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To "B" Or Not To "B": Reflections on Budgeting
First by Jeff Yeager in his latest book “The Cheapskate Next Door”, then by financial journalist Liz Weston. Now it’s my turn to come out of the closet, so to speak, as a financial professional who doesn’t “budget,” at least not in the traditional way. Don’t get me wrong! As many of my clients can attest, I don’t argue for one minute about tracking expenses. In fact, I’ve come to believe it’s about spending wisely The The single most powerful tool in everyone’s financial planning toolkit.
However, we call it the “B” word, spending plan, cash flow management, or [insert euphemism here], I agree with many of my clients who cringe in horror and recoil at the prospect of keeping detailed track of expenses. The idea of spending so much time staring at a small number — perhaps some red one — is off-putting enough to many that no matter how great the potential reward, it’s not worth it.
And therein lies the problem, as well as the solution. As a wise woman once said: “There is no single, right way to organize anything, whether it’s your stuff, your space, or your time”… or in this case, your living expenses. Okay, so the “Wise Woman” is my friend Sue West, a Certified Organizing Coach®, and her point was that no matter what you’re trying to organize, you don’t need anyone else’s ideas about the perfect system. Instead, you need a system that works you. Otherwise, you’re unlikely to maintain it, you won’t get any more useful information than before, and all the bells and whistles it features will be wasted.
According to Sue, there are 3 key elements to designing a system that works for you: people process and production. In terms of tracking expenses, this includes:
- Your Style — Are you detail-oriented or a “big picture” type of person? Are you an early adopter or someone who prefers the “tried and true”? Are you a road warrior or more of a homebody?
- Your Money Personality — Those who are savers by nature may not need to monitor spending as much as those who tend to spend more.
- Your goals — If you’ve already funded most or all of your goals and have cash on hand, you don’t need to delve as deeply into your cash flow statement as someone trying to pay off old debt, change careers, and pay for kids’ college and retirement. Save and buy a new house.
- Time Constraints — If you’re training for an Ironman triathlon while studying for a master’s degree in physics, working a full-time job and tripling, a full-blown “traditional” budgeting process isn’t going to work for you. If your schedule is a little less overbooked and you enjoy doing this sort of thing, a more detailed solution might make sense.
Whatever your situation, there’s a system that’s right for you, and the factors described point you to the right combination of process and product. I’ve seen people do an incredible job of getting the most out of their money by writing down their daily expenses using pencil and graph paper, calculator optional. At the other end of the spectrum, the more mobile and tech-savvy among us may need a fully automated, portable solution like Mint.com and its handheld app.
For me, with the time I’ve already spent analyzing small numbers in tables on the computer, I’ve chosen the easiest, least time-consuming way, which I call “reverse budgeting.” Basically, this involves once a year, after reviewing the previous year’s expenditure, deciding on the target expenditure for the next year. Saving Level Vs. After checking the funding status of the goals, how much is left to spend on living expenses every month? Once a month, this amount is transferred to an account whose sole purpose is to cover living expenses. If that account falls below its predetermined acceptable level, that’s a red flag that something isn’t going according to plan. May cost more, may be under budget. Either way, it’s time to dig into the details, figure out what’s going on and, if necessary, change course with plenty of time to keep the entire financial plan on track.
And that, without spending hours entering, sorting and analyzing data, is really the point of this whole exercise: to keep the gap between what comes in the door and what goes out for a living is so great that the long-term goals don’t diminish. by the way Once you find a system that allows you to do that without cramping your style, you’ll find your way to “B.”
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