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 formal plan for earning, spending, saving and investing--you should start by closely monitoring daily expenditures. Woody Allen once quipped 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 be accounted for. Once, a friend of mine casually flipped a quarter into a cascading fountain and dutifully categorized the tiny outlay under the heading of “wishes.” Though it's widely assumed that an outsized paycheck or a staggering windfall of cash will bring a swift and permanent end to one's financial woes, nothing could be further from the truth. And there's plenty of evidence to support this point. Generally speaking, lottery winners squander their vast fortunes (perhaps because they don't feel worthy of them) only to end up flat broke. Somewhat reassuringly, fiscal fecklessness isn't exclusively a U.S. phenomenon. Machael Carroll, a British sanitation worker and 2002 lottery winner, spent $15.2 million on drugs, prostitutes, parties, and gifts to friends and family. According to the National Endowment for Financial Education, 70% of those who acquire instant wealth blow it in a few short years. What's more, lofty incomes, though hugely popular, offer an equally illusory sense of economic invincibility. Many celebrities (Michael Jackson and Ed McMahon are two names that leap to mind) and professional athletes (Mike Tyson is something of a standout in this category) have earned obscene sums of money throughout their storied careers only to outspend their high six figure incomes.

The bottom line: it doesn't matter how much money you make or how sizeable a fortune is sloshing around in your bank account, how you manage your wealth is all that really matters. If there’s a poorly kept secret to becoming rich, it lies in obsessively managing the dollars that happen your way. Nothing screams wealth like a well pinched penny. An income is like a modest rivulet of water dribbling from the far end of a financial garden hose, one which has been mischievously pin-pricked with lots of tiny holes. Now, the water that's oozing out the tiny perforations of your garden hose represent non-discretionary spending--i.e., mandatory deductions for things like state and federal taxes and other essential outlays like food and shelter. Now, despite the many arcing columns of water that are spouting off in random directions along the length of your pressurized financial hose, there’s still a trickle of water pouring out the nozzle and wetting the grass near your bare wet feet. This is your disposable income. Essentially, it’s whatever money remains after all non-discretionary expenses are paid. Now, if you look around, you'll see that there's a wealth bucket lying on the grass near your financial garden hose. You do want to fill your wealth bucket, don't you? Certainly, good things come from doing so. Of course, most people want to fill their wealth buckets quickly. Should you share this particular aspiration, you'll need to inspect the condition of your wealth bucket carefully. Is it too riddled with holes? If so, are they huge? This is the million dollar question because, if the steady trickle of liquid coming out of your financial garden hose enters your wealth bucket only to slip through a bunch of holes and hydrate the lawn then it will never fill. Now, the holes in your wealth bucket represent discretionary spending; that is, money spent on wants--not needs... It doesn't take an MBA from a pricey Ivy League institution or a fancy schmancy accounting degree to know that your wealth bucket won't fill unless you plug these leaks and responsibly manage your disposable income. Ironically, though everyone has a wealth bucket, few of them hold water because, more often than not, they're riddled with holes. The systematic process of locating and patching them is what we’ll focus on next.

Isn’t it wonderful how technology has, for the most part, made our lives easier? Compared to the unthinkably tedious chore of having to track the ebb-and-flow of money in one's life the old-fashioned way (that is, with pencil and paper), the advent of personal finance software represents quantum progress. Thanks to the awesome number crunching power of personal computers, the newfound popularity of online banking, and the ease with which financial statements can be speedily and securely downloaded, it's never been easier for people to manage their money. No matter how complex or fragmented your financial situation might be--it really doesn't matter if you've got several credit cards, different saving and checking accounts, and a multitude of brokerage and retirement accounts--you can consolidate information from all of these disparate sources onto one easy-to-reference place. Because, at least in theory, there's a very rich and fulfilling life to be lived outside of tracking where your money goes, it's wise to make personal finance software the central hub through which the many different spokes of your financial life pass. Although there are several reputable personal finance software products on store shelves for consumers to choose from, I’m a big fan of Microsoft’s Money. Of course, you'll have to invest a bit of time and effort to acquaint yourself with the software and its many features, but once you're dialed in, you'll have a complete, detailed and timely record of all activity on all of your financial accounts. A credit card charge from Chevron, for instance, will appear under “fuel costs,” a convenient sub-heading under "automobile expenses." Similarly, restaurant charges can be found under "dining out" expenses. Personal finance software provides detailed information on your spending. Armed with this information, you'll know exactly how much you've spent on everything from coffee and gasoline to electricity and groceries—and everything in between. This way, if your spending in a particular area exceeds established budgetary parameters, you can fine tune your spending accordingly and by just the right amount to get back on track.  To make the torrent of data that Microsoft Money gathers easier to work with and interpret, much of the information it collects is automatically sorted and categorized under various customizable headings. What's more, the data it provides can be sliced and diced and exported to excel. Haven’t got room in your budget for fancy personal finance software? Fine, Yodlee Money Center and Mint are cost free alternatives. Bundle.com (a joint venture sponsored by Microsoft, Morningstar and Citigroup) offers a worthwhile economic reference that tells you how your spending compares to your neighbors. Click on "Everybody's Money" to see how your restaurant, grocery, automobile and clothing spending compares to "average" levels for your zip code. 

