Thursday, April 11, 2013

Lessons Learned in Life - Budgeting

Previous article is here.

Before the days of computers, my dad had an envelope budget system. I'm going to describe it to you so that you will understand the gist of how good budgeting works. Each person can adapt the illustration to his own situation.

My dad knew what his take-home pay would be for a year. He figured out how much it cost for groceries for a year, about how much the family paid for clothes, what the electric bill would be, etc. He got paid by the week and so he took each of those expenses and figured out how much would be represented each week. Perhaps groceries would be $30 each week. (This isn't now, it's way back!) Maybe rent would be $20 per week. Insurance might be $15. You get the idea. He would cash his check and then physically put the appropriate amount of money in each envelope. The envelope marked “groceries” would receive $30. The “rent” envelope would receive $20. We believe in tithing and so $15 would go in the tithe envelop to be given to God's work.

If every conceivable expense category was taken care of and if there was money left over, he could put some in a “fun” envelope and for sure some went into an “emergency” envelope.

If you actually do this physically, some interesting things happen. For example, one of the children needs shoes that are going to cost $40. There's only $30 in the clothing envelope. If you must have $40 shoes, what has to happen? You have to physically take $10 out of some other place. You could take it out of the insurance envelope. But your insurance costs are fixed at a certain amount. By taking money out of there, you are just going to have to take it from somewhere else when the insurance bill comes due because the insurance envelope will be short. So you are forced to think about where that money will come from. You have to think about that even though there may be $452 in the envelopes all together. If you had that money in a checking account, you would buy the shoes and not think about where it's coming from. But with the envelope system, you have to make decisions.

When I first got married, I used this same approach but instead of actual envelopes, I kept track in a notebook how much money was in each “envelope” even though most of the money was in the bank in a checking account. Even though I might have $800 in the bank, I might only have $40 in my “fun” “envelope”, and so I couldn't just spend $80 on some special outing for the family. Later on I moved on to computerized accounting. But the point is you need to know where the money has been allocated. Not knowing is what causes so many problems for families when it comes to spending.

Let's go back now to the desired stop at McDonalds. What if dad, before leaving home looked in the “fun” envelope and saw that there was a $20 bill in there and that is the one he used at McD's. In that case there wouldn't be a problem. Another scenario might be that there was only $4 in the “fun” envelope. That means that they cannot make the stop that might be so enjoyable. But everyone, including dad, wants that enjoyable treat so much! They can't afford it. But everyone is going to be so disappointed! They can't afford it!! Even though dad has $20 in his wallet, it is actually allocated for something else. They can't afford it!

If you don't budget, you don't know you can't afford it. If you do keep track of your spending, then you can make intelligent decisions. For example, mom may plan ahead and give dad some money out of the grocery envelope so he has money for a family treat. She can do that. Budgets don't control, they inform. But if she does that, she will have less to spend on groceries. She might be OK with that, but the good thing is that she knows the decision she is making. Or... maybe they could just stop at the grocery store and buy some ice cream, and make sundaes at home. That might work.

What drives people nuts is that they want everything. We don't like this budgeting scenario because we want to be able to have our treats, the best shoes, the cable company with the most channels, etc. It can't be done! It's best to acknowledge this fact early on, make your purchases accordingly and I can tell you from experience that your savings account will grow and you will be amazed at how far the dollar stretches. If you keep spending money you don't have on things you can't afford, it will all eventually collapse on you. However, if you make wise decisions, stifle your desire to have everything, and save some money out of each pay check, you will find that your savings grows and you become less vulnerable to the economic conditions that happen to be blowing through at the time.

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