If you’re like most people, the word budget is worse than a curse word and anyone suggesting you should use one should “wash their mouth out with soap.” What if I told you that all this time you’ve been looking at it all wrong?
Over the last decade or so I have asked hundreds of people what a budget meant to them, and I’ve gotten almost as many answers. The most common responses were:
- a budget is a forced restriction and they didn’t like the idea
- it’s for those who don’t have/make much money
- I have one, it’s in my head
What if I challenged you to rethink the way you perceive a budget?
First, let's define a budget. This is my personal definition, but I believe it provides a great starting point for the reimagining.
“A budget, is a written plan for what WILL happen with ALL the money, BEFORE you make/receive it”
Pretty simple right!!!
Notice I said ALL THE MONEY…now maybe this isn’t every single penny, buy it should be pretty close.
The key is to view the budget, not as an impediment or straight jacket that won’t ALLOW you to have fun, but as a tool to prepare yourself for success. It’s there to help you forecast WHEN you are likely to be able to accomplish certain goals and objectives.
Second, how do you craft one? Is it forward looking?
The most common mistake I see people make when developing a budget, is that they are looking backward, rather than forward. More often than not, a person takes a look at what they spent the previous 1-3 months, category by category, writes it down and says, "I've made a budget". Sadly, they are VERY wrong. What they have made is a Statement of Cash Flows. While a Statement of Cash Flows is helpful in the development process, it is most effective when used to evaluate how well you are following said budget.
What should be done, is to review that Cash Flow Statement, and ask yourself, "is this how much I SHOULD be spending in this area?"
Some of these categories can't be changed easily (rent/mortgage, car notes, utility bills, etc.). Other categories are discretionary, which are typically well within our control (entertainment, dining out, vacations, shopping, etc.).
The discretionary category is typically where the problems lie. It’s in that small, but powerful word...WANT. Unfortunately, there is no magic elixir to stop you from “wanting”, that's where self-control and discipline come into play.
Next you should rank those discretionary items by their importance, it might not be easy, but our goal is effective, not easy.
Now you’re ready to construct your budget, here’s the order:
- Obligations/Fixed Costs (rent/mortgage, car notes, utility bills, etc.)
- Savings target (How much do you need to allocate, to achieve your goals and objectives over the next 12-36 months)
- Discretionary (how much do you want to allocate towards your current quality of life
Remember, a budget is merely a tool, and a tool is only as useful as we allow it to be, and it’s MOST effective when used appropriately.