By Steve Kautz, a former Maine mathematics teacher and personal finance expert.
Budgeting. Oh, This is Going to Be Fun
Sorry, that was a bit of a lie. I suspect most people don’t think budgets are fun or interesting. I do, but “Kautz, you are such a geek” has been overheard in my classroom more than a few times. You don’t have to find budgets fun or interesting, but I hope you’ll at least consider their importance. So, hang with me for a few minutes while I try to inspire you to plan, plan away.
Dude, When is Payday?
You know that guy ꟷ or maybe it’s you ─ ordering water at the bar or eating ramen again because it’s Thursday the 14th and you are a few hours short of payday. I can’t think of a more significant component to personal finance than the budget. There are many topics critical to financial success, freedom, peace, or whatever you want to call it. It’s important to learn about investing, credit scores, banking, insurance, buying a car or home, etc. But if you are not living on a budget (or playing QB for the Pats) you are likely to find yourself in a hole, scratching by paycheck to paycheck. If you are currently in that situation you need to get on a budget. If your situation is stable but you can’t seem to reach any long term savings goals, or find peace of mind, you need to get on a budget.
“Plan Your Work, Work Your Plan”
I don’t know who gets credit for that quote, but I know that I first heard it while I was in the Peace Corps. It’s great advice for life in general, and it is especially relevant in terms of your finances. There are many ways to budget. I am a spreadsheet guy, and I like to keep it simple ꟷ Hello, Excel Spreadsheets. I actually started living-by-spreadsheet when I was in the Peace Corps. It was the fall of 1995, I was volunteering away in the Czech Republic, and back here in the States there was a threat of a government shutdown. We were told to be prepared to go without our tiny stipend for a month or so until they could get us out of the country. Desperate to maintain my new found habits of fried cheese and real Pilsner, that situation got me into planning mode, and the next thing I knew I had a living, breathing, 3 month budget, scratched out in my little Czech zapisnik (notebook).
Isn’t it ironic that government’s failure with budgets was a catalyst in transforming my finances? (If you’ve never looked at a federal budget, you should. The numbers and scope are fascinating).
Now I plan 12-15 months at a time, programming the budget to do the math. I can look ahead by changing income or expenses in any month and then looking for how it affects subsequent months. There are plenty of apps and software programs out there, but for me, they have too many bells and whistles. My personal budget is not being displayed at a board meeting. I mean, the charts and graphs, colors, and smiley-money-saving pop-up animals are cute, but they don’t really add much to a basic budget. I also believe a software/app that does too much of the work for that can disconnect you from the numbers. That’s right, stay close to your budget, be friends. I talk to mine (“Hey, where the heck is the money I had put aside for my Otto’s?”). And it talks back (“Dude, how much pizza does one man really need?”).
Another interesting budgeting tool is the envelope method. In this case it is a cash budget -the right amount of cash goes into a labeled envelope- when the cash is gone, there is no money left in that category. It forces you to do without or to shift money from another category. That method is especially popular/useful for folks who are currently in financial trouble and really need to name every dollar and watch it like a baby.
The Exciting Part
Whether you are digging out of a hole or working toward certain financial goals, the budget provides invaluable information. And, it does get exciting. If you are digging out you can look several months ahead and see how you are chipping away at the debt. If you are saving, it is really cool to look 6, 8, or 10 months down the road and see just how much you can put away. Budgeting is also critical for keeping an eye on your emergency fund ($1,000 if you are just getting started, three to six months of expenses if you are in a little better shape). I am often more broke than I want to be. But, thanks to my budget, at least I always know the situation, and what it will take to get where I want to go.
Let’s talk about starting your budget, and some key ratios to consider.
The views, information, or opinions expressed in this blog are solely those of the author and do not necessarily represent or reflect those of the Maine Jumpstart Coalition for Personal Financial Literacy.