not the jet set: What Is: A Budget

What Is: A Budget

A popular topic 'round the PF blogs these days is budgeting. Always important, this subject gets even more attention with today's difficult economic times. This should come as no surprise. What is surprising is that this supposedly simple personal finance concept is often misunderstood.

We love creativity, especially when it comes to making and saving money. There are all kinds of creative ways to generate income. At the same time there are lots of creative ways to cut back on spending and saving on what you do spend. People have also gotten very 'creative' with the way that they define a 'budget' these days. This would be a good time to refocus a bit on what exactly is the true definition of a budget:

From Princeton: "a sum of money allocated for a particular purpose; summary of intended expenditures along with proposals for how to meet them"
From Wikipedia: "Budget (from French bougette) generally refers to a list of all planned expenses and revenues."
From Arizona University: "A financial plan for saving and spending money."
From the State of Massachusetts: "A plan of financial operation for a given period of time."
From The Small Business Dictionary: "A detailed schedule of planned financial activity."
From Millionaire Saver: "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."

So what are the common threads here?

Planned expenses and revenues // a financial plan // plan of operation // schedule of planned financial activity // detailed plan of income and expenses
Money allocated // intended expenditures // planned expenses and revenues // saving and spending money // financial operation // financial activity // income and expenses expected // future investments and expenses

Planned money. Plan of income and expenses. Planned financial activity. So it is fair to say, that a budget is: a plan for your finances - both incoming and outgoing. The word "plan", implies that this is being done beforehand - as in not after the fact. Architects draw up plans before they even think about breaking ground. A driver wouldn't set out on a cross-country trip without first plotting the course. You don't set out to accomplish a goal without first making a plan to get there.

"So why do I need a budget? My finances are fine." I'm glad you asked. Just as that architect won't bring in the construction crews before the plans are done, you shouldn't start the month without your plan in place. Even though that architect has been erecting buildings for many years, even the best architects can miss things. It's easy to make a mistake or two with such a large project, and with no plan, even easier for the supporting teams to overlook details or misunderstand instructions. The plans keep everyone in line, keep everything on schedule, and keep everyone honest. The family budget will do the same thing for your incomes and outgoes. You and your spouse will have discussed and agreed upon how the family income will be appropriated - giving, spending, saving - and have it on paper before the month begins. During the month, when questions or expenses come, all one has to do is look at the budget. For singles, a budget is just as important, as there is no spousal accountability to help keep you in line. The end result is a reflection of the initial plan. That architect will tell you that the building is, at best, as good as the plans drawn up.

Great buildings don't happen by accident.

Now some of the noise we've seen/heard surrounding budgets:

"they are difficult and tedious to maintain" - Only if you are doing it wrong. Unless money is disappearing and you have no idea where it is going, then you have no need to track every purchase and document it. If that is the case, then you need to switch to cash envelopes. Once you make the budget and agree to it, there is nothing more to do to it unless something changes. Only then do you need to adjust the budget, which is nothing more than consciously taking money from one category to fund a more important one.
"they are too rigid" - A budget is only as rigid as you are. Like I said, you don't need to keep track of every purchase. The point of a budget is not to set it in stone and then beat your spouse with it. The point is to spend your money on purpose, on previously agreed upon expenditures. Maybe you're spending $600 per month on clothing, and $160 per month on dining out. Fine. Just be honest about it, and know where your money is going, instead of wondering where it went.
"nobody sticks to them" / "they don't work" - Here is a Dr. Phil response to that: They won't work if you don't do it. As we were taught about budgeting in FPU, it won't work the first time out. An likely not the second or third. But if you genuinely try it each and every month, you'll get better and better. By that third or fourth month, you'll start to get the hang of it. It's just like in basketball: You'll miss 100% of the shots that you don't take.
"my credit card automatically makes my budget for me" - It's nice how credit card companies find these extra, free services that they so graciously give to their members because they love them so much. Problem is - most of them are worthless. A big one a while back was this "service" of categorizing your monthly purchases to see where you are spending your money. As if all those charges labeled "Starbucks" was some great mystery. "Was that food gas or clothing?" The worst part is that some folks mistake this for a budget. "I can see where I am over spending and make adjustments for next month." That's great to know that you overspent, after the fact! This is not a budget, this is what's called an account statement. They just happened to categorize it for you.

Probably the best and the last word we have for you on budgets is from Financial Guru, Dave Ramsey. He says, if you were hired as an accountant for a company called Me and You, and you kept books for Me and You the way you do now - Would you fire you?