finances.

With a budget, you have the tools to decide what is going to happen to your hard-earned money, and when. You can control your money, instead of having your money limit what you do.

This bears repeating: you can be in control of your money, instead of letting it control you!

The third benefit is organization. Even in its simplest form, a budget divides funds into categories of expenditures and savings.

Beyond that, however, budgets can provide further organization by automatically providing records of all your monetary transactions. They can also provide the foundation for a simple filing system to organize bills, receipts, and financial statements.

The fourth benefit is communication. If you are married, have a family, or share money with anyone, having a budget that you create together is a key to resolving personal differences about money handling.

The budget is a communication tool to discuss the priorities for where your money should be spent, as well as enabling all involved parties to “run” the system.

The fifth benefit: a budget allows you to take advantage of opportunities. Knowing the exact state of your personal monetary affairs, and being in control, allows you to take advantage of opportunities that you might otherwise miss.

Have you ever wondered if you could afford something? With a budget, you will never have to wonder again–you will know.

The sixth benefit is extra time. All your financial transactions are automatically organized for tax time, for creditor questions, in fact, for any query that may come up about how and when you spent money.

Being armed with such information saves time digging through old records.

The seventh benefit is extra money. This might well be everyone’s favorite. A budget will almost certainly produce extra money for you to do with as you wish.

Hidden fees and lost interest paid to outsiders can be eliminated. Unnecessary expenditures, once identified, can be stripped out.

Savings, no matter how small, can be accumulated and made to work for you.

This is the next installment in a series of articles about making budgeting a way of life. It’s not the torture mechanism we’ve been trained to think it is, but rather a powerful method of gaining control, planning, communicating, and fulfilling your dreams.

At the very least, a budget should allow you to find extra spending money in your paycheck every month! In the last installment, I discussed the seven benefits of budgeting. This time, I’ll talk about the pros and cons of older budgeting systems, and the minimum features of the budget of the future.

Three Older Budgeting Systems

The envelope method:

This system has been around for a long time and has been used by many people. The idea behind this method is to use envelopes to divide your pay into categories, with each category targeted toward a specific expense.

To use this system, you would obtain a stack of envelopes, and decide what expenses you wanted to budget: for example, car payments, telephone bills, rent, and so on.

One envelope is allocated for each expense, and you write the amount of the expense on the front of the envelope. Come payday, you put the appropriate amount in each envelope.

The money stays in the envelopes until you pay the corresponding bill. The basic ideas behind this system are good ones: money is reserved “up front” for expenses and discipline is enforced in following an established budget.

The major problem with this method, of course, is that it was designed for a time when most transactions were handled in cash.

People received pay envelopes containing bills and coins, and the folding green stuff exchanged hands for most purchases and payments. In today’s world of checks, credit cards, and electronic banking, such a system is a nightmare.

You would spend an enormous amount of time making cash withdrawals and deposits. Safety is another concern. Can’t you just picture someone breaking into your home to find a collection of delicious, money-filled envelopes to choose from?

Even worse is the fact that money sitting around in envelopes isn’t working for you. Instead of just lying there, gathering dust, those funds could be out there making more money.

The “wish list” method:

This system can be simply described as “good intentions, bad results.” The basic scenario here is that a family sits down and agrees on “spending limits” for certain categories of household expenses.

“We won’t spend any more than $450 a month on groceries,” they might say. All of these decisions are carefully documented on paper.

That done, the list is carefully filed away, and the family goes out and begins spending. The problem: there is no easy way to enforce the budget plan.

When someone takes a trip to the grocery store, they have no idea how much they are “allowed” to spend. Furthermore, rarely do grocery bills come out to exactly $450 a month. If the family spends under that amount, the extra is never seen or heard from again.

If they go over budget, where does the extra money come from? Soon, the frustration of not being in control of the situation sets in, and the list is forgotten.

The “list-in-the-pocket” method:

This system is an attempt to put some control on the “wish list” method. Instead of filing the “wish list” away, the family carries it around in pocket, purse, or wallet.

Then, every time some money is spent, the amount is deducted from the appropriate category. With this technique, some feedback is available as to how things are going.

But still, there are problems. What does the family do if they need gasoline, and there is no money left in the gasoline budget? What if both husband and wife happen to stop at the grocery store while running separate errands?

Do they carry separate budget lists? Do they have to spend time reconciling their lists at the end of the day?

Perhaps the biggest annoyance with this type of system is the constant attention it requires. Imagine being at a soda machine and needing to pull out and make entries on a list before you can deposit a few coins! What a pain.

