8.21.2007

The Indispensable Budget

My friend Beth over at The Natural Mommy is starting a series on What She Believes- in her case, mostly about "natural" or "attachment" parenting methods. (Her first post in the series, on natural childbirth, is up!) She invited readers to chime in on what THEY believe, and I (obviously) have nothing to say about parenting philosophies, but a comment by a friend yesterday made me think of something I do believe in... She said:
how simply DO you live when you have loans to pay off? when you CAN make minimum payments, etc.
And it's a valid question. Do you put every last penny toward loan payments? Is it acceptable to have "fun money" that doesn't go toward paying down debt? What's the balance?

My immediate thought, and my answer turned toward a budget. If you don't know where your money is going, it is impossible to reflect your values and priorities in regards to spending. Yes, you can continue to make minimum payments & pay bills without a budget, but to plan for "extras"- whether that be extra loan payments or a Vacation or Eating Out fund, or giving to charity- you have to know how much you have left over, and plan for where it ought to go. Hence, the budget.

Why Does a Budget Matter?
I contend that a budget is a document reflecting a person's priorities and values. Jesus agreed- "Where your treasure is, there your heart will be also." Where my money goes directly reflects where my heart is- what is important to me. If you're a crazy Colts fan, your money will follow, buying season tickets and all the Blue gear you can get your hands on. If you are passionate about gourmet cooking (or golf or pets or any hobby, really), gadgets and merchandise abound to support the hobby, and your wallet or pocketbook will follow your passion. A budget matters because it reveals what matters to me. It allows me to make a conscious decision on where my money is being spent, and gives me a way to reflect my priorities in my saving and spending.

Why Have a Budget?
To be a good steward of what is entrusted to me, I must know where it is being spent or invested. I must be able to give an accounting of it. If I want to be serious about making sure my spending & saving are in line with what really matters to me, I must have a budget. Also, a budget makes me the master of my money rather than Money my master. I don't worry if I'm going to have enough in the checking account to pay the bills if I already set aside the bill amount in the budget. I never have to worry about overdrafting or using a credit card if my lifestyle is already planned out, and I have made the choice to not live beyond it. I don't have to worry about checking the bank account balance online all the time to see if I have the money for this or that, because I already know the limits I've set. (As a side note: We budget many of our items as cash, so I very, very rarely even use a credit card. I have to worry even less, this way, because I know all the money budgeted is in hand, and if the cash envelope's empty, so be it, I can't spend negative cash.) The freedom from worry is my favorite aspect of the budget.

How do I Make a Budget?
To make a realistic budget, you have to start with Reality- what are you actually currently spending every month? Write down fixed minimum bills- rent or mortgage payment, loan minimum payment, average electric, water, gas, trash, phone, internet, TV bills, regular giving, whatever it is for you. These are obviously non-negotiable. they must be paid, and must be a part of your budget. Next, include less obvious, less frequent expenses. Car insurance due twice a year? Divide the amount by 6 and include it in a monthly budget. Car registration once a year? Divide by 12 & do the same thing. Think of other less-regular-but-still-necessary expenses and add those line items. Don't forget anything! If the budget is going to work, it has to include everything you can think of, so there are no surprises to throw everything off later. To be honest, this will take a while. When my husband & I first sat down to budget, we didn't take into account Christmas (and all the birthdays that come within a month either direction). It's a learning experience. I haven't discussed much about Gifts and Food- two things that are very variable, based on your values. I mean, you need a food budget, because we all eat- but will you buy prepackaged or preprepared food? Gourmet? Organic? Local? Peanut butter & jelly? Food budgets vary widely. Gift budgets do, too- setting a spending limit (and saving for that limit beforehand!) is important.

So, you've got all your Musts in a list. What's left? The Wants. Stuff like Eating Out, Vacation, House, Car Replacement, Extra Loan Payment, Clothes, Entertainment, Extra Giving. This is where your priorities shine through. For us, our relationship is top priority, and our entertainment is eating out, so we plan on a meal or two out every week. We also have our future in mind, so our VERY first savings priority was an Emergency Fund. Now, our future goal is getting into a house, so a large percentage of our income is being put into a House Down Payment fund. When we have a house, a car will be up for replacement, and our priorities will shift. Right now, we're comfortable with the school loan interest rate & amount after the school loan consolidation Josh did before he graduated, so we're not paying that off like crazy- yet. We are pretty debt-averse, so that's a priority when the other saving goals are accomplished.

