A Budget: The Key to Your Financial Success—Part 1

Financial concepts are slippery things. After all, they can’t be touched or visually examined. To be fully appreciated, they must be imagined. Although this small but necessary feat of mental dexterity can make the economic logic of budgeting seem fuzzy, it’s important to map out an economic game plan that, on a month-to-month basis, clearly identifies how much money you intend to spend and save. This is a useful ongoing exercise because great wealth seldom materializes by itself and accidental millionaires are extremely rare. But take heart, you can amass a sizable fortune over the course of your life with even a modest income. Only, chances are, if you eventually succeed in doing so, your striking it rich later on will be a direct result of careful financial planning, continued personal sacrifice and tireless persistence. You see, when it comes to saving money and inflating a personal balance sheet, doggedness pays off. Believe-it-or-not, if you establish good money habits now and aggressively save and invest throughout your teens and twenties and beyond, you’re likely to attain an enviably high future net-worth. All it takes is a bit of determination and a willingness to make sound financial decisions in your day-to-day life. A budget makes economic miracles possible because it provides a largely self-imposed framework that, in turn, will enable you to relentlessly focus on and ultimately achieve major financial goals. Moreover, a budget will keep you on track and prevent you from blowing great gobs of money on stuff you don’t really want. To understand why a budget is crucial to your economic progress, it might help to compare a budget to something else entirely; something tangible that’s easier to relate to and identify with. What sort of everyday item embodies the potential and promise of a budget? Strangely enough, it’s a car… Though, at first glance, a budget and an automobile might seem to have nothing whatsoever in common, there are striking similarities between them.

Essentially, budgets and cars are vehicles. What differentiates them, however, is the type of transportation they provide. Whereas an automobile is a complex marvel of engineering that converts gasoline into transportation, a budget is an equally intricate and useful device that harnesses the power of an income and channels it toward any number of short-term, intermediate and long-term economic goals. Now, as you speed down life’s highways and biways, the destination is often a place; with a budget, however, it’s a financial goal. Granted, the anatomy of a budget and a car look nothing alike; but if you overlook this superficial dissimilarity and view them instead as elaborate mechanisms whose productive output requires the successful and well-timed coordination of many different and loosely interrelated parts, their similarity is immediately apparent. Just as a glimpse under the hood of an automobile’s idling engine compartment will reveal a puzzling tangle of wires, hoses and oddly shaped mechanical parts, an X-ray view of a working budget’s moving internals reveals an equally active dynamic, one that consists of carefully controlled, frequently monitored and constantly shifting cash flows which, in turn, support your goals and priorities. If you design and stick to a budget–which, make no mistake, isn’t easy–your day-to-day economic choices will gradually foster a deeper and more meaningful sense of personal satisfaction and fulfillment.

Of course, to operate at peak efficiency, cars and budgets require periodic tweaking and maintenance. With automobiles, the oil has to be changed and routine maintenance must be performed. Similarly, for a budget to operate at peak efficiency and produce optimal results, it too must be periodically monitored and adjusted. Sudden or dramatic changes in personal economic circumstances–which can include anything from violent fluctuations in spending to hiccups in income will, for better-or-worse, affect your progress toward financial goals. So, from time to time, you’ve got to pop your budget’s metaphorical hood, reach for the appropriate tools, and tinker with it until it’s once again producing desired results. On the road of life, cars and budgets are essential tools; if they’re properly cared for, they’ll take you wherever you want to go.

Alas, scarcity is one of money’s many qualities. Disappointingly, dollar bills don’t sprout like leaves from trees or erupt from cracks in the sidewalk like weeds. In theory, managing money sounds deceptively simple; in actual practice, it’s anything but—and there are many reasons why. As people distractedly going about the hectic hustle and bustle of everyday life, it’s often easy to forget that we’re continually bombarded by all manner of commercial stimulus. Meanwhile, each of us is inwardly nudged and outwardly cajoled by a shrieking cacophony of wants and needs. With enough money or even the right kind of plastic in one’s wallet, the urge to splurge is understandably difficult to resist. Which brings us to the crux of the problem: it’s extremely difficult–no, impossible–to satisfy an infinite number of wants and needs with limited financial resources. Establishing priorities is what budgeting is all about.