Though personal finance software conveniently eliminates much of the hassle and tedium of tracking and managing your personal finances, its most glaring defect is that it can’t account for cash spending. Until Microsoft's talented software engineer's design the omniscient version of this product, there's simply no way for it to determine where your cash goes once it’s been withdrawn from a bank or ATM. Lest you think otherwise, this glitch is shared by all personal finance software products. But don't fret; if you're bound and determined to account for every last nickel, this problem has an elegant low-tech solution. When withdrawing cash from a bank or ATM, keep the receipt. This little scrap of paper, which has the date and amount of each withdrawal, should be stashed 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 receipt how much you spent and what you bought. When your cash pulls its usual disappearing act, you won’t have to agonize over where it all went. You’ll have a complete record of your cash expenditures. Keep all of your spent receipts in one place so that, at the end of each statement cycle, you can manually key in your cash spending along with downloaded financial transactions.

Do you find that money is frustratingly difficult to come by? Fortunately, there are many ways to make your dollars stretch. You can start by keeping a watchful eye out for that blue packet of coupons that reaches most mailboxes every month. If you accidentally discarded it with a fistful of junk mail, don’t worry, they can be viewed online at www.valpak.com. Simply enter your zip code and, from the comfort and convenience of your own home, you can peruse and print money saving coupons on everything from oil changes and dental cleanings to restaurants and lawn care. Still not satisfied? Other penny pinching sites (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 lately? If not, you can reduce your premium by raising your deductible. Do you own an old clunker whose replacement value is somewhere between nada and zilch? If so, then eliminating the portion of your automotive insurance policy that compensates for damage to your vehicle should it be dented in an accident will lower your premium. Still wasting almost fifty cents in postage for every bill you pay? Sign up for online bill pay services. Over time, you’ll save a small fortune on postage, envelopes and check printing costs. Is your budget constantly kicked in the shins by pesky video rental charges? Nowadays, public libraries carry a good deal more than 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 both offer free admission to the public the first Tuesday of every month. 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 textbook prices send you into a state of catatonic shock? If so, you can save a princely sum of money on school books by buying them someplace other than the campus bookstore. I won’t reveal the extremes I went to as a militantly frugal-minded college student to avoid being swindled by unreasonable textbook prices, but you should look into sites like Bookfinder.com and campusbookswap.com. The bottom line: if you want limited financial resources to work harder, you've got to think outside of the box and find creative ways to spend less.

Now that we've covered the financial output side of the budgetary equation, let’s focus on the financial input side. Just as there are many ways to reduce personal expenses, there are just as many proven strategies to boost an income. If you’re an entrepreneur, this could be the perfect time to jumpstart that business venture that’s been idly collecting dust 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 informational support. Entrepreneurship isn’t your bag? Fine, as Warren Buffet's shrewd investing exploits have clearly demonstrated over a multi-decade period, 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. Don’t prematurely dismiss 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 accumulate income producing commercial property. Real Estate Investment Trusts, or REITs, are a dandy way to cash-in on this vast and widely underappreciated asset class. Moreover, the price of REIT shares won’t land you in the poor house. Much like a stock, REITs offer investors fractional ownership of commercial properties in various industries throughout the world. If none of this sounds enticing, you can go back to school and upgrade your professional skills. Of course, these are all tried and true methods of boosting an income, but they generally require time, effort and patience to produce meaningful results. If you’re hungry for instant income gratification, paid surveys are an option. Corporations will pay big money for feedback from consumers concerning the efficacy 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 for a half hour of your time. Google it.

