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. Although this small feat of mental dexterity can make the economic logic of budgeting harder to appreciate, the fact of the matter is that financial success isn't something you're likely to stumble upon by accident; it's a happy byproduct of thoughtful planning and deliberate sacrifice. Believe-it-or-not, great wealth can be accumulated over a period of many years simply by making sound financial decisions. A budget drives this process because it offers a constructive framework for managing the money you earn, save and spend. What's more, by following self-imposed budgetary guidelines, personal spending won't spiraling out of control. If you create a budget and live within its parameters, you'll make tremendous economic progress and, over time, will establish a lifestyle in which you will have greater control. To better understand why a budget is indispensable your long-term financial success, it may help to compare a budget to something else entirely; something tangible that's readily familiar and is likely to play a key role in your everyday life. What item embodies the potential and promise of a budget? Interestingly enough, it’s a car. Though, at first blush, a budget and automobile might seem to have nothing whatsoever in common, there are striking similarities between them.

Budgets and cars are essential vehicles; what differentiates them, however, is the type of transportation that they each provide. Whereas an automobile is a marvel of engineering that somehow converts gasoline into transportation, a budget is an equally complex device that harnesses the power of an income and efficiently channels it in a way that will help you to achieve short-term, intermediate and long-term goals. When you're speeding along in a car, the destination is often a place; with a budget, it's a financial goal. Obviously, though the inner-workings of a budget and a car look nothing alike, if you look beyond this superficial dissimilarity and view them instead as complex systems whose productive output requires the successful coordination of many interconnected parts, their similarity is immediately apparent. Though an automobile's rumbling engine compartment reveals a puzzling maze of wires, hoses and oddly shaped mechanical parts, the anatomy 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 you acquire, spend or save. Of course, to work at peak efficiency, cars and budgets require periodic oversight and maintenance. With an automobile, the oil has to be changed, the brakes need to be replaced, and recommended maintenance must be performed on schedule. For a budget to continue producing optimal results, it too must be closely monitored and adjusted. Sudden or dramatic changes in economic circumstances--which can include anything from dramatic changes in personal spending to violent hiccups in income--will, for better-or-worse, affect your financial progress. Every now and then, you'll have 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.

The odd thing about money is that it's scarce; it doesn't sprout like weeds from the ground and dollar bills certainly don't grow like fruit from trees. 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 constantly bombarded by commercial stimulus. Meanwhile, at the same time, we're inwardly nudged and outwardly cajoled by a shrieking cacophany 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. But this brings us to the heart of the matter: it’s frustratingly difficult, no—impossible--to satisfy an infinite number of wants and needs with limited financial resources.

Regrettably, when it comes to making financial decisions, there's a natural tendency to fixate on satisfying short-term wants at the expense of intermediate and longer-term goals. No-doubt, the idea of blowing money willy-nilly is hugely exhilerating. Nevertheless, this sort of chronic behavior has an undesirable side effect: AFS (Acute Financial Shortsightedness). The telltale symptoms of this debilitating economic condition include consistently failing to save and regularly living well beyond one's means. Living this way may be thrilling in the short-term but, as you might correctly guess, it has undesirable long-term consequences. There are many reasons for consumers' financial exuberance and their economic behavior is influenced by a multitude of factors. By and large, social pressures play an outsized role in defining consumers' relationship with money. Conspicuous consumption is a term that sociologists use to describe a curious but widely observed phenomenon: when people spend lavishly on goods and services in an attempt 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. It's worth noting, however, that research has shown that the link between consumption and happiness is tenuous, at best. An informative article in The Economist (12/23/06) explores the interaction between wealth and happiness. Ultimately. it concludes 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."

Interestingly, the unlikely field of neuroscience also has something to say about the addictive nature of spending; MRI studies of the brain reveal that spending money triggers the release of intoxicating pleasure chemicals to the brain. So, apart from the social catalysts previously discussed, peoples' economic decisions are influenced by our neural wiring and pleasure seeking tendancies as well. But there's yet another factor in this wonderous mix: it's called advertising. It's a thriving multi-billion dollar industry and it’s how businesses compete for consumers’ dollars. Make no mistake, in the no-holds-barred arena of free-market capitalism, a war is noisily being waged for your dollars. Ever set foot outside of your home, turned on your computer, listened to the radio, answered your telephone, or powered up your TV and been struck by an eerie feeling that someone is desparately trying to sell you something? In an economy that's addicted to profits—which, of course, requires an ever-escalating level of sales activity—advertising is inescapable. It’s literally everywhere. It's slyly affixed to coffee-cup sleeves; the once blank side of scrap paper that's stuffed into fortune cookies; the rooftops of taxi-cabs; bus billboards; magazines; and, occasionally, even restroom stalls. Kalle Lasn, co-founder of Ad Buster’s magazine, rightly observes: “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.” Susan Douglas, University of Michigan's Communicatins Professor, summarizes the situation with the following 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 loudly clamoring for your money, the simple act of hanging onto it requires a superhuman act of self-restraint. Sure, it's important to smell the flowers and savor life in the now (which may mean occasionally indulging in a bit of retail therapy) but it’s equally important to establish and strengthen the fiscal discipline to deny these irksome impulsives and build personal savings. Essentially, you want your money to gradually establish and slowly nurture the kind of personal balance sheet that will enable you to deal with unforeseen economic setbacks, address short-term emergencies, and achieve lasting security. 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 closely monitoring daily expenditures. So, the next time you’re next-in-line at the checkout counter, take a few deep tantric breaths and get a firm grip on your economic chakras. You can start by composing a shopping list of items you need to buy before setting foot outside of your home. And don't deviate from the plan. When listing what you need, it's important to be aware of the sizeable distinction between a “want” and a “need.” Don’t confuse the two... If the difference somehow seems fuzzy, here's a helpful tip: needs include things like food and shelter. They’re biological necessities and they’re essential for survival. Wants, on the other hand, are discretionary purchases that can be safely postponed.

