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

Financial concepts are slippery things. After all, they can’t be touched, picked up or visually examined. To be appreciated, they must be imagined. Though this may make the logic of budgeting harder to appreciate, make no mistake, you need to have a strategy for making the most of whatever money comes your way. For reasons that will be glaringly apparent a few decades from now, your quality of life depends on it. Essentially, a budget is a helpful tool because it enables you to track of where your money goes and control personal spending. If you can more-or-less stick to a budget, you'll make steady incremental progress toward a wide range of goals. To better understand why a budget is essential to your economic progress, it might help to compare a budget to something else entirely; something tangible that's easier to relate to. What sort of item best captures the 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.

You see, a budget, like a car, is a type of vehicle. What differentiates them, however, is the type of transportation they provide. Whereas an automobile is a wonderfully complex device that converts gasoline into transportation, a budget is an equally elaborate instrument that harnesses the power of an income and redirects it toward the realization of various short-term, intermediate and long-term personal goals. With a car, the destination is a place; with a budget, it's a financial goal. Of course, the inner-workings of a budget and a car are very different, but if you overlook this fact and regard them instead as systems whose output depends on the closely coordinated interaction of various parts--the similarity between budgets and cars is obvious. Though a look at an automobile's idling engine compartment reveals a puzzling labyrinth of wires, hoses and oddly shaped mechanical parts, an X-ray glimpse at the internals of a budget reveals an equally active dynamic; one that consists of closely monitored and constantly shifting cash flows that, in turn, correspond to whatever money slips through your fingers. Of course, to operate at peak efficiency, cars and budgets require a similar amount of oversight and maintenance. With automobiles, the oil has to be changed, the brakes need to be periodically replaced and all moving parts should be inspected. Similarly, for a budget to function effectively, it too must be monitored. Dramatic changes in personal economic circumstances--which can include anything from variations in spending to gyrations in income--will (for better or worse) affect your progress. So, from time to time, you'll need to pop your budget's hood, reach for the appropriate tools, and tinker with it to achieve optimal 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.

The odd thing about money is that--though it’s made of paper, which generally comes from trees--dollar bills don’t grow on trees. In theory, managing money sounds deceptively simple; in actual practice, however, it’s anything but—and there are many reasons why. As people distractedly going about the hectic hustle and bustle of daily life, it’s easy to forget that, 24 hours a day 7 days a week, we're continually bombarded by commercial stimulus. In such a consumption oriented atmosphere, it's often easy to forget that we’re also internally nudged and cajoled by various wants and needs. With enough money (or even the right kind of plastic) in one’s pocket, the urge to splurge is understandably difficult to resist. But therein lies the root of the problem, it’s frustratingly difficult, no—impossible, to satisfy an infinite number of wants and needs with limited financial resources.

Unfortunatelly, when it comes to decisions involving money, there's a natural tendency to gratify short-term wants and desires at the expense of progress toward intermediate and longer-term goals. Though the idea of spending money may prompt a momentarily satisfying burst of satisfaction, financial recklessness--that is, failing to save and compulsively spending as much or more than you make--has unsavory long-term consequences. And, lest we forget, social pressures influence peoples' economic choices as well, and usually not for the better. Conspicuous consumption is a term that sociologists use to describe a peculiar yet widely observed social phenomenon: when people spend lavishly to elevate their social standing among piers, acquaintances, and, in some cases, complete strangers. For America’s burgeoning consumer class, maintaining appearances and keeping up with the Joneses is an exhausting full-time effort. Interestingly, though, studies show that the link between consumption and happiness is tenuous, at best. The Economist (12/23/06) examined the link between happiness and wealth, concluding that: “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.”

