A Budget: The Key to Your Financial Success—Part 2

Preventing small expenses from spiraling out of control is the main reason why it's necessary to have a budget to begin with. If you’ve never created a plan for earning, spending, saving and investing, the best way to begin is by monitoring your daily income and expenditures. Woody Allen once said that 80% of success is showing up. Well, if that’s true, then 80% of financial success is keeping track. No expenditure is too small to account for. A friend of mine once noted a twenty-five entry in her spending journal and somewhat whimsically labeled the trivial outlay under the heading of “wishes.” Though many people assume that a whopping paycheck or a staggering windfall of cash would be a cure-all for their financial worries, nothing could be further from the truth. Lottery winners typically squander their newly acquired fortunes (perhaps because they feel unworthy of them) only to, after a period of time, end up flat broke. According to the National Endowment for Financial Education, 70% of those who come into instant wealth blow their windfall in a few short years. Lofty incomes, though widely coveted, provide an equally illusory sense of economic invincibility. Well paid celebrities (Michael Jackson and Ed McMahon somehow leap to mind) and professional athletes (Mike Tyson is a shining example) have, over the course of their storied careers, made impressive sums of money but have artfully outspent their outsized earning power.

The bottom line: it doesn’t matter how much money you make or how sizeable a fortune you’ve got sloshing around in your bank account, how you manage your money is all that matters. If there’s a secret to achieving lasting wealth, it lies in carefully handling your finances. After all, nothing screams wealth like a well pinched penny. Think of your income as a liquid that's dispensed at the far end of a financial garden hose, one that's pin-pricked with lots of tiny holes. Now, the minor leaks along the length of your hose represent non-discretionary spending, that is, deductions for state and federal income taxes and other essentials like food and shelter. Now, despite the small arcing columns of water spouting off along the length of your financial garden hose, there’s still a modest trickle of water dribbling out the nozzle. This is your disposable income; it’s whatever money is left over after paying for non-discretionary expenses. Now, if you look around you'll notice that lying beside your financial garden hose there's a wealth bucket. Now, you do want to fill your wealth bucket, don’t you? Certainly, good things will come from doing so. To fill it as quickly and efficiently as possible, you should inspect the condition of your wealth bucket. Examine it carefully. Is it riddled with holes? If so, are they unusually large? No-doubt, if the modest trickle of wealth pouring out the far end of your garden hose spashes into your wealth bucket only to dribble out and water the lawn, then, obviously, it’ll take twice as long and double the energy to fill. The holes in your wealth bucket represent discretionary spending—that is, money which is typically spent on wants, not needs... If you want your wealth bucket to fill quickly, you must cautiously manage your disposable income. Interestingly, though everyone has a wealth bucket, few of them hold water because they're riddled with holes. The systematic process of locating and patching these holes is what we’ll look at next.

Isn’t it wonderful how technology has, for the most part, made our lives easier? Compared to the unthinkably tedious chore of manually tracking financial inflows and outflows with pencil and paper, the advent of personal finance software represents revolutionary progress. Thanks to the massive number crunching power of personal computers, the popularity of online banking and the ease with which account statements can be downloaded, tracking the ebb and flow of your financial life has never been simpler. No matter how complex and fragmented your financial life might seem--and it doesn't matter if you've got multiple credit cards, a smattering of savings and checking accounts and an assortment of brokerage accounts--you can quickly, easily and securely organize information from all of these sources in a single place. Luckily, because there's a very rich and potentially fulfilling life to be lived outside of accounting for the dollars and cents that slip through your fingers, I strongly recommend making personal finance software the central hub through which the various spokes of your financial life pass. Though there are several reputable personal finance software products for consumers to choose from, I’m a big fan of Microsoft’s Money. It can be configured to automatically dial into your financial accounts every night and update itself to reflect new transactions. And to make the information it provides easier to understand and interpret, much of the data it downloads is automatically sorted and categorized under different headings. For instance, a credit card charge from Chevron would appear under “fuel expenses,” a convenient sub-heading of "automobile expenses." Similarly, restaurant charges can be easily located under "dining out" expenses. In short, personal finance software can track and organize your spending and, with fancy customizable reports, tell you exactly how much you've spent on everything from coffee and gasoline to electricity and groceries—and everything in between. Armed with this detailed information, it's easy to know if you’re on budget and, if not, adjust your spending appropriately. Haven’t got money in your budget for personal finance software? No problem, Yodlee Money Center is a cost free alternative. Other online resources offer similar no-charge alternatives. Mint.com will compare your spending in any budget category- and compare it to national averages so you can see how your spending patterns compare to most peoples'.