For many, when it comes to making financial decisions, there’s a natural tendency to fixate on satisfying immediate desires at the expense of longer-term goals. Admittedly, the thought of blowing money willy-nilly with no regard whatsoever to future consequence is, at times, powerfully seductive. Like a strictly regimented diet of ice-cream sundaes, the idea is appealing. Problem is, there’s a significant and widely overlooked downside to reckless binge spending. Such behavior seems satisfying but it has unsavory long-term consequences, namely: AFD (Acute Financial Discomfort); the telltale symptoms of this debilitating condition include an inability to save and a tendency to spend more money than one has.

Peeling back the layers of the decision making onion, consumers’ financial choices are guided by numerous factors, and few of them are positive. Social circumstances play a significant but hard-to-quanitify role in establishing the overall tone and tenor of consumers’ relationship with money. Conspicuous consumption is a term sociologists coined long ago to describe a curious but widely observed phenomenon: people spend lavishly on goods and services in an (often futile) attempt to elevate their standing among piers, acquaintances, and, in some cases, complete strangers. For America’s consumer class, maintaining appearances and keeping up with the Joneses is an exhausting full-time effort. It’s worth emphasizing, however, that numerous studies suggest that the link between consumption and happiness is, at best, tenuous. An informative article in The Economist (12/23/06), which examined the murky interrelationship between wealth and happiness, ultimately concluded, “…People quickly grow accustomed to whatever they have—however much of it there is. Moreover, having lots of things isn’t necessarily enough if other people have more. A rising tide lifts all boats but not all spirits, giving rise to a kind of status-anxiety.”

Interestingly, the unlikely field of neuroscience also has something to say about the addictive nature of spending; MRI studies of the brain show that spending money triggers the release of intoxicating pleasure chemicals to the brain. So, because of our fixed neurological hard wiring, there’s a biological explanation for consumers’ economic spendthrift ways. And if all this wasn’t enough to entice shoppers to empty their wallets and stimulate the national economy, there’s another game-changing factor in the mix as well. There’s this industry called advertising. It’s a thriving multi-billion dollar business and it’s how companies large and small compete for consumers’ dollars. Make no mistake, in the no-holds-barred arena of free-market Beyond Thunderdome capitalism, a war is indiscreetly being waged for your dollars. Ever set foot outside of your home, turned on your computer, listened to the radio, answered your telephone or watched TV and been overcome by the feeling that someone somewhere is desperately trying to sell you something? In an economy that’s addicted to profits—which, in turn, requires a steadily escalating level of sales activity—advertising is virtually inescapable. It’s slyly affixed to coffee-cup sleeves; the once blank side of that scrap of paper that’s stuffed into fortune cookies; the rooftops of taxi-cabs; the sides of buses; the periphery of sports stadiums; magazines, and even restroom stalls. As Kalle Lasn, co-founder of Ad Buster’s magazine, rightly points out: “From the moment you awake in the morning you’re assaulted by commercial stimulus. In fact, on average, about 3,000 marketing messages seep into the average North American brain every day.” Susan Douglas, University of Michigan’s Communications Professor, is credited with this clever quote: “Advertising–which is the bread, butter, jam, and mother’s milk of media–has afflicted Americans with a perpetual unease that can be momentarily appeased but never quite satisfied with future purchases. Advertising is designed to sell us envy, and the person we envy is the future self we become if we purchase goods and services.”