Taking it to the 21st Century

What are the characteristics of the budget for the future? It should be designed to let you divide and reserve your funds, and remain in control of them, without a lot of extra work.

It should allow easy transfer of funds among budgeted items so you won’t starve if you happen to run out of grocery money. And it should provide a single reconciliation point so that all family members can use a single budget plan.

The concept of an overlay

An overlay allows you to see the way your funds are divided and reserved for special purposes–it imparts organization to your finances without changing them or the way you handle them.

To illustrate this idea, suppose you were given an aerial photograph of a town that you had never visited, and asked to pick out a few locations of interest: the park at the corner of Elm and Main, or the bank at High and Third. Pretty tough assignment, right?

Now, suppose you were handed an overlay printed on celluloid–clear plastic material used for overhead projector transparencies and animation drawings.

A map of the city, with all the streets clearly marked, would be printed on the celluloid. Placing the map on top of the photograph, you could pick out that park and bank with ease!

Notice that the photograph itself would not change at all, but your understanding of it would be significantly enhanced with the use of the overlay.

The budget of the future works hand-in-hand with your checking account to provide an overlay of your account balance.

Normally, when you look at the final line of your checkbook balance, you don’t have much of a clue as to what that money is for. How much of it can you spend on groceries? How much do you need to reserve for your utility bills?

The overlay system will give you those details. You will always know the deposition of every penny, without changing your checkbook, the way you pay bills, or the way you write checks.

Focusing attention where needed

Another idea central to the future of budgeting is that your budget allows you to focus your attention where it is needed. The daily, routine assaults on your checkbook as you pay monthly bills and take care of mundane expenses can get in the way of truly managing your money and concentrating on financial strategies.

A good analogy here might be to put you in sole charge of a daycare center responsible for 20 active four-year-olds. To add complication, suppose that one child had a special need that day–perhaps she had suddenly become ill and required lots of special attention.

Stranded by yourself, this situation would be very difficult to deal with. But what if you could enlist some helpers? Suppose you could call in additional workers to watch the other children while you administered the special care. You could devote your attention where it was needed.

Handling the routine aspects of your finances

The budget of the future can be your helper to handle all the routine aspects of your income and payments, allowing you to concentrate on the important things: investments, savings, financial growth, important purchases, or whatever your priorities are.

A budget is a tool, not a dictator

This means that a budget is something you should use to control your finances. It is not something that should control you.


When to Begin Budgeting

This is the next installment in a series of articles about making budgeting a way of life. It’s not the torture mechanism we’ve been trained to think it is, but rather a powerful method of gaining control, planning, communicating, and fulfilling your dreams.

At the very least, a budget should allow you to find extra spending money in your paycheck every month!

In the last installment, I tried to dispel some of the myths of budgeting and show how dramatically it can change your life. Now I’ll tackle the natural question of when you should start that new budget. The best time to start a budget is right now.

As the old adage goes, there is no time like the present. Procrastination is your enemy! The sooner you begin a budgeting system, the sooner you can begin reaping all of its benefits.

In his book The Pursuit of Wow, Dr. Tom Peters makes an emphatic, impressive point about change: beginning new habits, acquiring new skills, pushing yourself to excellence, and adopting new lifestyles.

He says: “The first 99.9 percent of getting from here to there is the determination to do it and not to compromise, no matter what set of roadblocks those around you (including peers) erect.

The last 99.9 percent (I know it adds up to more than 100 percent-that’s life) is working like the devil to

(1) keep your spirits up through the inevitable storms,

(2) learn something new every day, and

(3) practice that something, awkward or not and no matter what, until it’s become part of your nature.”

In short, if you want to have excellent money management skills, you can simply resolve right now to do just that.

That decision will shape your actions, decisions, thought patterns, experiences, and successes for the rest of your life.

All that said, there are certain “triggers” that offer inviting “clean breaks” and make excellent and natural starting points for a new budget:

* A change in your marital status
* A change in the number of people living in your household, such as the birth or adoption of a new family member, a child leaving the nest, or a parent coming to live with you
* A new job, a promotion, or a raise
* A new home
* Retirement
* A major purchase, such as a car or vacation home
* January 1st (or the beginning of any month)
* The beginning of a quarter or tax period (e.g., April 15th)


How to Begin Budgeting :

This is the next installment in a series of articles about making budgeting a way of life. It’s not the torture mechanism we’ve been trained to think it is, but rather a powerful method of gaining control, planning, communicating, and fulfilling your dreams.

At the very least, a budget should allow you to find extra spending money in your paycheck every month! In the last installment, I tackled the question of when you should start that new budget. Now I’ll cover exactly how to get yourself in the best position to begin budgeting.