Though personal finance software conveniently eliminates much of the dull legwork that goes into tracking and managing your finances, its greatest shortcoming is that it can’t account for cash spending. Sadly, until Microsoft's talented software engineer's release the omniscient version of this software product, there’s no way for it to determine what happens to your cash once it’s withdrawn from the bank or an ATM. Lest you think otherwise, this functionality glitch is common to all personal finance software products. For the annaly retentive, however, this glaring lack of accountability is unacceptable. Fortunately; there’s a clever low-tech fix.

When withdrawing cash from the bank or ATM, keep the receipt. This little scrap of paper, which has the date and amount of each withdrawal, should be tucked away in a readily accessible fold somewhere in your wallet. Keep a pen handy at all times so that, whenever you spend cash, you can note on the back of the ATM receipt how much you spent and what you bought. This way, when your cash eventually pulls its disappearing act, you won’t have to agonize over where it went. You’ll have a complete detailed record of all your cash purchases. Be sure to keep your ATM receipts together and in one place so that, at the end of the month, you can manually enter your cash spending along with automatically downloaded transactions.

Do you find that money is hard to come by? Fortunately, there are many ways to do more with less. For starters, keep an eye out for that blue packet of coupons that's delivered to most mailboxes once a month. If you discarded it along with a fistful of junk mail, don’t worry, they can be browsed online at www.valpak.com. Simply key in your zip code, and, from the comfort and convenience of your own home, you can browse and print money saving coupons on everything from oil changes and dental cleanings to restaurants and lawn care. Still not satisfied? Other money saving sites—like FatWallet.com, Active-Freebies.com, SlickDeals.net, CouponMom.com, MyGroceryDeals.com and CouponMountain.com—are a bargain hunter’s delight. Have you shopped your automotive insurance rates lately? If not, you can save a fortune in premiums by raising your deductible. Are you driving an old clunker whose replacement value is somewhere between nada and zilch? If so, eliminating the portion of your auto policy that compensates for damage to your vehicle should lower your premium. Still wasting 44 cents in postage for every bill you pay? Sign up for online bill pay services. Over time, you’ll save a bundle on postage, envelopes and check printing costs. Is your budget constantly kicked in the shins by video rental charges? Nowadays, public libraries carry more than just books, newspapers, and magazines. Many offer an impressive selection of movies on DVD that can be checked-out for free. Looking for cheap thrills in the big city? San Francisco’s Museum of Modern Art and the Academy of Science offer free admission to the public the first Tuesday of every month. Looking for an inexpensive way to pass time with friends? Living richly doesn’t necessarily require great wealth, you know. Parks are lovely places to pass time with friends. Are you a college student? Do text-book prices send you into a state of catatonic shock? You can save big money on textbooks by buying them someplace other than the campus bookstore. I won’t describe the extremes I went to as a frugal-minded college student to avoid being price gouged on textbook prices, but you should check out sites like Bookfinder.com and campusbookswap.com. The bottom line: if you want limited financial resources to work harder, you've got to find creative ways to spend less.

Now that the financial output side of the budgetary equation has been covered, let’s focus on the financial input side. Just as there are many ways to cut costs and trim expenses, there are just as many strategies for boosting an income. If you’re an entrepreneur at heart, this might be the perfect time to jumpstart that promising business idea that’s been languishing on your mental workbench. When it comes to transforming a viable business concept into a profitable money-making venture, the Small Business Administration can help. It offers one-on-one mentoring, financing, and lots of informational support. Entrepreneurship isn’t your bag? Fine, as Warren Buffet's business savvy and penny-pinching exploits vividly illustrate, you can accumulate great wealth over time by kicking your money off the couch and making it work just as hard as you do. Putting a portion of your savings into cash generating assets like stocks, bonds and real estate (or a sensibly diversified mix of all three) is an effective long-term wealth building strategy as well. Don’t scoff at the idea of owning real estate. Just because the median price of a goat-shack on the outskirts of the Bay Area is painfully out of reach doesn’t mean you can't afford to own income producing commercial real estate. Real Estate Investment Trusts, or REITs, are a cost-effective way to capitalize on this vast and widely underappreciated category real estate. What's more, the price of REIT shares won’t put you in the poor house. Much like a share of stock, they offer investors fractional ownership of commercial properties and the income they produce. If none of this sounds appealing, you might consider going back to school to enhance your professional skills. Of course, these are all tried and true methods of boosting an income, but they usually take time and patience to produce meaningful results. If you’re looking for quick money, paid surveys are a good option. Corporations will pay good money to obtain feedback from thoughtful consumers concerning the effectiveness and/or desirability of their products and services. Believe-it-or-not, your two-cents worth can fetch a lot more than one-fiftieth of a buck. Some companies will pay upwards of $50 a half hour. Google it.