So, with a brain that’s hard-wired to spend and so many disparate factions noisily clamoring for your cash, the simple act of hanging onto it occasionally requires a heroic act of self-restraint. Sure, it’s important to smell the flowers and enjoy life now (which means engaging in a bit of retail therapy every now and then), but it’s equally important to develop and strengthen the fiscal resolve necessary to deny these irksome impulses and build personal savings. This is essential if, over the long windy course of your economic life, you want to build the sort of rock solid balance sheet that will enable you to comfortably weather unforeseen monetary setbacks and achieve lasting financial peace of mind. But here’s the kicker: reconciling the need to live large now with the seemingly less urgent need to scrimp and save for the future isn’t easy. It requires striking a sensible balance between hedonistic abandon and Spartan frugality. Unfortunately, this is all but impossible to do if you’re not carefully monitoring daily expenditures. So, the next time you’re next-in-line at the convenience store checkout counter, take a few deep tantric breaths and get a death grip on your economic chakras. Start by creating a shopping list that includes all of the items you’re going to buy well before setting foot outside of your home to run errands. And don’t deviate from the master plan. When creating a shopping list, it’s important to differentiate between a “want” and a “need.” Don’t confuse the two… Although the difference might seem hazy, needs include things like food and shelter. They’re biological necessities and are essential for survival. Wants, on the other hand, fall into that vast category of prospective purchases that can be safely put-off for another time. Bertrand Russell said it best: “To be without some of the things you want is an indispensable part of happiness.”

In short, the simple act of spending money is a frustrating one-step-forward-one-step-backward proposition. Although a purchase may fulfill a desire in one area, it simultaneously lessens your ability to satisfy other (and perhaps even more worthwhile) wants and needs. Obviously, the dollars you spend won’t miraculously regenerate in your wallet’s bill fold once they’re gone. Replacing the money you’ve spent means having to earn it all over again. Think about all the stuff you bought last month. Now, if you had it all to do over again, would you still want the stuff you bought or would you rather have your money back? Keep the answer to this question firmly in mind next time you’re considering a purchase. You see, money is very much like life itself; it’s the lifeblood of your time and labor–both of which are scarce and, no-doubt, valuable. The upshot? While budgeting may seem to be about dollars-and-cents, don’t be fooled, a budget is really about a lot more than that. It’s about your life—and getting more out of it. It’s about dreams and priorities; having them, holding yourself relentlessly accountable to them, and never shrinking from the trivial sacrifices you must make to achieve them.

Now, if you’re eager to whip your financial house into shape but haven’t made much progress because you lack an actionable game plan, take heart, the whole process begins and ends with you. Sadly, no external power is going to formulate a winning economic strategy that’s tailored to your individual preferences and miraculously beam it into your consciousness. Creating a functional budget, one that delivers results over time, is a highly iterative, sadly imperfect and profoundly introspective process. Make no mistake: self-assembly is required. So, be prepared to hunker down and roll up your sleeves. If you need a starter dose of economic reality, start by tallying your financial assets. Next, total your liabilities. Now, put both on opposite ends of a cantilever scale; wait patiently, and see what happens. If your assets outweigh your liabilities, congratulations, you’re among a proud minority of frugal-minded folks with a positive net-worth. Conversely, if the opposite is true, and your liabilities exceed your assets, don’t worry, you’re in good company. Many Americans, not to mention Uncle Sam and a good many U.S. cities and states—are right there with you.

The next step in the economic self-appraisal process is crucial. No matter how dreamy or dire your financial situation might appear, don’t dwell on it. From here on out, the future is your focus. Though the particulars of your economic present may seem paramount, trust me, the financial direction you’re headed is, over time, far more important. Creating and sticking to the parameters of a sensible budget is the single most important step you can take to seize the reins of your economic destiny. If you devise a budget and allow ample time for it to produce results, you’ll eventually look back in awe at your economic progress. But, before reaching for a calculator or applying pencil to paper to create a winning financial strategy, you should know up-front that budget minded living isn’t easy—especially at first. It’s a trying and sometimes heartbreaking challenge. It will test the limits of your resolve. On a cheerier note, if you stick with it, you’ll discover that the benefits of earning, spending and saving according to a specified plan are well-worth the effort and sacrifice. Just don’t expect instant gratification or flashy overnight results. A budget is a process. It’s effective, but it works slowly and it requires considerable patience and persistence to produce meaningful results…

