Battling the Personal Finance Budget

What's a budget anyway?

There's a pretty good chance you aren't keeping a budget. There's also a pretty good chance that if you think you keep a budget, you really aren't keeping a budget. Understanding what a budget is and isn't is the first step to actually keeping one, so what is it?

A budget is a system.

A budget is a system that manages the inflow and outflow of your finances. It isn't a form on a piece of paper. It isn't a software. It isn't a model. It isn't a savings plan. It isn't even a restriction to spending in certain categories. A budget is a system. That system is made up of processes which must all function correctly in order for the budget system to be "kept." Just like your caridovascular system is made up of different parts which must all function correctly, your budget system is made up of many parts that must all keep functioning all the time.

What happens if I mess up?

Welcome to the club! We all mess up at some point. Something falls through the cracks, or we just get emotionally overwhelmed. Does that mean our budget system is going to have a "heart attack"? Well, probably not at first. You can skip a beat. However, this is where we usually don't just skip a beat. If you are anything like me, this is where you make excuses and don't actually get things checked out. Yes, that does lead to a budget "heart attack."

How do I keep my budget healthy?

You need to define each process of your budget system, and make sure each process is functional. You need to check on your process regularly and self-diagnose any issues.

The Processes of a Healthy Budget

  1. Name Every Dollar - Every dollar you make, should have a name (or a job). One reason for this is that it helps you figure out how and why you are spending it. The other reason is that it's so much harder to let go of something after you've named it.
  2. Track Every Dollar - Every dollar you spend should be manually tracked and approved. Don't think you can get away with having some software automatically categorize expenses for you. The computer will get something wrong because whatever you bought at Walmart probably ended up in the wrong category. I'm not saying you can't use software that automatically categorizes expenses, but you need to approve those categories manually. This keeps you accountable to yourself.
  3. Spend Every Dollar - Ever dollar you have should be spent. Most of you probably think that's just crazy talk. However, think about it. Every dollar you make will eventually be spent. Whether you spend it or your kids spend it, it will get spent. However, I'm talking about justifying your expenses because you named your dollars in the first place. In a healthy budget, everything you make minus every expense you account for should equal zero. What about saving? Well, saving is really just delayed spending. So when you set aside money in your budget for a purchase down the road, you are both saving and justifying the delayed expense.
  4. Embrace The Unexpected - This is the process that most people struggle with. You can't expect or account for everything. If you try to, you will find yourself fighting a battle that never ends. Ultimately, you will forget about something or life will throw you are curve ball. Just go with it, and adjust your budget. That means you have to change the name on some of your hard earned dollars. Fortunately, the paperwork to change the name on your dollars is pretty simple. You don't have to visit the social security office or the DMV. Unless you are moving money from a dedicated fund account in a church accounting system, you pretty much have the freedom to change the name on your dollars as much as you want. Gas money can become eating out money. Then you can change it into bill money when your bill is higher than you expected. Changing your budget, doesn't mean you have failed. It means you are keeping a budget.

You need to check on these processes regularly. What does regularly mean? It means more often than necessary. Practically it probably means checking on them every day at first. You are more likely to keep a healthy budget when you check your budget processes more often.

Happy Budgeting!!! And Spending!!!

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