Over the last several months, many of us have re-realized the importance of a good budget. This is normally a four-letter word at worst and, at best, something we periodically place on the to-do list between “clean out the gutters” and “wash the windows”.
When we do get around to it, we spend a rainy weekend knee deep in piles of old bills, credit card statements and receipts trying to figure out where exactly all of our money went. Whether through Excel, Money or Quicken, we eventually produce some kind of budget that represents the recent past in a somewhat coherent pattern. We make a few cuts, have a talk with members of our household and set forth with our new budget. The net result of all of this effort generally proves to have the same staying power as our new year’s resolution to eat less and workout more. Perhaps it’s time to revisit this time honored approach to budgeting and look at some new tools and ideas that can help.
A budget, in short, is what allows you to live within your means. The word “live” is optimal here as your budget needs to be a part of your daily life. That’s not to say that it needs to become an obsessive habit, but with all the technology available to help you stick to your well made plans, why not make keeping this resolution as easy as possible? Mint, Finicity, Wesabe and YNAB (You Need a Budget) are just a few of the online-based products out there today that attempt to take these principles to the next level.
YNAB, a personal favorite, goes as far as to suggest a whole new way to look at your budget, establishing four rules as keys to a successful budget. To borrow from their website, they are paraphrased as follows . . .
1. Stop Living Paycheck to Paycheck – or, simply, live on last month’s income not this month’s. While it may take 4-6 months to save and work to that point, it will greatly increase responsible spending while alleviating many of the stresses that come from timing monthly expenses to pay day, whether that be waiting on the next pay check, social security payment or monthly portfolio withdrawal.
2. Give Every Dollar a Job – sit down each month and allocate where the income you’ve built up from the prior month is to be allocated. Continue this process until you have no more dollars to allocate. Once you’re comfortable with this process, it should take no more than 15-20 minutes each month and will greatly improve financial communications and comfort levels throughout the household. Whether a car payment, entertainment, savings, or a vacation, every dollar will be assigned a task. As the website suggests, “dollars are like teenagers, unless given some guidance, they’ll own you.”
3. Prepare for Rain – This is fairly self explanatory. Make sure you are saving in advance for those bigger ticket items like property taxes or auto insurance and that you’re setting some additional funds aside for the unexpected.
4. Roll with the Punches – You and your budget will fail from time to time. The key is to recover quickly and make adjustments to the current allocation that will allow for a softer correction rather than a harsh, unexpected cash flow stoppage down the road.
Regardless of what you decide to do, do something different next time the budget makes your to-do list. As we will undoubtedly see dramatic changes over the next several years in how we approach finance in this country, it only makes sense to make this a time of personal review as well.
By Chip Workman