Here's another piece of financial wisdom: when it comes to the lifelong struggle to gain financial yardage, it pays to multi-task. In other words, to accumulate meaningful wealth, you've got 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 financial insights be gleaned from the competitive arena of, say, basketball and football? Yes, there is much to learn from these highly competitive arenas. 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 an equally stellar defense, a dominant offense isn't very productive. In sports, winning requires a powerful offense and an equally good defense. The same basic concept applies to creating and protecting wealth over the course of your life. Financial offense (managing what you make) and financial defense (reducing what you spend) are opposite but equally necessary sides of the same wealth building coin.

Another point bears emphasizing: if income and expenses are the building blocks of the budgetary process, then personal goals are the driving force behind it. Without a fire-in the-belly passion for achieving something you truly desire, it will be very difficult to marshal the willpower necessary to make the many sacrifices that will enable the budgetary process to work. Of course, goals vary and they're intensely personal things; they're also likely to change over time in ways that will surprise you. Although not all goals are financial in nature and money certainly isn't the measure of all worth, achieving your life's ambitions will surely require amassing some wealth. To nudge your thinking in the right direction when it comes to assigning money its rightful place in the hierarchical pecking order of your life, you should know up-front that there’s another (though, to be sure, less popular) term for money: fiat currency. In other words (and you might want to sit down for this) those artfully decorated scraps of government issued paper which many 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 a dollar's worth is strictly defined by what it can buy, then its purchasing power is more volatile than many unsuspecting citizens think. If this sounds outrageously absurd and you firmly believe that the value of a nation’s currency can't precipitously fluctuate in a remarkably short period of time, you should crack a history book and read about how well Germany's economy performed back in the winter of 1923. The one-two whammy of a war torn economy and being forced to pay hefty reparations to Allied nations dealt a swift deathblow to its rapidly depreciating currency, the Deutsche Mark. A poignant little story from this dark chapter of economic history illustrates fiat currency's true value. Reportedly, at the depths of Germany’s depression, an elderly woman trudged into town schlepping an enormous burlap sack of mostly devalued Deutsche Marks. Rumor has it that she wanted to exchange her enormous sack of money for a day-old loaf of bread. En route to the town bakery, she put her giant sack of money down to catch her breath and, shortly thereafter, found an enormous pile of loose bills heaped before her. Somehow, a thief had made-off with her burlap sack and left her money littered on the sidewalk. This amusing little anecdote speaks to the intrinsic value of paper—I mean fiat—currency. But I digress; the underlying moral of this story is that the value of the dollar (and other forms of fiat currency) is supported by two things: 1) peoples' faith in it as a reliable medium of exchange, and; 2) our government’s willingness to, if called upon, fire up the printing presses and manufacture oodles more. Now, I don't mean to poke fun at fiat currency (which, for obvious reasons, would be hard to do), but rather, to emphasize the point that the pursuit of money for its own sake is likely to be a disappointingly hollow endeavor. Consequently, it pays to think first and foremost of your life and to make the betterment of that the focus of your fiscal efforts.

You can start today by creating three separate lists, each corresponding to a series of short-term, intermediate and long-term goals. When listing your life's goals, it's helpful to be as specific as possible. Remember, specific expectations foster achievable results. Short-term goals might include items that, with continued saving and sacrifice, can be obtained in a fairly short period of time; say, one-to-three months. Achieving intermediate term goals, however, will require even greater patience and persistence. This list should include items that can be achieved in anywhere from six to eighteen months. Realizing longer-term goals, however, is a fiesty challenge. But accomplishing them is also infinitely more rewarding. Examples of long-term goals might include things like saving for college, funding a cozy retirement, buying a dream home or bankrolling the vacation of your dreams. Once you’ve created a list of attainable goals that are well-worth pursuing, create a budget and give it a realistic timetable for success. 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.