Sizing Up Your Budget

Everyone is talking about budgets — “What is your budget for this?” or “How much have you budgeted to spend?” If you have never heard these words or haven't asked yourself these questions, please read this entire post. You'll love it...

But do we really understand a budget's purpose and how it’s supposed to work in our household economy?

By definition, a budget is an itemized documentation of expected income and expenses for a given period in the future; an operating plan derived from such documentation; an itemized allotment of funds and or time over a given period. In short, a budget tells you what funds you are bringing in (income) and where its being spent (expenses). I have seen a variety of budgets from the very vague to the meticulously detailed.

Vague Budgets

A vague budget is like going on a first date to the movies and expecting that you will get to know the person you went with. You want to do something to start things off right however you ultimately fall short and don't get very far. A vague budget will generally list the total amount of income and will only list the most pertinent expenses—these being mortgage or rent, car note, utilities, etc. A vague budget groups similar expenses together under one umbrella. The problem with grouping expenses is that you will not be able pinpoint the spending areas that may need to be adjusted. Like the movies, you won't get much info out of your date because instead of focusing on getting to know your date, you probably have a mouthful of popcorn while shouting "Oh snap!!! Did you see that?" Not productive, or tasteful.

Case in point, you have $500 shown towards utilities, yet $250 is for water and sewage. That's a problem area that you won't see as significantly unless you break down every expense. Seeing a water bill that's higher than a car note tends to get some attention!

Detailed Budgets

A detailed budget on the other hand has dozens of expense categories. Kind of like your date that you should have taken more time bonding with before going shopping. The budget that is distributed to my clients has over 25 categories for the sole purpose of revealing what the areas of concern really are. More than 90 percent of the individuals and couples that I've worked with really looked at themselves a bit differently after listing out every expense they incurred in a 30-day period. Being able to see what you spend on cable, electricity, hairproducts, kids clothing and car repairs can be an eye opener. Buying any combination of breakfast, lunch, dinner and snacks adds up fast and usually tops the list; gas tends to run a close second.

In order for a household to be financially successful, a viable working budget must be one of its major focal points. But it doesn’t stop with just having a budget; budgets must be used, referred to and updated weekly and monthly. Like the memory of your shopping trip with the date you didn't know too well, which you try to forget but your friends remind you of regularly.

If we could manage our finances off of memory, there wouldn't be a need to create budgets. But we can't do it off of memory or assumption. Finance is the one area of our lives that is derived from facts. The facts are that when we go shopping, we know what we would like to spend. And let's face it, we're upset if we spend more than what we allotted (though we rarely leave out of a store or return items). And the degree to which the overspending and not knowing what you’re truly able to spend actually bothers us, is the degree to which we will act to make a change.