Understand where the money goes

Start with a week. Carry around a small pad of paper and jot down every penny you spend. This is a wonderful eye-opening experience that will make a world of difference in your progression to controlling your money.

Just knowing where your money goes is a terrific education in and of itself.

Once you’ve tried expense tracking for a week, it’s our hope that the insights you gain will want to make you continue.

If you can keep up the practice for a full month or two, you will see a full cycle of your money life, and have the first building block of your customized budget!

Spring clean

Simple organization is key to financial success. Get your checkbook balanced and reconciled, if it isn’t already.

Gather and begin to organize all of your financial records. Create a filing system if you don’t have one.

At minimum, separate the important documents (stock certificates, wills, powers of attorney, etc.) from the routine statements (credit card, paycheck, utility, etc.).

Taking this a step further, consider separating your papers into four types of files: “current working,” “reference,” “safety,” and “archival” files.

** Current working files are those you use on a routine, bill paying session basis (your budget, checking account statements, credit card statements, utility statements, etc.).

** Reference files are those you use for standard information (household inventory, warranties, appliance manuals).

** Safety files are your important original documents (birth certificates, marriage license, stock certificates, deeds, etc.).

** Archival files are a tidy way to handle your repository of old papers.

After you get your records in order, create a couple of “Master Lists” that identify important information such as telephone numbers, credit card numbers, insurance and investment policy numbers, bank account numbers, and on and on.

Getting yourself organized will go a long way to giving you the knowledge you need to make better decisions.

(Finally!) Create your personal spending plan

Talk to friends or relatives about the system they use.

Go to the library or bookstore and find a book. Be aware of the inadequate budgets.

Make sure it has all of the qualities outlined in my past article “Finding a Budget You’ll Stick With; 9 Things to Look For.”

Whatever system you choose, it will be the most important financial step you ever take. Budgeting is the foundation upon which all financial decisions are made.

You’ll never regret doing it, but you’ll certainly regret not doing it!


Finding A Budget You’ll Stick With: 9 Things to Look For

This is the next installment in a series of articles about making budgeting a way of life. It’s not the torture mechanism we’ve been trained to think it is, but rather a powerful method of gaining control, planning, communicating, and fulfilling your dreams. At the very least, a budget should allow you to find extra spending money in your paycheck every month!

In the last installment, I discussed the pros and cons of older budgeting systems, and the general features of the budget of the future.

This time I’ll specifically itemize the key features of a good budgeting system; one that will grow with you, frustrate you the least, and keep you in control of your money! The system should be fairly easy to run.

If it’s too complicated, you’ll give up on it quickly and end up with no system at all.

Many budgeting systems require you to fill out dozens and dozens of forms, and/or keep meticulous records of every penny you spend. It doesn’t have to be that complicated!

Your budgeting system should be able to be used as a communication tool with the other members of your household.

Effective money management within a marriage or family is based on good communication. Your budgeting practices must support and facilitate the communication process.

Your budget should allow you to define your goals up front, and then act as an instrument panel to guide you to success.

Beware of budgets that act like “rear-view mirrors”, that only tell you what has happened to your money in the past. You want a proactive system that gives you the power of planning and control.

If you have a spouse, it should be very easy for either of you to understand and run the budget at any time.

Even if one person is the “primary” bill-payer, there will be times when the significant other will have to run things. The hand-off should be effortless.

Your budget should be customizable. Our relationships with money are as individual as we are. Your budget should be a reflection of you and your needs, dreams, and goals.

There should be an element of fun to the budget. Fun or rewards built into your budget will keep it interesting and help keep you committed to it.

Examples of fun elements are saving for a treat or vacation, or getting “refunds” of spending money back when you pay a check.

The budget should be based on organization, not penny-pinching. Too often, people fall into the trap of thinking that the only way to get ahead is to give up things.

Organization is much more effective, and a necessary first step before you can judiciously decide what to give up, or before you can decide if you even need to make any sacrifices.

The system should easily and instantly let you know how much spending money you have.

Between bills, regular payments, savings and investments, taxes, and all the other routine and not-so-routine assaults on your checkbook, it must be an easy matter to know exactly how much discretionary spending money you have at any time.

This knowledge lets you take advantage of opportunities, react to emergencies, or perhaps just enjoy a comfortable evening out.

Your budgeting system should continually teach you what’s going on rather than just blindly giving some “rules” to follow.

The goal of any good budgeting system should be to impart understanding. Knowledge is power.


by Jane Chidester, Jane Chidester ( is the author of BudgetYes! 21st Century Solutions for Taking Control of Your Money Now! 614-766-2050


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