When it comes to the lifelong struggle to gain financial yardage, it pays to multi-task. To accumulate and protect great wealth over the longer-term, it pays to think offensively and defensively at the same time. Is there a connection between the rough-and-tumble world of professional sports and personal finance? Can worthwhile money management insights be gleaned from the athletic arena? The answers to both questions are, respectively, yes and yes. Obviously, a football team with a dominant offensive and an inept defensive is likely to lose a lot more games than it wins. High-caliber scoring power is certainly flashy and impressive. But, without the ongoing support of an equally stellar defense, a dominant offense is practically worthless. In sports, winning requires a sensibly balanced approach. And the same concept applies to creating wealth. Financial offense (managing what you make) and financial defense (minimizing what you spend) are opposite but equally necessary sides of the same coin.

What's more, if income and expenses are the basic building blocks of the budgetary process, then personal goals are the real driving force behind it. Without a fire in the belly passion for something and the willingness to make sacrifices in pursuit of a major life goal, it'll be that much harder for you to make the sacrifices necessary for the budgetary process to bear fruit. Obviously, what you ultimately want to get out of this limited experience called life is entirely up to you. And though not all goals are strictly financial in nature, most involve an economic component. To properly orient your thinking when it comes to assigning money its rightful place in the grand hierarchy of your life, you should understand up-front that there’s another (though, to be sure, infrequently used) term for money: fiat currency. In other words (and you might want to sit down for this bit of news) those widely prized pieces of green paper that people tirelessly fuss over have little-to-no intrinsic value. You see, money’s real value stems from everyone’s unwavering faith in it as a semi-stable medium of exchange. If the value of a dollar is defined by what it can buy, its worth is more volatile than many people think. If you doubt that the purchasing power of a nation’s currency can violently fluctuate in a very short span of time, you should crack a history book and read about how well Germany's economy held up during the winter of 1923. The one-two whammy of paying hefty wartime reparations and the brutal aftermath of runaway inflation tore that country's economy apart. An amusing anecdote from this somber period perhaps best illustrates fiat currency's true value. At the depths of Germany’s depression, an old woman is said to have trudged her way into town to exchange a burlap sack brimming with mostly worthless Deutsche Marks for a day-old loaf of bread. En route, she puts the sack of money down to catch her breath and, shortely thereafter, found a heaping pile of loose bills before her. Somehow, a thief slyly made-off with her burlap sack, leaving her money untouched on the sidewalk. This story speaks volumes about the intrinsic value of paper—I mean fiat—currency. But I digress; the upshot is that the value of the dollar (and any other form of fiat currency) is propped-up by little more than peoples' faith in it as a semi-stable medium of exchange and the issuing government’s willingness to, if necessary, print more. Now, it’s not my intent to undermine the value of fiat currency (which, obviously, would be hard to do), but rather, to put an exclamation mark on the point that the pursuit of money for its own sake is utlimately a hollow endeavor. Consequently, it pays to think first and foremost of your life and to make the betterment of that the focus of your financial efforts.

Start by creating three seperate lists, each corresponding to a series of short-term, intermediate and long-term goals. Now, when jotting down economic goals, it's helpful to be as specific as possible. Remember, realistic expectations foster achievable results. Short-term goals might include things that, with moderate patience and continued sacrifice, can be had in a relatively short period of time, say, anywhere from one to three months. Achieving intermediate term goals, however, requires greater peristence and patience. This list should include items that can be obtained in six to eighteen months. Realizing longer-term goals, however, is even more challenging but achieving them is also far more rewarding. Examples of long-term goals might include things like saving for college, funding a cozy retirement, buying your dream home, or bankrolling the vacation of a lifetime. Once you’ve identified clear goals that you feel passionate about and are willing to sacrifice for, formulate an economic game plan and give yourself a realistic timeline to achieve them. Remember, it’s your life, it’s your list, and it’s your budget; perhaps it’s time you gave serious consideration to all three.