Remarkably, the field of neuroscience also has something to say about the addictive nature of spending as well; to whit, MRI studies of the brain show that spending money triggers the release of intoxicating pleasure chemicals to the noggin. And though economic decisions are complex and motivated by countless factors, perhaps the single most significant among them is this thing called advertising. It’s a growing multi-billion dollar industry. More importantly, it’s how businesses compete for consumers’ dollars in the commercial marketplace. Make no mistake, in the bare knuckled no-holds-barred arena of free-market capitalism, a war is indiscreetly being waged for your dollars; and fortunately, who wins it is up to you. Ever set foot outside of your home, turned on your computer, listened to the radio, answered your telephone, or watched TV only to be greeted by a pushy solicitation urging you to buy or just try a product or service? In an economy that thrives on profits—which, in turn, requires an ever-escalating level of sales activity—advertising is virtually inescapable. It’s literally everywhere; it's slyly affixed to coffee-cup sleeves; the once blank side of paper that's folded into fortune cookies; the rooftops of taxi-cabs; roadside billboards; magazines; and, in some cases, even restroom stalls. As Kalle Lasn, co-founder of Ad Buster’s magazine, puts it, “From the moment you get up in the morning you’re assaulted with commercial stimulus. On average, about 3,000 marketing messages seep into the average North American brain every day.”

So, with a brain that’s hard-wired to spend and so many disparate factions desperately clamoring for your money, the seemingly straightforward act of hanging onto it requires a nearly super-human act of self-restraint. Sure, it's important to savor life and enjoy the moment, (which, of course, requires indulging the occasional impulse buy) but it’s equally important to develop and strengthen the fiscal discipline necessary to deny these impulses so that you can build your savings. This way, in a pinch, you'll have enough cash to address emergencies and longer term needs. But here's the trick: reconciling the need to live large now with the seemingly less urgent need to save for the future isn't easy: conceptually, it means striking a sensible balance between hedonistic abandon and Spartan frugality. Unfortunately, this is all but impossible to do if you’re not closely monitoring daily expenditures. So, the next time you’re in line at the checkout counter, take a few deep tantric breaths and get a frim grip on your economic chakras. Start by composing a carefully thought out list of everything you need to buy before setting foot outside of your home to go shopping. When drafting this list, you should be acutely aware of the difference between a “want” and a “need.” Don’t confuse the two... If the distinction seems fuzzy, here's a hint: needs include things like food and shelter; they’re biological necessities, and they’re essential for survival. Wants, however, are discretionary purchases that can be safely put-off for another time.

Essentially, spending money is a tricky proposition. Though making a purchase will satisfy a desire in one area, it will simultaneously lessen your ability to satisfy other wants and needs. Though, at first glance, the anatomy of a budget might boil down to dollars-and-cents, don’t be fooled. A budget is about a lot more than that. It’s about your life—and getting more out of it. It’s about goals. Having them, holding yourself unrelentingly accountable to them and not shrinking from the many small sacrifices you must make over the long haul to achieve them.

Now, if you’re eager to whip your financial house into shape but haven't made measurable progress for the lack of an actionable plan, take heart, the entire process begins and ends with you. Sadly, no external power is going to formulate a winning economic strategy that’s tailored to your unique circumstances and sensibilities and then miraculousy beam it into your consciousness. Creating a working budget is a highly iterative, sadly imperfect, and deeply introspective process. Self-assembly is definitely required. So, be prepared to hunker down and roll up your sleeves. If you’re looking for a starter dose of economic reality, however, start by tallying your financial assets. Next, add up your liabilities. Now, put both on opposite ends of a cantilever scale; wait patiently, and see what happens. If your assets exceed your liabilities, congratulations, you’re among a tiny minority of frugal and balance sheet minded Americans with a positive net-worth. Conversely, if the opposite is true, and your liabilities greatly outweigh your assets, don’t be alarmed, you're in good company. Many Americans—to say nothing of Uncle Sam and a good many U.S. states—are right there with you.

The next all-important step in the economic self-appraisal process is crucial. No matter how dreamy or dire your financial circumstances seem, don’t dwell on them. From here on out, let the future be your focus. Though the particulars of your current economic situation may seem paramount, the financial direction you’re headed is, over time, far more important. Creating and sticking to a sensible budget is the first all-important step you can take to seize the reins of your economic destiny. If you create a budget and allow ample time for it to produce results, you’ll lay the groundwork for tremendous future progress. But before reaching for that calculator or applying pencil to paper to hash out a winning economic strategy, you should know up-front that budget minded living isn’t easy—especially at first. It's a fiesty challenge. At times, it will test your resolve. The long-term benefits of creating and sticking to a sensible budget, however, 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 requires commitment and patience because it works slowly over time. Are you good with that? Fine, let’s move on…

