An Introduction to Budgeting
Budgeting
is the systematic allocation of one's limited resources (income) to
a potentially unlimited number of needs and wants (expenses.)
Budgeting your income, though often times tedious and difficult to
maintain, can help you better control how your income is being
spent.
Some form of budgeting is a
necessity if you hope to meet long-term financial goals. One's
ability to control debt is often a good measure of the success of
their budgeting methods. For some, a budget is a detailed process
of tracking each source and use of their money. For others, it is
as simple as setting aside their savings first, then using the
remainder for day-to-day living expenses.
If I Just Had Another 10 Percent!For years, studies have
been undertaken by all manner of institutions to find out if
people feel like they are able to live within their means.
Virtually every study has shown that in our society we not only
are not comfortable living within our means, but that the vast
majority of us feels that we would need just 10% more income to do
so. If we just had that extra 10% we would save for our children's
college, we would save for retirement, we would prepare for
tomorrow. Perhaps the most interesting revelation from these
studies is that how much money we make does not impact the results
of the surveys. The person earning $10,000 per year feels they
need just 10% more, the person earning $100,000 feels they need
just 10% more. The key is not in how much we earn, it is in how we
use it.Defining the TargetOur money is like arrows that
we can shoot at targets. We pick the targets we shoot at, then
decide afterwards whether or not we picked the right targets.
Hopefully, over time, we begin to get a good feel for which
targets we would like to hit with our arrows. The sooner that we
learn that we have a limited number of arrows, the better we learn
to select meaningful and lasting targets. Short term targets like
expensive clothes, cars and vacations must be balanced against
long term targets like college funding for our kids, an emergency
fund, and retirement saving.
As our stage in life changes, our targets should change as well.
No one can tell you which targets are right for you, but there are
several principles that should be followed by every wise
individual. Principles like:
- Preparing for a rainy day by establishing and funding an
emergency fund.
- Preparing for an emergency by securing appropriate and
adequate insurances.
- Paying yourself first by setting aside a portion of your
income every month for long term objectives.
Reasons People Miss the MarkEveryone knows what it feels
like to spend unwisely. Our feelings of regret are strangely
absent when we first make the unwise purchase, or the investment
we don't understand. But we soon know with a certainty that our
hard earned resources would have been so much better used
elsewhere.