Budgeting - Personal Spending and Money Management a Key to Weathering the Storm Part 2 - FV

Money management, finance, and budgets can no longer be regarded as concepts and applications used predominately by businesses. Our economy and the economic forecast are causing individuals to become more spending conscious. In this article I will discuss how to take full advantage of budgets so you can steer, and adjust your course through these economic storms.

In the closing thoughts of Part 1, I presented the case that all business large and small create and maintain budgets. Medium and large corporations require their department heads to submit and follow approved department budgets. A component of the department head’s yearly increase is based on their ability to keep the department on or under budget. Businesses plan and budget to become successful, individuals should adapt that same mindset. You might say “I have a job and I pay my bills on-time what more do I need.” Well, if we consider you a business I might reword those thoughts like this: “My business’s sales have always been adequate, and the doors remain open.” Recently we have seen business after business, large and small, close their doors. We cannot afford to be complacent, the status quo has changed and we must adapt to these changing times. We must choose to take an active role in the management of our resources.

As we focus more on budgeting, we must ask ourselves why people fail to follow-though with their budget. Why do people start a budget and then leave it like all those other New Year’s resolutions. I would suggest that most people do not have a vision, or goal. A vision (goal) will help you keep focused on the bigger picture, which will help keep you on track and on plan. Goals must be attainable or they will remain dreams. If you are focused, you can break long-term goals and objectives in smaller chunks, knowing that the long-term goal is getting closer. In these high-tech times, I would suggest that you select a budgeting software package. Paper and spreadsheets are not going to provide you with the visibility, changeability, and maintainability you will need to succeed.

The software you select must be designed with visibility, changeability, and maintainability as core functions. Visibility is the product’s ability to display your cash-flow or budgetary plan in a meaningful way, where you can see the full potential of your earnings. The ease at which the product provides for the creation, edit, and deletion of income and debt sources is what I call changeability. Changes should immediately update the entire budget. Lastly, to be successful, the software should be maintainable. It should provide an easy means of updating the budget with current data. Optimally, an integrated check register would provide a familiar yet efficient interface for updating the budget.

With the right software you should be able to easily make those adds, edits, and deletions and tailor a budget that meets your requirements. Don’t forget the vision, whether it is to save up for a home, pay-down a bill, or you just want to put away money each pay-period towards an emergency fund. A budget can provide the roadmap you need to reach your goals; it can provide visibility to your goals, which is an incentive to follow-through with your budgetary plan.

To take full advantage of a budget, you must ensure you have added as much detail as you can stand. Too much detail is far better than not enough. Remember detail is not going to constrain you; lack of detail however could potentially invalidate your plan and budget. As an example if you know it costs $7.10 for you and your spouse every time you visit the coffee shop, and you normally visit it twice a week, be sure to include it in your budget. This example of only $7.10 per visit actually becomes $681.60 per year. If it were just you, that would still be $340.80 per year.

With your initial base budget complete, look at December’s ending balance to discover your financial potential. Realistically, this amount represents the amount you can potentially apply to goals, minus the amount you want to keep in your checking account as a buffer. If your goal is to apply additional amounts to existing debt sources like credit cards, than all you need to do is increase the base amount of that debt source. Your budgeting software should be able to rollout that change across all pay-periods. Next check all your pay-periods to ensure the budget has not gone negative. You can follow this same procedure for new debt sources. If you wanted to keep a minimum buffer amount in your checking account, be sure to add that minimum amount to each pay-period balance. Continue to make changes and adjustments to the budget until you feel it has met all of your goals.

Finally and most importantly, do not create a budget that is too tight. If you have allocated every dollar and an emergency or unexpected purchase arises, it could blow your budget and hopes. But don’t fear, if an emergency or unexpected purchase occurs, you re-evaluate your budget, and make some short term corrections which could get you back on-track. You could choose for example not to double up on that credit card payment for a couple of months until you are back on-track. In order for the budget to work, it must be living, it must be changeable; the big picture and overall goal is to close the year on or under budget.