Personal Finance Budgeting Means Planning Not to Fail

Budgeting Means Planning Not to Fail

BY MICHAEL MUCKIAN

Illustration by Michael Burmesch.

Early in my career I worked for a small nonprofit membership organization whose well-meaning CEO followed a simple budget plan for his organization. If you ended the fiscal year with money left over after expenses were met, he reasoned, then you’ve had a successful year.

That might work for lemonade stands, but less so for professional organizations, or so reasoned his board of directors made up largely of financial people. He was replaced and a more stringent regimen put into place. Now, decades later, the organization hasn’t really grown all that much in the number of members it serves, but it now serves them from the first floor of a three-story office building it financed and owns.

The same issues affect many of us as individuals. Too many families hold their collective breaths throughout entire months, only to exhale gratefully when they turn the calendar page and realize their money has outlasted the month’s expenses. As satisfied as you may feel when that happens, it’s no way to live unless you don’t plan to live past lemonade season.

That’s where personal budgeting comes in. Even if you don’t want to own a three-story office building, you can maximize your resources, no matter how limited, by creating a budget that helps you meet your needs within your means. As Money Guru Dave Ramsey says, “A budget is telling your money where to go instead of wondering where it went.” A budget is a plan, a financial roadmap that hopefully will help you reach your personal and economic goals with minimal interruptions. Like any map, a budget is not about perfection, but about education. You implement guidelines and then learn from both your success and failures. Budget standards should be firm, but with enough flexibility to address unexpected financial needs. A sudden medical emergency is something worth bending your budget for; a shiny new Apple watch is not. Preparing for the former expense may give you the skills to budget for the later.

BUDGET TYPES

Budget structures are as variable as the individuals or families who create them as long as it meets their economic needs on the way toward future prosperity. One of the simplest budgets is the 50/30/20 percentage breakdown, and really forms a basis for other types as well.

In this model, 50 percent of your income goes to foundation expenses, or “needs,” such as housing, transportation, food, energy costs, childcare costs, and other must-haves that will keep your family housed, fed and safe. The second 30 percent covers “wants,” including entertainment, dining out, vacations, leisure activities, and maybe even the aforementioned Apple watch. The final 20 percent goes to savings, investments and satisfying existing debt. Granted, many people and young families struggle with so simplistic a breakdown but keeping the structure and percentage allocations in mind helps you create a functional system that will help put you into a better financial space, which is the goal for any budget.

Even more basic is the zero-based budget. The equation is simple: Income minus expenses equal zero dollars left. This works well for people that have a clear idea what their income and their expenses are each month. Clarity and regularity are key and adding a category such as “Unexpected Expenses” or “Miscellaneous” can leave room to maneuver when the inevitable unexpected surprises show up in your mailbox, electronic or otherwise.

Similar in approach, the envelope budget system operates much the same way, except it’s all done on a cash basis. You identify key expenditures using old-fashioned paper envelopes filled with old-fashioned cash in the amounts you need for each expense. When it’s time to grocery shop, take the cash out of your grocery envelop and head to the supermarket. You can buy only as much stuff as you have the cash for in hand. If you don’t have the cash, the item goes back on the shelf. People who rely on debit cards will find this inconvenient, but it does clearly identify what you can afford.

One method favored by my accountant father was the pay yourself first budget system. Assuming you have a clear idea of income and expenses each month, you first set aside what you want to direct to savings and debt service, then spend the rest however you need to. Either overtly or subliminally, it will help a lot if you have a 50/30/20 mindset, with the 20 percent given over to what you pay yourself. But the very idea of paying yourself before the money all flies away provides psychological solace to many families. Finally, there is the no budget system, which really breaks down to not spending more than you have. Period. Keep an eye on your bank checking account to monitor outflow; know when recurring bills hit your debit account; “pay yourself” with cash set aside for savings and debt payment; and don’t spend more than what’s in your account. Period.

Whichever budgeting methodology you choose, all are predicated by understanding when to say “NO” and when to say “YES” to an expenditure. And all budgets are designed to provide structures through which to make the right decision at the right times.

Dave Ramsey, once again, says it best: “A budget isn’t about restricting what you can spend. It gives you permission to spend without guilt or regret.”

Pick the one you like and get underway.

Michael Muckian was the banking and finance writer for the Milwaukee Business Journal and is the author of The Complete Idiot’s Guide to Financing and Accounting and The One-Day MBA in Finance and Accounting.