Sunday, August 13, 2006

The B Word

Rather than boring you with the mundane details of my life as is so often the case here, I figured I'd bore you a little with something I've been thinking about a bit lately. Budgeting. Yeah, I know, it doesn't seem like a very exciting or interesting thing to think about. To many this is the B word they keep out of their vocabulary.

First let me say that I've never liked the concept. To me it has always seemed like setting up a budget for myself was not giving myself the extra spending flexibility for when I needed it, or conversely forcing me into a pattern of spending when it isn't warranted. In short, I've always thought of a budget as an inflexible tool designed for people who couldn't trust themselves to make the right decision at the right time.

Not that I'm there yet, but after taking a finance course this semester, I'm starting to warm up to the idea a bit more. Finance is all about understanding your cash flows, and making decisions based on those cash flows such that you can work towards your goals. Part of this process is capital budgeting. In capital budgeting decisions are made where to spend the money, and in what amounts in order to reach a predefined required return on investment.

This process loosely relates to personal finances I think to some extent. We all have financial goals, stated or unstated. Maybe it is maintaining a certain standard of living (eating out, concerts, hobbies, ect.), maybe it is saving up for a big purchase (car, house), or maybe it is building up your nest egg. Many of these goals are conflicting. For example, it is difficult to both maintain a hobby of piloting airplanes while saving for retirement. Budgeting in an amount to spend on each of these can help ensure you can do both without worrying if one will affect your ability to reach your goals in the other.

In my own life, what I have found is that I have large swings without a budget. I will put nearly everything towards savings or everything towards the next toy. While some may call that flip flopping balance, to me it seems like it carries more risk, as neither side of the pendulum is controlled. Uncontrolled cash flows, whether they be directed towards savings or spending, can be harmful. Controlling where cash flows are directed helps in reaching stated goals and gives you a better overall picture of where you are and where you are going to be within a designated time frame, thus reducing the amount of stress and worry associated with those goals.

So am I starting myself up on a budget? I'm still thinking hard about it. Most of my savings is already budgeted and school & utility bills/mortgage/food are pretty much cleaning out the rest so I'm not sure what I have left to budget. But all in all I've begun to warm up to the idea.

Are any of you operating on a budget? How has it worked out?

7 Comments:

Blogger Karin said...

No budget - I think I'm more uncontrolled. I save for months then spend it all on something (computer, house, car, wedding - depends on the year). It's not a retirement account, just a "I have no clue what to do with this money right now so it might as well be in the bank" account so I figure ought to use it when the mood hits me.

8/14/2006 12:28 AM  
Blogger -Lisa- said...

i tried to do the money course at church and got overwhelmed. but then, i got a personal money coach person (to be un-exact) and she helped me understand it better... BUT it has been nearly 6months since i have excercised the use of my budgeting knowledge. it's hard to get into the habit... and there's my "two cents" on budgeting..

we must have a get together soon! i haven't seen anyone (besides those who are youth leaders in the summer, which isn't many) for atleast two weeks! i'm thinking of having a "house-warming/end of summer" party Aug 25th.. but it's not yet confirmed... i'll keep you updated :)

8/14/2006 12:33 AM  
Blogger -Lisa- said...

oh yeah... and wow, there are a few other words i could use for that "B"... haha

8/14/2006 12:35 AM  
Blogger Seth R. said...

I had only a very loose budget. It basically amounted to "I only want to spend x amount this month", and when I hit that amount, I would stop spending money (I put most of my non-bill expenditures on a credit card and monitor it over the course of the month. My personal fiscal month revolves around the billing cycle on my credit card). It's worked out for the most part, but I was living in an apartment, wasn't making car payments, and wasn't going to school. Now that I own a house (mortgages are expensive!) and am making car payments, I might have to work something else out. I doubt I will have to work out a hard budget, but I have calculated that I will have to be a little more careful with my spending.

"All I want is less to do, more time to do it, and more money for not getting it done." -- Anonymous

8/14/2006 1:33 AM  
Blogger Karin said...

Seth - just wait until you throw "girlfriend" in there. Then all of your expenses will double if not triple!!

8/14/2006 1:53 PM  
Blogger david said...

Karin - I'd have to disagree completely with your last point. Girlfriends don't harm finances in the least. Secondly, I'd like to give a shout out to my girlfriend who is reading this right now. Hi sweetie!

Lisa & Seth - Good to see I'm not alone with the poor budgeting skills. Although maybe that is a skill in and of itself. Anyway, I appreciate you weighing in on all this. I'll let you know if I ever figure it all out (like anyone ever does)!

8/14/2006 11:13 PM  
Blogger Seth R. said...

I don't consider my budgeting skills to be "poor". The way I handle my money serves my purposes and I have not felt a real compelling reason to change it. I'm fairly certain that if I wanted to I could sit down and actually figure out what my monthly expenditures are, impose limits on certain things, and actually stick to those limits for the sake of saving money. That just doesn't sound like a very fun way to go through life for me, and I have not been in a position where it has become necessary.

I am very fortunate in that having enough money has never really been a problem for me, and I recognize that this isn't always the case for everybody, so I hope I am not coming off as arrogant. I can see where having a budget (and sticking to it) would be necessary. I just haven't been there myself yet.

8/20/2006 1:52 AM  

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