Putting your finances on stable footing means following a simple multi-step process. First, quantify how much money you earn. Next, calculate how much money you spend. If you spend lavishly and tend to blow money with the reckless abandon of a drunken sailor on shore-leave, that's a behavioral problem you'll have to beat. After you've neatly categorized and sub-totaled your income and expenditures, put on your heartless CFO hat and ruthlessly trim unnecessary expenses. Once you've adjused to the fiscal confines of a more frugal lifestyle and your spending and income are harmoniously balanced, take the next crucial step. Tighten your financial belt a notch or two and strive to save one out of every ten dollars you earn. Don’t blow this money; save it (preferably, in a high interest bearing FDIC insured money market account. For ideas, visit bankrate.com). If socking away 10% of your paycheck isn’t doable, then, by all means, adjust your savings target up or down to suit your personal circumstances. Once you've rewired your financial thinking and have adopted a healthier and more patient outlook with regard to spending and saving, you’ll look back, marvel at the results you've painstakingly achieved, and realize that setting aside a portion of your income isn’t only financially rewarding, it’s emotionally habit forming. Even modest financial progress emboldens a greater sense of confidence that, over time, will pay whopping dividends. Eventually, the once unthinkable process of scrimping and saving takes on a virtuous and self-sustaining momentum of its own.

No matter how difficult living within the parameters of a budget becomes, however, stick it out for three weeks. Behavioral experts say that it takes about this long to break old habits and reinforce new ones. Another point to consider when adjusting to the tedious monotony of budget minded living is that, ironically, the only thing worse than not saving enough money is saving too much. Though this might seem counter-intuitive, it’s not. Remember, for a budget to work, it must be sustainable over the long run. Binge saving ultimately leads to binge spending—a counterproductive yet frequently experienced form of economic self-sabotage. So, when trimming expenses, don’t go overboard. Give yourself plenty of wiggle-room and accept small-scale cheating every now and then as a normal byproduct of an otherwise healthy and perfectly functional process. At times, you’ll fall off the budget wagon. Fine... Don’t beat yourself up or waste time agonizing over 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 no sense to grimly scrimp and save for the future only to party like a rock-star at the ripe old age of 80. By the same token, however, it’s equally foolish to squander every last penny living for the now only to discover—moments after blowing out the candles on your 80th birthday cake—that you haven’t got a pot to piss in. Ironically, everybody wants to live a long life but nobody wants to grow old. Just hope that 80 (if that’s the lifespan you’re budgeting for) doesn’t become a rest-stop on the bullet-train expressway to age 100. Because the good life doesn't come cheap, you've got to be aggressive and proactive about planning and saving for the eventuality of your sunset years. And if you’re a woman, there's an even greater need to pay attention to how you manage your finances because, chances are (if actuarial data painstakingly compiled by life insurance companies offers any indication) you're likely to outlive the average man—and possibly by a good many years. Though, from one standpoint, this is certainly news worth cheering, longer life-expectancies translate to a substantially greater lifetime savings requirement. The longer you plan on living the more money you'll need to maintain a desireable quality of life. All of which explains why women need to be especially good managers of their financial lives. Don't believe it? Data collected by the 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 be budgeting for? Gather up your medical history and check out the following site: www.livingto100.com...

In short, it doesn't matter whether you're male or female, young or old, everyone needs to have a budget. Fortunately, they’re a cinch to create because they involve only two variables: financial inputs (money that's coming in) and financial outputs (money that's going out). To start, let’s concentrate on the financial output side of the budgetary process. In life, there are expenses. Though some are large, most are small. For working class Americans, the biggest budgetary outlays are usually those associated with keeping an automobile on the road, food on the table, and a roof overhead. Of course, smaller nitpicking expenses have a not-so-funny way of adding up. Personal perks and creature comforts—things like gourmet coffee, an evening at the movies (especially when you add the cost of popcorn and drinks), electronic gadgets, fashionable threads, trendy hand-bags, chichi shoes, savory restaurant meals, and many other things—can easily torpedo a budget. For most people, it’s the cumulative impact of many small and seemingly trivial expenses that keeps them from making meaningful financial progress over time.