Wednesday, February 5, 2014

Living on a Formal Budget (Part I)

I don’t really enjoy writing about the formal budget. No one wants to hear about it. I am fortunate. For most of my life I haven’t lived on a written formal budget. I got away with it because of the way I was raised and because I was blessed with a mind that could juggle a lot of numbers without writing anything down. Over the course of my life, I have spent a lot of time worrying about money, checking my bank balance, projecting what would be required to pay an infrequent bill (like biannual car insurance premiums) as well as attempting to control power bills with a thermostat. When all was said and done I am not sure that I spent any less time tracking my income and outflow than I would have if I had used a formal budget.

Before we get into the nitty-gritty details, ask yourself the question, “Why would I want to live on a budget?” The answer is your goals, the life you want to lead. The answer is freedom. Any good thing requires the sacrifice of something that you perceive as less valuable. I read an article written by Peggy After, a 47 year old mother and cancer survivor entitled A Black Belt is a White Belt who Never Quit. What did it take for a 47 year old woman to earn a black belt in Muay Thai Kickboxing? They don’t give those things away in cereal boxes. What are you willing to sacrifice to achieve your life’s ambition, whatever that might mean to you?

Money In = Money Stored + Money Out

Once again consider the money equation. This equation integrated over a lifetime is all the mathematics there are to the story of your money. The “Zero Based Budget” more properly called the Zero Sum Budget looks at two components of the money equation on a reoccurring monthly basis, Money In and Money Out.

At the end of the month, Money Stored will absorb Money Out that was allocated but not expended, building special purpose funds for infrequent events from vacations to car repairs.

For most of us Money In is a predictable number that reoccurs on a weekly, biweekly, or monthly basis. We call it our paycheck. For those of you on straight commission or if you live on tips, estimate that number. Then adjust it to match reality as the month progresses.

Write this number down on the left hand side of a piece of paper, or in the appropriate blank in a monthly budgeting form or enter it into the appropriate box on a spreadsheet or your budgeting software.

On the right hand side of the piece of paper write a list of everything you can imagine that will require some of your money over the course of the month. Be sure to include lines for savings, giving, and a line for contingencies. At the end of the planning process, as well as the end of the month the sum of the numbers on the left hand side of the paper will exactly match the sum of the numbers on the right hand side of the paper. These two sums, when added together will equal zero. Hence, the name Zero Sum Budgeting.

Every personal finance author I know anything about tells their readers, Pay yourself first.” Most recommend 10% of your take home pay goes into savings before the first penny. It may be difficult to start with that number but give it a try. Until you reach a full six months take home pay in an emergency fund your savings will be building a safety net for you and your family.

There is an evolution how budgets might work as a student of money management progresses through life. Consider a typical emergency, a \$1,000 car repair. They happen.

Before living on a monthly budget, this kind of event could constitute a serious emergency resulting in a visit to a credit card, or something worse like a payday loan company. A loan from an 18% credit card paid back at the rate of \$200 a month would result in six months of payments, \$1,200. At such a time in a person’s life this could constitute a very serious problem.

After building even a \$1,000 emergency fund, a thousand dollar emergency while quite unpleasant and painful only costs \$1,000.

After living on a budget for a time, our student simply goes to the auto repair envelope, a real envelope or a virtual envelope in a large single bank account. When the time comes, the money is there. The emergency has no effect on the monthly budget whatsoever.

Finally, after years of consistent effort, the mortgage payment is gone. Faced with a \$1,000 repair bill, the unfortunate car owner shrugs their shoulders and thinks, “Well, a little less is going into savings this month.”

You can get there. Step by step. Year after year. You can improve your financial condition and your life.

Giving

It doesn’t matter if you are a Christian, a Buddhist, a neo-pagan, or an atheist. If you are a human being living on this planet, you need to be a giver. Take a moment as you plan your finances at the beginning of each month to thankfully reflect on all you have received from the Lord, the universe, or whatever you believe is the source that has given you life. Then offer a portion of these blessings to benefit the other beings with whom you share the earth. Do this before you spend the first penny on yourself.

I will not tell you how much to share or where to give. I am a Christian. I believe in a religion of freedom and grace. I have learned that the ability to give is a gift from God as well as a spiritual discipline. As you learn to exercise this muscle, I believe that you will discover that you can not out give God. I am not going to discuss conmen who would cheat a widow out of her Social Security check. I am asking you to look deeply into the needs of others both in your city and the world. When you are convinced that the money entrusted to you is going to be used wisely, be a blessing in this unhappy world. You will not regret it.

No Matter Who You Are, No Matter What You Believe, Giving is Important.

Jesus Quote: (Luke 12:33)
Sell your possessions and give to the poor. Provide purses for yourselves that will not wear out, a treasure in heaven that will not be exhausted, where no thief comes near and no moth destroys.

Siddhartha Gautama quote:
"If you knew what I know about the power of giving, you would not let a single meal pass without sharing it in some way."

The Prophet also said: "Give charity without delay, for it stands in the way of calamity."

Confucius Quote:
"He who wished to secure the good of others, has already secured his own."

Winston Churchill Quote:
“We make a living by what we get. We make a life by what we give.”

Chief Seattle Quote:
“The earth does not belong to us. We belong to the earth.”

The Contingency Fund

There is a third component to fund before actually beginning to plan your expenses, contingencies. As you learn to prepare and live on a budget, you will make mistakes, big ones and little ones. The contingency fund is your first line of defense. If you estimate your power bill at \$130 and it comes in at \$150, where are you going to get that extra \$20.00? Just lower the number in the Contingency Fund by \$20.00. Move it to the line for the power bill. Pay the power bill. End of story. Say you spend all this month’s allowance for restaurants when an old friend unexpectedly shows up in town on a business trip. If there is still money in the contingency fund, you can still meet him for lunch at your favorite restaurant. By the way, lunch with your buddy does not rise to the level of an emergency. If the contingency fund is empty, meet him for lunch in the park with a brown bag and a thermos bottle in your hand.

How much to put in the Contingency Fund? Try starting with 10%. I expect you will need to whittle that number down the first time you try to prepare a budget.