Misconceptions abound when it comes to budgets and budgeting. As a result, the word and the process have acquired a negative connotation. Many financial counselors and authors on the subject prefer not to use the word budget. They employ euphemisms instead, such as “spending plan” or “cash flow plan” or “lifestyle plan” to make budgets and budgeting more palatable.
Still, no matter what you call it, a budget is a budget. And, believe it or not, budgets are a good and necessary thing if you are to be successful in managing your personal finances.
Let’s take a look at the misconceptions so we can discover the truth about budgets and budgeting.
Budgets always fail.
You may overspend in some of your expense categories, but this does not mean your budget has failed or that you have failed. A budget is a tool. It provides information about your spending. As such, it cannot fail. It will always give you information.
With a budget, you will always know if you are spending more or less than you planned. This allows you to make informed decisions about changing either your spending habits, your budget or both. The information the budget gives you puts you in control. Control is necessary for successful management of your personal finances.
An unexpected expense always blows the budget.
You can insulate yourself against unexpected expenses when you create your budget. First, be diligent in listing all of your expense categories. Second, fund a cushion account with ten percent of your total budget dollars to handle expenses that are truly unexpected. (Note: The cushion account only works if you follow the first suggestion above.) Third, budget money each month for those unpredictable, infrequent but often costly items such as medical expenses, appliance repair and replacement, house repair and maintenance, car repair and replacement, etc. Fourth, split up quarterly, semi-annual, and annual bills for insurance, property taxes, tuition, dues, etc. into monthly increments and add them to your budget.
By following these suggestions, you will be planning ahead for the unexpected expenses, which will no longer be unexpected because you anticipated them.
A budget is restrictive.
A budget is an information source that tells you how much you can spend in each expense category without exceeding current resources. If you feel restricted, don’t blame the budget. It is only a reflection of the reality of your financial situation.
Using a budget to plan how you will spend your money before you spend it actually liberates you. You are now free to spend up to the limit in each expense category, knowing that all of your needs will be met through the budget. No more guilt. No more guessing. No more nasty surprises at the end of the pay period.
Budgets are difficult to create.
Creating a budget requires you to make decisions about spending. This can be difficult if you don’t have a clear set of priorities. After all, without priorities, how do you decide how much to spend on one item versus another? Establishing a long-term (five- year or more) financial goal or goals will help you prioritize your spending.
You can’t escape making spending decisions. Every time you purchase something, you have made a spending decision. Isn’t it better to make those decisions ahead of time, before you start to spend, even if it is difficult? That way you can set aside enough money for the important things in your life.
The key to making budgeting easy is to know what is most important to you and your family.
Effective budgets require detailed paperwork.
Keeping track of expense account balances can be cumbersome, but it doesn’t have to be. One simple and effective way to implement a budget is to use the envelope method.
Assign an envelope for every expense category (food, clothing, gasoline, haircuts, entertainment, repairs, etc.), except those you pay by check (rent, phone bill, utility bills, etc.). Cash a check for the total sum budgeted for these expense categories, then put the budgeted amount in the appropriate envelopes. Spend money out of the envelopes as expenses arise. Tip: The envelope method works best when you pay cash for as many expenses as is practical. Use checks to pay bills by mail. Use cash for all other expenses.
When you want to know how much is left in a particular expense category, just count the money in the envelope. Your checkbook keeps an automatic record of those budgeted expenses you pay by check.
A budget is simply spending money on paper. It allows you to prioritize your expenses before you start to spend. As such, it is an information tool. It tells you if you are spending more or less than you planned on an expense item. This information puts you in control of your finances. With it, you can make intelligent decisions about your spending in concert with your priorities.
Copyright 1997 K.C. Knouse
K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages