Sunday, April 21, 2013

Are You Lost? (Part III)

I hesitate to discuss the BUDGET!! It is one of those subjects that cause people to lock up in fear thinking, “If I go on a budget it will be like working on a chain gang. I will never enjoy anything in my life again.” From a combination of somewhat legitimate fear, plus sloth, coupled with a desire to remain in a comfortable deluded mental state rather than confronting reality very few people ever stick with a formal budget. This is too bad. There really isn’t much debate. If you are looking for the tool to guide you to financial independence, whatever that means for you, the formal budget is the gold standard.

I have to be honest, for almost all of my life I have lived without a budget, except the one in my head. That one worked pretty well because I was raised to squeeze a nickel so hard the buffalo bellowed. I also had a third generation terror of debt. The only time I ever borrowed money was to buy our home. I paid it off in a little less than 10 years. I carefully watched the ebb and flow of my money. If I didn’t like what I saw, I tracked every penny for a month. That seemed to answer most of my questions. I also spent most of my life working towards one or another long term goal, cash for cars, degrees without debt, paying off the house, and retirement.

Spending less money is not the goal, the purpose of a budget. Ultimately, the purpose is freedom, enough money to have and to do what is really important—to you.

I have another problem with how the budget is generally taught. It is my experience that change that sticks is slow incremental change. I have seen folks with serious financial problems get struck down with the holy lightning of frugality, permanently changing direction overnight. It just isn’t all that common. What is important is that you start—today. Not tomorrow. What is important is that you take the blinders off your eyes. Really look at your financial situation. Be compassionate and forgiving to yourself if that is necessary, but be honest. If you can’t be honest with yourself you are truly lost in the wilderness. Find your own personal long term goals. This will be your source of power to continue on those days when living on a budget really isn’t any fun. Learning to live better for less is a challenge. Find a way to make it fun. It’s your life. Enjoy it.

This stuff really, really works. Live it! Forty years from now you will not regret the way you lived your life.

If you are committed to calculating and recording your net worth on a monthly basis, you already know if what you are doing is working as planned. If your net worth is headed upward at a steadily increasing rate and you are happy with your job and your life. This may be all you really need to do. If your net worth is headed down or is a negative number, perhaps you need to do more. If your net worth is headed up, but you hate your soul sucking cubicle, your desire for freedom might indicate a formal budget. It might be the key to a new life.

There are intermediate steps short of a full court press formal budget. If you are disciplined and have a gift for juggling a large number of figures in your head perhaps you can get away with devising your own compromise system.

For example:

Charlie brings home about $1,800 a month. He is contributing 5% to his 401-K so he can get his employer’s matching money. His rent is $700 a month. His car payment is $200 a month. His utilities run about $300 a month including cable TV and his iPhone. However, he has a hard time paying off his credit card every month. He is worried. He doesn’t understand why. He eats peanut butter sandwiches, ramen noodles, and canned tuna fish. He isn’t married. He doesn’t have any expensive hobbies. Where is all going? Well, it turns out Charlie is young and single, so he spends a lot of time at bars with his buddies and their girlfriends. By recording every single penny spent for a month he discovered his bar tab was running over $300 a month. Charlie decided to cut the cable saving $60 a month and limit his “entertainment” expenses to $150 a month. To make certain he didn’t cheat, he wrote beer money on an actual factual envelope. At the beginning of the month he put $150 in real U.S. dollar bills in the beer envelope, swearing an oath to himself that he would not exceed that amount. When he noticed that $100 was gone by the end of the first week, he decided to drink beer at home with his buddies at $1.00 a bottle rather than $5.00 a bottle (with tip) at the bar.

I hope Charlie uses some of the money he saved to improve his diet, but let’s save that topic for another day. I do hope you get the idea that if you are mindfully watching your expenses, putting safeguards in place to avoid your particular weaknesses and shortcomings, as well as relentlessly tracking your net worth you are probably going to be OK. If you see a drop in your net worth that you can’t explain, jump on it. Immediately! Return to tracking your daily expenses until you have the problem nailed down.

You may have noticed I used a simple example, a single man without any really serious problems. When he decides to get married, the personal finance stakes just got higher. When the young couple buys their first house they raise the stakes again. When they fill their yard with little boys and girls, they are all in. Each time you raise the stakes in your life the arguments in favor of a formal budget get more compelling. Also, once you choose to introduce a spouse into the mix, the formal budget process limits and controls arguments over money.

If you are in trouble don’t look for a way out. Go ahead and do the full formal budget. I don’t think I could improve on Dave Ramsey’s teaching on the subject, so here it is from an earlier post.

Dave Ramsey Cash Flow Planning

Here is a link to a wide variety of free budgeting software. Personally, I think for most folks the old fashioned paper and pencil forms are just fine. They can be copied from the back of any of Dave Ramsey’s books or his course material. He stated that he is OK with sharing these materials, but he is not OK with you selling his copyrighted materials. You can also buy these forms at any business supply house.

Free Household Budget Spreadsheets

I hope that somewhere in this series of posts you have found a map to guide you home.

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