Friday, February 09, 2007

Mr. Budget

Years and years ago, when I first graduated from college with my fine magna cum laude double major in Finance and Real Estate, plus what any other school would call a minor in Economics, I went to work at my first post-college job. I was a Real Estate Consultant at a major accounting firm.

It was an entry level position. But since I 'd worked for eight years before I went to college, including time spent as a licensed real estate broker in Illinois and salesman in Florida, I got a significantly higher starting salary. Not to mention, some interesting side benefits. I worked there for a year. The company, once one of the top accounting firms in the world, has since folded. But my time there was neither boring nor fruitless.

One thing I greatly enjoyed was the wonderful selection of papers that accountants used, back in pre-laptop days.

Long ones! Short ones! Skinny ones! Fat ones! Colored lines all over, special columns and rows! Different size squares for different size numbers!

Special long LONG papers that were folded in very particular ways, once complete, and filed away with the carefully numbered and sourced Work Papers of any given job.

Like most employees, I indulged in minor pilfering of such precious things as stray tablets of paper here and there.

This was most helpful in preparing Mr. Budget.

See, in times past, I'd had to make do with regular paper. Doing up Mr. Budget on actual accounting paper was a treat and a half.

I call him Mr. Budget as a sign of respect. However, as I've always told anyone who questioned me thus, Mr. Budget does NOT rule my life. On the contrary! I, myself, am Budgetmaster.

I was not made to serve Mr. Budget. Nope. He was made for ME.

Recently, a young person of my acquaintance disclosed that he doesn't use a budget. This is an exceptionally intelligent, responsible, independent, and resourceful person. Yet he's not the first one to tell me: *I don't have a budget because I can't - I'm a student, I don't make enough money to have a budget.*

ai yi yi!

When on limited income and/or too many expenses is when a person needs a budget the MOST.

In a sense, the study of finance has less to do with numbers than with decision-making. The greatest value of that study isn't even coming to understand that there really is a time value to money: no, it's understanding how to choose one course of action over another. And that action can be financial, or any other.

Having a budget is what provides the information needed to make certain decisions.

For some reason, a lot of people think a budget is something where you are dictated to, where some horrible vicious totalitarian takes away all your choices and forces you to eat spinach when you HATE it and don't CARE if it's good for you or not.

WRONG.

If you have any income of any kind, and/or spend any money at all, you're already on a budget. You just didn't write it down.

And writing it down puts YOU in control of it.

NOT the other way around.

Knowing what you're doing with your money means YOU, your own good self, can finally be in charge of it.

Okay. Now I'll try to lay off the lecture part and get into basic practicalities.

I make my budget for at least three months into the future, and usually for six months. Not all numbers are certain. Of course. In fact, when you think about it, most numbers aren't, ever. That's how life works.

That doesn't mean you can't estimate them.

We don't use colorful accountant paper much any more. A great computer program for this sort of thing is Quickbooks. If you can get past the initial learning curve, it's really not hard to use at all. In fact, if you combine it with your various bank accounts, credit card charges, etc., at the end of the year you have perfect records to file your taxes; an easy-to-use resource for disputed bills with vendors or insurance companies; all that.

Me, I'm still a bit PO'd about losing my small business to the war. I don't use Quickbooks or any of the multitude of spreadsheet programs available, because they're associated with certain memories I'd rather let sleep.

Instead I use an archaic, completely antiquated thing in Word Perfect 5.1. It adds the numbers up for me, which is all I really need. Like most people, doing the arithmetic the Old Way can irritate me, not to mention that I'm prone to error doing it manually.

I'm telling you this: If I can easily and happily do a budget using an unsophisticated program like that, anyone can use just about anything.

Here's the basic form I follow. I tossed in a couple pretend numbers just to show where they go. In my real life budget I round them to the nearest $5. Don't screw around with nickels and dimes; they just distract you from the big picture.

~~~~~~~~~~
Month
February, 2007

Period 1
Income
Have $100
3 SSA
5 Walter's pay

Expenses
1 HH/Meds $100
1 Mortgage
1 Electric
3 BellSouth Phone
5 Cable
10 IDT Long Distance
10 Sprint PCS
10 HFC
14 W Chase Visa
14 City Utilities (water)
17 GEICO
xx savings

Total Period 1
Income $100
Expenses $100
Variance $0

Period 2
Income

Have
20 Walter's pay
xx IRS refund

Expenses
20 HH/Meds
30 Edith
30 P. Visa
xx savings

Total Period 2
Income
Expenses
Variance


Total Month
Income $100
Expenses $100
Variance $0
~~~~~~~~~~
That's it. At this point, you probably don't even need me to explain any of it.