This budget thing is sometimes hard to get used to, and maybe it's because I just like structure, but it has been a lifesaver for me, freeing me from worry about both the immediate and long-term future. I feel like the document gives me a choice where my money goes, as well as a peace of mind, knowing that everything's already taken care of and planned for.

8 comments:

Matt said...

Ching ching! That's my two cents hitting your blog. Again.

I've already harped on the topic of budgets before, so I'll try my best to keep it on target this time.

Creating a budget was an excellent way for my wife and I to get outside of ourselves and look at our standard of living from a more objective standpoint. One's current income is a fairly arbitrary and moving target, and has little to do in my mind with defining one's needs and wants.

If I made half of what I make now, would my needs or wants really be different? Conversely, am I justified in claiming more things as needs or seeking more things as wants just because I get a raise or promotion? That doesn't make sense to me. I hope my identity is not seriously that dependent on money.

I would challenge your list of non-negotiables... internet and TV bills specifically, but also mortgage and utilities. These things are quite negotiable. In fact, I was surprised and impressed when Brett started talking several months ago about re-negotiating his mortgage payment by moving to a house that was kinder on his budget. That kind of decision certainly takes more effort than deciding to cook at home more and eat out less, but it's still just as feasible for many people to consider.

I agree with you that getting your ducks in a row financially is freedom from a certain degree of worry about being unprepared or unfaithful with your finances. You still cannot really know for sure that God won't throw a Plan B (moving, losing a job, having a house/car burn down/up) at you at any moment, so there's some worry that you have to give up in faith that even Plan B will be good, because it is from our sovereign God who loves us. But it helped me a lot in preparing for a possible Plan B from God to at least know what my Plan A is.

Joanna said...

You have a good point about needs and wants regardless of income. Josh & I have made it a goal to cap our lifestyle someday- when it makes sense, when the size of our family is plateaued, and we're comfortable with where we're living. I look forward to that day.

And, as for the list of non-negotiables, it was just an example for my friendly readers. A mortgage/rent is very negotiable, and can vary widely, based on the type of house you choose to live in. It's part of your lifestyle choice. We don't have a TV bill, and, just last night, were looking into free or under-$5 internet. These are definitely very negotiable, but, if you plan to have them, you need to put them as line items in your budget. That's all I was pointing out.

AnneK said...

Good article. It was a coincidence I just read your post after discussing finances and budget with my husband! We were discussing about our wants and needs and what would happen if one of us were to leave our jobs. We do a biweekly budget and we just found what appears to be a cool website (https://www.expensr.com/index.php) I haven't checked it out completely yet, but I am looking into it.

I loved Matt's comment as well! We bought a house recently and we bought one below our means. Our criteria was to be able to pay it off even if husband (higher earning person) lost his job. And categorizing and knowing where the money goes was an eye-opener to me.

Beth @ The Natural Mommy said...

Very nice! Budgets can wear on you, though. Especially when you have no fun money. However that's when the grace of God shines through. I have found that as I've been more responsible with what God gives us, there are months when, according to my excel sheet, we should not be able to pay the bills - due to unexpected expenses. However, something always happens and God always provides!

I'm curious, what is the free or $5 internet you're looking into? Our internet is so verrrrrry slow and unreliable! I've been looking into switching, but everything better is more expensive. What kind of internet can you get for free or $5?

Josh said...
This comment has been removed by a blog administrator.
Joanna said...

Joanna asked me to respond because I was the one looking into the cheaper internet.

I found this site which list a whole bunch of free/cheap alternatives. The one I found most interesting was this one, which gives you 150 hours a month (rather than 10 like the free ones), but only costs $4 a month or even less when paid yearly. There are some drawbacks, like no phone tech-support and port 25 blocked (no using an e-mail program like outlook), but if we switch to dial up I think we'd try one of these out.

Joanna said...

(the above comment was made by Josh)

Brett said...

My wife and I were reading a book recently and one of the things it stressed was the need to proactive communication in a marriage. That is, addressing touchy subjects before they become issues. For many, many people, finances are a very touchy subject. Different spending, different saving goals, etc can really stress a marriage. Throw in one or two unplanned events (job loss, illness, car repair, etc) and you've got a marriage pushed to the brink.

Putting your monthly spending down on paper or, as Dave Ramsey says, spending your entire paycheck on paper before it ever arrives, is an excellent example of proactive communication. Move numbers around. Look at things from different angles. It's a good exercise in focus and opportunity costs.

Joanna, I especially like your emphasis on the emergency fund. Having a few months (Ramsey recommends 3-6 months) of expenses set aside can really take the sting out of those unplanned expenses.

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