A personal budget is a financial plan that covers a short period of time. Typically a year, but there is nothing sacred about the time period. It is quantitative and it relies on limits. Two limits. How much will you spend, and how much is to come in.
The budget is the link between your long term plan and today. No long plan is complete until you know what you need to do today to make it happen.
There are rules.
Preparing the budget is not the important part. The comparison of the plan to actual is important but the most important part is what do you do about deviations from the plan. This like a test in high school. Not fun but you learn from your mistakes. No one gets there first budget right. Not the second very often either. Persistence pays.
People who do budgets regularly and govern themselves by the plan usually end up okay. Many of the others do not. Many of the others fail for a simple reason.
You cannot spend the same dollar twice.
When you think about it, that is the essence of budgeting. Budgeting is about unique preplanned choices. That is the problem for most people who fail. They don’t like the limits that budgets impose. They have failed to recognize a fundamental fact. When you spend on A it automatically means you have decided to not spend that money on B or C or any other attractive choice. Some people do not recognize the “decided not to” part of the decision. Some think it is still open for discussion. It is not. You cannot spend the rent money at the track and still pay the rent.
Some people don’t get the concept. You cannot have it all unless you are very wealthy indeed. I have been told that the thinnest book in the world is, “Things I Cannot Afford To Buy, by Bill Gates” The rest of us have rather thicker versions on this subject.
Is it possible to get more with what you have for resources? Of course, but you need to work at it. I don’t know whether extreme couponing works if you consider all the inputs; but shopping for lower prices probably makes sense and most of us can do it.
Consider replacements. There are good quality, white label, substitutes for many routine things. For many years Michelin designed and built Sears tires for about half the price. May still, I have not checked.
Avoiding interest works but it requires discipline. Just because you can borrow the money doesn’t mean you should. Things like education and houses will tend to create debt and are exceptions. Other than those, you probably don’t need whatever it is that you are borrowing for – right now. Borrowing for a vacation for example. Take a cheap one this year and put aside during the next year what would have been the credit card payments had you taken the expensive trip. Then pay cash for your next trip. Continue to put money aside for the one following. Given credit card interest rates you would likely get a free trip about once every 10 years.
Creating the budget is not fun and adhering to it is even less fun, but the payback will make it worth the trouble.
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Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. email@example.com
Follow on Twitter @DonShaughnessy