Back to Basics: Budgets

 

     Among the many things I wish my children had been taught, while in school, to prepare them for life in the "real world" is the aspect of budgets. We are fortunate enough to currently have adequate money to not have a very strict budget but it has not been many years (about ten, if I am counting) when I had to add the price of each item I put into the shopping cart, at the grocery store, to make sure I did not exceed our budget for food. It was not enjoyable.

     But, my (now 24 years old) middle son asked me how does a person make a budget (this was in response to my reply to him when he, once again, wanted an "advance" to take care of a birthday present that he had known, for a long time, was coming up). I just had to blink, give him a brief reply, and then hand him a copy of the household budget so he had a real life example (and so he would be aware of just how much money was going to where).

     A budget is very similar to a diet or balancing your accounting records (personal or business). You want the outgo to not exceed the income. (For budgets, it is okay for the outgo to be less than the income <smile>. For diets, it is the opposite.)

     The first, easiest, thing to determine is how much income you have. This includes all wages, automatic dividend dispersals, pension checks (including Social Security in the US), and such. Since (in the US) one has to come up with such every year when taxes are due, this should not be difficult.

     The expenditures come next. These are divided into fixed, recurring, and discretionary spending. Fixed items are those which have the same, known, amount each month (or day or week depending on how small of an interval for which you want to budget). Fixed expenditures includes mortgage/rent, Internet bills, insurance bills, streaming subscriptions, and so forth -- amounts that do not normally change between months. Note that it is always possible for a fixed item to increase (rarely decrease) as rates go up. Large businesses (and wealthy individuals) differ in that they have more possibilities for financing and investments but, otherwise, they should have the same budgeting requirements.

     One fixed amount that I suggest to have present, if possible, is to have a "set aside" amount of money that goes each month into savings, certificates of deposit, investments, work or national savings plans. During working years, as I talked about in an earlier blog, it is wonderful if you can have enough money, in easily accessible funds, to supply your household needs for six months. It is still a good rule in retirement as it can allow you more flexibility in when/what/how you extract money. This fund (even if it is not enough to support six months) can also be used for unexpected, larger, costs -- automobile repairs, dental work, medical costs (in the US).

     Recurring expenditures vary in their amounts but occur every month (or every regular interval, we pay for water/sewage once every three months). Our largest amount in this category is groceries. It is also the category that has gone up the most in the past three years since pandemic burrowing. I estimate our grocery bills have gone up 25 to 30% (which doesn't agree with official inflation numbers but that is another story).

     Since the exact numbers will vary, it is useful to include a maximum average amount in your list of expenses. Our gas/electric bill is lowest in Spring and Fall when we often are able to turn off the heater/air conditioner. It is highest in Summer as our need for cooling is greater (and more expensive) than our need for heating. This will vary upon personal desires and geographical location.

     The final category is discretionary spending. It is so very tempting to make this zero ($0.00) but it is not realistic in the long run. Try to be honest with yourself. How much do you need to buy books each month (never enough)? Or "on demand" or theater movies? How many pairs of shoes or new shirts?

     Now it comes down to arithmetic. Add up all of the items in the three categories. This is how much you would like to have to spend. If the amount is less than income, rejoice and allocate more to savings/investments. If the amount is more than your income, look at each of your discretionary items and see which ones you think you can honestly reduce for the long term (most of us can reduce an area for the short term). Add them up again. Look over discretionary once more. Try again.

     If cutting discretionary spending is not enough, then look at the maximum averages you have set for recurring amounts. Can you set the thermostat for heating two degrees cooler? Or three degrees warmer for the air conditioner? Do you really need four separate streaming subscriptions? Cut and add.

     Still not in balance? Here you have two main paths. If you have sufficient savings/retirement investments to last as long as you expect to live, you can withdraw that deficit each month (this is when you determine the amount of deficit budget to pull out from savings). That is one path. (For us, during a 15 year period of declining income, we remortgaged twice to pull out equity).

    If that is not possible, try to get a better income job (or, if required, a second job). Prepare to move into a smaller living area or one in a "less desirable" neighborhood. You have to either reduce expenses or increase income (or both).

     Of course, you can do as many do and pray for something to change for the better. And it can happen -- but counting on it may put you into a situation where you are unprepared and that may mean drastic changes (homelessness, food banks, etc.).

     And that is the world of budgets. Income equals outgo. Of course, budgets only work if you keep within the numbers you have determined (don't spend more than allocated and continue to have the expected income).