Budgeting - Principles of Financial Management #9

Originally this principle of financial management was titled – You can’t manage what you don’t measure. I’m afraid I would lose too many readers if I didn’t stick to the conventional; so budgeting it is.

Many financial sites and bloggers focus on the big stuff. They write about saving thousands on real estate, slashing hundreds on cell phones, cutting the rates on credit cards. All of these are important and should be addressed, but what about the other 50% of your expenses?

The other 50% is made up of the little stuff that accumulates over time. The energy bars at $2 each, the sodas at $1.50, eating out for lunch each day at $9.80 and that’s just the consumables; impulse purchases add up too. You’ve just got to have that new lime green MP3, or a new fashion accessory. Walking through a store at the mall a pair of jeans caught your eye or you left without an umbrella and it’s now raining. In the heat of the moment almost anything can be justified. But at the end of the year when you realize that you’ve spent everything you’ve earned and then some you are wondering where it all went. You can’t remember the lunches, the MP3 was given to a friend when they came out with blue ones, the jeans came apart at the seams and for the life of you, you can’t remember where you left your “other” umbrella.

Can you really keep track mentally of every dollar you spend eating out? Can you really keep track mentally of every dollar you spend on coffee, snacks or presents for relative’s birthdays?

If you are like the 99.9% of the rest of us that continual has a hole in their pocket a budget is imperative. Aren’t you tired of “stealing from Peter to pay Paul?” Wouldn’t it be great to know that you spend more on eating out than you do on your car? Imagine how motivating it would be to change your spending habits if you knew that you were paying more for soda than you were for gas! Don’t laugh; you probably do pay more for soda than for gas, take a look at a different perspective on pricing.

Why do so many people have a hard time with budgeting? Is it because it is time consuming and boring? Is it because the numbers never seem to add up? Maybe you feel that it is a futile exercise because there is so much variation in your expenses?

Take a moment and think about what you are trying to accomplish by budgeting. In the end all we really want is some control over our expenses. It has been repeated often; the only sure way to wealth is by “spending less than you earn”.

Stop reading for a moment and think; financial comfort and wealth is not about what you make, it is about what you keep! Nobody likes this, but it is a fact of life. If you really want to get control of your financial life this is a must, you have no choice, you must save and the only way to assure saving is by budgeting.

So how does a budget help you keep more? Frankly it is simply about awareness. A term I use repeatedly in this blog (check out the 7 forms of muda) and in life. If you are not aware, if you do not track, if you do not measure how much money, time or effort you spend, the pennies add up to quarters, which add up to dollars, and dollars add up to hundreds or thousands. The opposite is true if you simply take the time to budget. Your pennies can turn into dollars and dollars will turn into hundreds, hundreds become thousands saved and money saved becomes wealth!

Budgeting will bring awareness and budgeting will bring wealth. But budgeting will also bring you much more:

  • Clarity – For the first time in your life you will have a clear understanding of where all your money is going. It’s enlightening to know how much you spend on groceries, gas or gum. You can’t manage what you don’t measure. Knowing where your money is spent is the first step toward controlling it. With this clarity you will find opportunities to reduce and or eliminate wasteful spending.
  • Control – Do you recall a day when the ATM wouldn’t give you the money you needed for gas or lunch? By using a budget and managing your money will finally put you in control of your finances. Once you are in control, it is only a matter of time before you will wake up one day with a reserve of cash.
  • Communication – If you are married and sharing your finances, a budget will prevent much of the tension and arguing over money. 50% of divorces are due to fighting over money. There is no room for disagreements if a budget is clearly documented.
  • Choice – With a budget you can now begin to prioritize your debts and expenses. As you get rid of debts and increase your free cash flow you we have greater flexibility in how to use your money to pay off additional debt or begin investing.  
  • Comfort – With budgeting you will eventually be able to pay off all your debt and there is little that is more comforting than to know that you have control over your finances and your future.

Check back next week for details on how to start a budget!



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