Putting your financial life on stable footing requires following a simple multi-step process. First, figure out how much money you earn. Next, determine how much money you spend. If you blow cash with the reckless abandon of a drunken sailor on shore-leave, that’s a behavioral problem you’ll have to acknowledge and work on. Once you’ve quantified your income and expenditures, don your heartless CFO hat and trim unnecessary expenses. Once you’ve developed the discipline to live within self imposed spending constraints and know your income, do whatever it takes to ensure that they’re harmoniously balanced. Once you’ve accustomed to living within your means, take a deep breath and steady yourself for the next crucial step in the wealth building process. Tighten your financial belt a notch or two and strive to save at least one out of every ten dollars you make. Don’t blow this money; save it (preferably, in a high interest bearing FDIC insured money market account. For ideas, check out bankrate.com)–religiously. If socking away 10% of your income isn’t doable then, by all means, adjust your savings goal to suit your personal circumstances. Once your financial metabolism has reached a productive equilibrium and you’re comfortable spending less and saving more, you’re economic progress will gradually snowball. Before long, it’ll take on a virtuous and largely self-sustaining momentum of its own. And here’s the good news: saving money isn’t only financially rewarding, it’s emotionally habit forming. Even modest financial progress emboldens a sense of confidence that will pay monstrous dividends over time. In the not-too-distant future, the once unthinkable chore of scrimping and saving becomes oddly addictive as you begin to achieve goals and watch your net-worth rise.

No matter how difficult living within the cramped confines of a budget becomes, however, stick it out for three weeks. Behavioral experts say that it takes most people about this long to jettison old habits and reinforce new ones. Ironically, when adjusting to the realities of a budget-minded living, the only thing worse than saving too little is saving too much. Though this might seem wildly counter-intuitive, it’s not. Remember, for a budget to evolve into a lifestyle, it has to be livable. Much like a diet, binge saving leads to binge spending—a common and counter-productive form of self-sabotage. So, when whittling away at expenses, don’t go overboard. Give yourself plenty of wiggle-room. Accept small-scale cheating every now and then as a natural and perfectly healthy byproduct of an otherwise functional process. From time-to-time, you may fall off the budget wagon. Fine… Don’t beat yourself up or waste energy agonizing about it. Simply recognize the error of your ways, dust yourself off, and jump right back on. After all, in the grand scheme of life, it makes little sense to grimly scrimp and save for the future only to party like a rock-star at the ripe old age of 80. Conversely, it’s equally senseless to squander every penny living for the now only to discover—moments after blowing out the candles on your 80th birthday cake–that you haven’t a pot to piss in. Ironically, everybody wants to live a long life but few people save enough to age gracefully in retirement. Just hope that 80 (if that’s the lifespan you’re budgeting for) doesn’t become a momentary rest stop on the bullet-train expressway to age 100. When you take inflation’s long-term wealth withering affects into account, a desirable quality of life three to five decades from now will easily cost a million bucks. Which is why you should aggressively and proactively plan and save for your golden years; and you should do so now–don’t procrastinate. If you’re female, it’s especially important for you to prudently manage your finances because (according to actuarial data painstakingly compiled and analyzed by life insurance companies, which are in the business of knowing such things) women often outlive men—and by a significant number of years. Though on one hand this is certainly news worth cheering, longer life-expectancies imply a much greater lifetime savings burden. Essentially, the longer you intend to live the more money you’ll need to live well. Don’t believe me? A study by AARP makes a compelling argument: though only 12% of our nation’s elderly live in poverty, 74% of them are women. Want to know how lengthy a lifespan you should budget for? Gather up your medical history and check out www.livingto100.com…

In short, it doesn’t matter if you’re male or female, young or old; everyone needs a budget. Fortunately, they’re a cinch to create because they involve only two key variables. And luckily, you control both: financial inputs (whatever money you make) and financial outputs (whatever money you spend). Let’s start by examining the financial output side of the budgetary equation. In life, there are expenses. Though some are overwhelmingly huge, most are small. By and large, Americans’ biggest expenditures are those associated with keeping an automobile on the road, food on the table and a roof overhead. Of course, smaller expenses have a not so funny way of adding up. Personal perks and creature comforts—money spent on things like gourmet coffee, an evening at the movies, electronic gadgets, fashionable threads, trendy hand-bags, chichi shoes, savory restaurant meals, and countless other things—can sabotage a budget. For many, it’s the steady accumulation of many small and seemingly trivial expenses that prevents them from making long-term economic progress.

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