Budgeting is a State of Mind -- how to start a financial budget

When most people think about budgets, they think – accounting and BORING.— Sure, it makes sense to budget but I have more important things to do than play with a bunch of numbers!

It is true that some budgets are quite complicated and boring. In my opinion, simple budgets are better. Complicated budgets are hard to comply with and frequently have adverse consequences. Want an example of budgeting gone wrong? Look no further than the Budget for the U.S. Government. http://www.gpoaccess.gov/usbudget/

The best budget is one the makes you aware of what you are earning and spending. The general goal is to earn more than we spend so that we are left with money to save and invest. You can start your budgeting process by following four simple steps.

1. Track – The first step in effective budgeting is keeping track of your earnings and expenditures on a monthly basis. There are a variety of ways to do this. You can set up a simple paper or computer spreadsheet register or use a software program like Quicken or Microsoft Money These two programs are very inexpensive and easy to use. They usually come preloaded on many personal computers so you may have a trial version available right now. Paying for most of your purchases on a debit card or credit card saves you the trouble of tracking those expenditures – just make sure you don’t charge more than you can pay off each month. Even if you are not ready to put pen to paper, I suggest you start to mentally track these items.


2. Evaluate – At the beginning of a month, compare your prior month actuals to what you estimated (of course you can’t do that in the first month). If there are differences think about why/how they arose? Was it a bad budget? Was there an unforeseen cost? Did you temporarily lose your mind? In the evaluation process you might also be surprised by the “unaccountable” funds. Was there a hole in your pocket? Probably not. What was more likely is that you got cash from an ATM and spent it like a drunken sailor. While comparing your actual to budgeted amounts may be a somewhat embarrassing process, remember, this can be done privately. This doesn’t need to be shared with others. The important thing is that you understand why the actuals were different than the budget.


3. Estimate – Use the information from the evaluation process to establish a budget for the next month. . It is important that the budgets reflect reality. Don’t budget only $25 for entertainment when you plan on going out every weekend. We only fool ourselves when we make up an unrealistic budget (why am I thinking about the Government again?)


4. Act – Use the estimate to focus your actions for the next month. Correct any behaviors that caused you to go off budget in previous months. For instance, if you found that any cash you had on hand just burned a whole in your pocket, try to avoid ATM withdrawals. Also, determine whether you want to make any modifications to your behavior (e.g., earn more or spend less). Some modifications (such as making more money) might require months, even years, to fully modify. Just make sure that you are taking the necessary first steps. Most importantly don’t continue bad behavior. If you are spending more that you earn, you need to fix that ASAP.

Budgeting is a continual process. One where practice makes perfect. It is understandable that you will make mistakes at the beginning. Just think about taking small steps forward. When I started budgeting all I did was simply make sure that I never spent more in a month than I earned. If I overspent in any one month, I cut back in the next month until I was back in balance. I kept track mostly by monitoring my bank balance -- there were no fancy software programs at that time!

Your budget will become more sophisticated over time. And, once you see how budgeting can improve your financial position, you will become more motivated to give it more thought. For instance, in my twenties, I began automatic investing as part of my budget. Once I saw how the funds accumulated, I was motivated to save more and spend less

Trying to establish a budget that is too complicated or too severe at the beginning will just turn you off from the process. Nobody was going to tell me not to spend my hard-earned money when I first graduated from college! In later posts, I will get into more of the mechanical process for setting up a budget (you can also go to the GE money budgeting website shown as the budgeting link below). For now, I just want to leave your with the thought, “I think, therefore I budget.”