Budgets can bring strife. Budgeting in times of debt can cause even more. Just take a peek at recent headlines on the turmoil in the US instigated by disagreements over how much public debt the federal government should allow itself to carry.
In my household, my wife and I also disagree about money from time to time, though our mundane fiscal affairs are nothing compared to the fiduciary crisis of the U.S. government, and we do not have the option of raising our personal debt ceiling to infinity. While lawmakers in the U.S. and here make it a livelihood to argue about where and how much to spend, in our case it is the actual act of budgeting that causes contention.
On the one hand, I consider myself a high-minded free spirit, enlightened far beyond the necessity of material encumbrances, and responsible enough to live my life to the fullest each day, like the water in a stream, without having my expenses dictated by an impersonal spreadsheet. My wife, on the other hand, is not delusional.
I am fortunate that I am married to someone who works in accounting, who sees the relevance of bank statements and is patient enough to shepherd me through the ritual each month, without grousing right back at me. I think her fortitude is also strengthened by the knowledge that she’s absolutely right about the need to budget, which I readily admit after we have gotten through with it and have the books straight for another few weeks.
Everyone needs to budget
Ralph Lewis, founder of independent financial counselling site LCmoneyPlan, concurs that my wife is in the right.
“Everybody needs to budget. Every individual, every business, every government,” he said. “Money unfortunately is a critical element of life and a critical factor in survival. Anywhere there is money, there has to be a budget.”
Lewis has 30 years’ experience in commercial banking institutions, has a banking degree and is a Certified Financial Counsellor. He spent 10 years in senior management positions with local financial institutions, including Cayman National Bank and the Cayman Islands Development Bank, before embarking on a new career in personal financial counselling.
For financial planning resources, Lewis pointed to his site, which includes a personal budget organiser that can be accessed with free registration. He suggests that people use a budget organizer, breaking out income and expenses according to pre-labelled categories, to make it easier to budget each month.
Steps to making a budget
The first step in creating a useful budget is to be realistic and write down all of your actual expenses, he says. A major pitfall people encounter is not recalling expenses accurately. For example, someone might withdraw $100 from the bank every Friday, then use the money for various things such as movie tickets, gas or music. Then, looking back at the end of the month, the person cannot remember making all of those purchases and wonders where the $100 went.
One solution is to use a debit card as much as possible, or a chequing account if available, so that expenses show up on one monthly statement, or handful of statements, rather than being mysterious cash withdrawals. If someone does withdraw cash, that money should be earmarked for a single purpose, rather than being dispersed through several on-the-spot transactions that seem insignificant individually, but collectively add up to a lot of money.
The second step in creating a budget is to compare your total expenses to your total income, and then identify whether you have a regular budget surplus (meaning you make more than you spend) or a budget deficit (spending more than you make).
“If you have a surplus, then you can plan how to dispose of the surplus, whether by saving it or using it for something beneficial,” Lewis says. “If you have a deficit, then you have some work to do, going through your expenses and reducing your expenses. That’s where the budget becomes important.”
Another major pitfall is not being realistic with income. For example, someone might include on the budget income that is not regular or guaranteed, such as commission, temporary part-time work, alimony/child support or overtime pay. “I don’t like to include those in the budget,” he said.
On the flip side, steady income would include money from a stable job, stocks, investments with guaranteed returns, and pensions.
The next step in creating a budget is to set up projected expenses and earnings based on previous months, then continue to monitor your spending and income. “All the work you have done before is no good unless you monitor it,” he says.
Additionally, when creating a budget, it is important to keep in mind the concept of the ‘household,’ Lewis says, meaning that everyone making or spending money, including adults and children, needs to be involved in the preparation of the budget, or else it will not be a realistic picture of the family’s finances.
The role of credit
While credit and loans are useful and do have their place in finances, people should remember to calculate their monthly payments and include them in expenses when budgeting, he said. To keep credit obligations straight, Lewis recommends creating a separate credit budget that lists debts, balances, monthly instalments, interest rates and maturity dates.
As a general rule, total debt servicing or loan payments should not exceed 45 percent of total income. That includes mortgages, personal loans and credit cards. The goal should be to be entirely debt-free by age 55.
Lewis notes that it makes it much easier to prepare for next month’s budget if you spent less than you anticipated last month.
“If you start the next month with a surplus, then you’re way ahead,” he said.
The objective of having a budget and sticking to it is simple: “The most important thing about budgeting is you need to understand the importance of spending less than you earn. That is key. It is unfortunate that a lot of people don’t do that,” Lewis says.
In addition to threatening governments and businesses, financial conflicts are a leading cause of ruining personal relationships, he said.
I’ll keep that in mind the next time my wife asks me to sit down and go over the budget. Maybe I’ll make it a date, and have a calculator and pile of receipts waiting on the kitchen table when she gets home from work one Friday evening. I’ll make sure to budget beforehand for the babysitter.