Spending money is a frustrating one-step-forward-one-step-backward proposition. Although a purchase may satisfy a desire in one area, it'll simultaneously lessen your ability to achieve other (perhaps more pressing) wants and needs. As I'm sure you're well aware, the dollars you spend won't magically rematerialize in your wallet once they're gone. Replacing the money you've spent means having to earn it all over again. In this way, money is like life itself; it's valuable because it symbolically represents your time and effort. So, although the anatomy of a budget might seem to be about just dollars-and-cents, don’t be fooled. Philosophically speaking, a budget is about a lot more than that. It’s about your life—and getting more out of it. It’s about personal goals; having them, holding yourself relentlessly accountable to them, and not shrinking from the many sacrifices you'll have to make over time in order to achieve them.

Now, if you’re eager to whip your financial life into shape but haven't yet made measurable progress for want of an actionable game plan, take heart, the entire process begins and ends with you. No external power is going to formulate a winning economic strategy that's custom tailored to your unique personal preferences and miraculously beam it into your consciousness. Creating a functional and productive 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, start by totaling 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 greatly exceed your liabilities, congratulations, you’re way ahead of the game; you're among a small minority of people with a positive net-worth. If the opposite is true, and your liabilities outweigh your assets, don’t fret, you're in good company. Many Americans—to say nothing of Uncle Sam and a depressing number of U.S. 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 circumstances might seem, don’t dwell on them. From here on out, let the future be your focus. Though the particulars of your economic present may seem paramount, trust me, the financial direction you’re headed is far more important. Creating and sticking to the parameters of a sensible budget is the first all-important step in seizing the reigns of your economic destiny. If you create a budget and allow ample time for it to produce meaningful results, you’ll someday look back and be astounded by your economic progress. But, before reaching for a calculator or setting pencil to paper to hash-out a winning financial strategy, you should know up-front that budget minded living isn’t easy—partiularly at first. It's a colossal challenge. At times, it will surely test your resolve. But, if you can just stick it out, you'll come to appreciate the perks of earning, spending and saving within clearly established guidelines. 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 a tremendous amount of patience and resolve. Are you OK with that? Fine, let’s move on…

Putting your finances on stable footing requires following a simple multi-step procedure. First, determine how much money you earn. Next, calculate how much money you spend. If you habitually spend money with the reckless abandon of a drunken sailor on shore-leave, then that's a behavioral problem you'll have to address. Once you've got a handle on your income and expenditures, don your heartless CFO hat and begin ruthlessly trimming or eliminating unnecessary expenses. Once you've adjusted to living within the cramped confines of a budget and have tweaked your spending and income so that they're 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 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 simply isn’t doable then, by all means, adjust your savings target to suit your personal circumstances. Once your financial metabolism has reached the point where you're genuinely comfortable spending less and saving more, you’re economic progress will slowly build momentum and snowball. 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. Eventually, the once unthinkable and painstakingly tedious chore of scrimping and saving takes on a virtuous and largely self-sustaining momentum all of its own.

No matter how difficult living with a budget becomes, however, you have to stick it out for three weeks. Behavioral experts say that it takes most people this long to rid themselves of old habits and cement new ones. Also, when it comes to adopting to the rigors of a budget-oriented lifestyle, 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 produce results over a long period of time, it must be sustainable. Much like a diet, binge saving will inevitably lead to binge spending—a common and profoundly self-destructive form of economic self-sabotage. So, when whittling away at expenses, don’t go overboard. Be sure to give yourself plenty of wiggle-room and accept small-scale cheating every now and then as a natural byproduct of an otherwise healthy and perfectly functional process. No-doubt, from time-to-time, 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 things, it makes very little sense to scrimp and save for the future only to party like a rock-star at the ripe old age of 80. On the other hand, it’s equally stupid 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 momentary stop on the bullet-train expressway to age 100. Because living large in old age takes a tremendous amount of money, you've got to proactively plan and save for your golden years. If you’re a woman, it's all-the-more important to shrewdly manage your personal finances because (according to actuarial data compiled by life insurance companies which are well aware of such things) women, on average, outlive men—and frequently by a substantial number of years. Though on one hand this is certainly news worth cheering; on a more somber note, longer life-expectancies mean a substantially greater lifetime savings burden. Here's the upshot: the longer you live the more money you'll need to live well. Don't believe me? A study by AARP makes a compelling counter-argument: although 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 dynamic variables which, by and large, you control: financial inputs (whatever money is coming in) and financial outputs (whatever money is going out). For starters, let's examine the financial output side of the budgetary equation. In life, there are expenses; although a few are large, the vast majority are small. Many Americans' biggest expenditures are those associated with keeping an automobile on the road, food on the table and a roof overhead. Of course, smaller outlays have a non-trivial way of adding up. Personal perks and creature comforts—things like gourmet coffee, an evening out at the movies (especially if you throw in the staggering cost of popcorn and drinks), electronic gadgets, fashionable threads, trendy hand-bags, chichi shoes, tasty restaurant meals, and many other things—can easily sabotage a budget. For many hard working full-time taxpayers, it’s the cumulative impact of many small and seemingly inconsequential expenses that derails their long-term economic progress.