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 oftentimes 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 Target
Our 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 Mark
Everyone 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.