No Budget? You’re Probably Spending More Than You Think.
Wow! Congratulations for taking the step reading this post! Most people hear the word “budget” and run as far away as possible, as quickly as possible! Why is that? Is it because when we hear the word we immediately think of restrictions and going without things we want? What if instead the word brought up feelings of true financial freedom and having the money to do the things in life we truly desire?
The definition of budget is simply an estimate of income and expenditure for a set period of time. Would you take off on a family road trip without knowing the address for your destination and directions on how to get there? Who knows where you might end up! Starting out the month without a budget is much the same.
I like to think of budgeting as telling my money where to go. I have found that when I don’t budget, it feels as though my earnings simply disappear. But when I go through a process of consciously deciding how I intend to allocate my earnings, I am in complete control of my money and where it ends up.
There are so many families that make great money but still live paycheck to paycheck. I believe this is a direct result of the fact that most of us don’t make a conscious effort to budget on a regular basis.
Let me give a simple example, let’s say you are a family of 4 with household take-home monthly income of $10,000 who desperately wants to take a vacation to Hawaii 8 months from now but you are not sure that you will be able to save the $8,000 to make that happen. Your fixed monthly costs (mortgage, utility, car payments, groceries, etc.) is $7,000 which leaves $3,000 per month in disposable income.
Scenario 1 – No Budget
Without being intentional and budgeting how you will spend that income, it’s amazing how quickly the remaining $3,000 or $100 per day can disappear. If you are married and there are 2 of you with debit/credit cards, it only takes an average of each of you spending $50 per day before it is totally gone.
Day 1 – You did some of your grocery shopping at Target or Costco and ended up with an extra $60 worth of clothes, books or candles that you hadn’t intended to purchase when you walked into the store. Your children did great at school today so you decide to take them to frozen yogurt on the way home from school and spend $14. You had a rough time getting the kids off to school in the morning so stopped at Starbucks to get a latte and breakfast sandwich and spent $11. When you get home your next door neighbor comes over selling girl scout cookies and you spend another $20.
None of these things taken individually is a big deal but before you know it, you’ve spent over $100 today! And there is a good chance your spouse has also!
Day 2 – The kids have sports practice and you are running late so decide to stop for dinner on the way home and spend $70. Your children bring home a scholastic book order and you are excited that they want to read so you allow them each to buy a new book and you spend another $30. There goes today’s $100!
Day 3 – Your daughter’s 10th birthday is coming up this weekend so you swing by Party City just to grab a few things and by the time you leave, you have $108 worth of cups, napkins, balloons, plates, silverware, decorations, etc. You stop to purchase her the gift she asked for (a $45 outfit) but you want her to have more than one gift to open so you grab a few “other little things” on the way out of the store and the total bill comes to $92. Today you have spent an extra $200 without realizing it!
Day 4 – You walk out to a flat tire in the morning which creates a lot of stress AND costs $200 once you get it to the auto repair shop and replace the two bald tires. There goes another $200!
Day 5-30… It’s always something. You can see how quickly the $100 a day simply disappears. Before you know it, you get to the end of the month and haven’t saved a single dollar to put toward your dream Hawaiian vacation.
Scenario 2 – Budget
As a family, you have decided that having family memories and vacations is a priority and you have picked out a dream vacation. You know you only have 8 months to save $8,000 so you want to see if there is any way to save $1,000 each month.
You realize that once you have allocated $1,000 to savings, you only have $2,000 left in disposable income to spend this month. So you set out to do a budget and make sure you can make it happen.
Before the month starts, you sit with your spouse and consider things that you know are coming up this month:
- Your daughter’s birthday is coming up and you want to be able to make it special, so you budget $200 toward her party and gifts. You put it aside in an envelope so that when you go to spend it, it is CLEAR when the money is gone and you cannot spend any more on the birthday.
- You know it’s been a long time since you had your tires replaced and you see that two of them are balding so you budget $200 to get those 2 tires replaced before they become a safety hazard to your family.
- You know with the kids sports schedules it can get hectic in the evenings so you budget $400 to spend at restaurants throughout the month.
- With $1,000 left in the budget, you and your spouse decide to take out $500 each for the month is “spending cash” to use on spur of the moment items. When you have cold hard cash sitting in an envelope or your wallet and recognize that with $500 to last 30 days you can only spend an average of about $16 per day so you are more conscious of making decisions about whether or not you want to go to frozen yogurt or purchase those girl scout cookies.
A budget doesn’t mean you can’t choose to do those things, it just means you are choosing in advance and putting more relevant decisions (like taking a family vacation) first!
In Scenario 2, at the end of the month the family likely won’t have felt like they were missing out on a single thing by putting $1,000 into their vacation savings before the month started. All that they gave up were a few trips to Starbucks, staying out of the clothes aisle at Costco, etc. But by choosing to be proactive, they were able to accomplish that big goal of taking their family to Hawaii!