But I will, anyway.

Since Walter's usually on the road and I'm at home managing things, he doesn't use a separate budget per se. We pool our resources and expenses. He gets - oh that nasty word! - a certain *allowance.* As do I. Every pay period, I transfer a set amount into his separate bank account. That's his to use as he sees fit; it's enough to cover his road expenses like food, plus some for books and other forms of entertainment, clothes, what have you.

To anyone who bitches about being on an allowance, I have a few thoughts for you to contemplate. First of all, your Budgetmaster is also on an allowance. Frequently, it's far less generous than the one provided to others on that same budget. Second, if you ever think to yourself: *I better not spend more than x this pay period because this is when the rent is due,* you already are on an allowance. You're just not calling it by its real name. Third, if you truly aren't on any allowance at all, even a mental one, you're a fool. Spending money without forethought gets you into troubles like poverty quick as can be, because yes, a fool and his money really are soon parted.

Allowances are NOT devices dreamed up by evil control-freak spouses as a means of thwarting one's happiness and providing an excuse to yield a whip. When I hear anyone bitch about living on an allowance, they morph from an adult into an emotional two-year-old right in front of my eyes. You know. The sort of person who needs to have a firm allowance the most, because they lack the maturity to modify decisions in light of the consequences of their actions.

Dates: In front of each expense and income category you'll see a number. That's the date things are due, or scheduled. In each month, whatever the income circumstances, I match each budget period to payday. I've been paid by the job, by the hour, day, week, every other Friday, twice a month, and monthly. The frequency matters not. It's just numbers and timing, subject to structure. That, you see, is one of the very important freedoms a budget provides: flexibility.

In each budget period I start the income side with *Have,* meaning what's still in my household bank account at the beginning of the period. Walter gets paid twice a month, on the 4th and the 19th. I get my SSA disability check once a month, on the 3rd. Both are direct deposit. I schedule Walter's income one day later than the company claims, in case there's any snafu in the payroll department to delay it. The number I use is take-home pay. This is a cash budget, and the actual amount of cash available is what matters here.

If your income is uncertain due to being paid hourly, then estimate it. You know how much you usually make. Often, you also know when you'll make more because things are busy at work; or, you're going on unpaid vacation, so in a certain period you'll make less.

By *estimate* I mean *most likely.* I'm all about realism. Underestimating your income or overestimating your expenses may sound wise to some, but it's a falsehood. One of the greatest values of budgeting is getting an accurate picture of your present and future income and expenses. Keep it real, or you won't learn what's really up in your financial life.

So these days, my own Period 1 encompasses my SSA and Walter's first paycheck of the month, and Period 2 is just Walter's pay. I anticipate getting an income tax refund toward the end of February, but I don't know precisely when. So I put in *xx* for the date, and insert it in the period I think it will arrive. If it's later, I'll just move the sucker to the appropriate period in the future.

Alternatively, if any item is unusually uncertain, I take it out of the main body of the budget and put it underneath as a little note to self. This is very useful in keeping one from counting unhatched chickens - and in keeping one from forgetting a known future expense hit of uncertain timing.

The dates in front of the expenses are the dates those bills are due. Besides regular monthly bills, I have a category for Walter's sister Edith. We send a small amount of American dollars to her in Europe each month to help pay for her post-stroke nursing care. I also put emphasis on saving a certain amount each period, no matter how small. If I put it in as an expense, and consider it a *done deal,* I find I'm far less apt to postpone saving money. The amounts I can save are tiny. We're seriously broke. But saving those tiny amounts has helped bail us out of unexpected hits time and time again. It's my slush fund.

Or, say there's some special expenditure you want to make. If you lay out all your usual bills and paychecks first, it's much easier to tell when you can make this special expenditure. If you can't do it all at once? Easy solution: Put that little savings item into the expense column, and really do set that amount aside, with physical cash or in a separate bank account if you need to - whatever works. Before you know it you'll have enough saved up for your purchase.

Here's the expense category most people turn to when they need to modify their budget. What I call *HH/Meds,* or Household and Medical, is an extremely important item. It's where most people goof when they DON'T have a budget. In the beginning, this category in my budget was highly detailed, as it should be for anyone when they first start a written budget. Now I have a very good idea of what I spend each period in that category, so I use a lump sum estimate instead.

*HH/Meds* consists of:
Food
Sundries such as soap
Co-pays to doctors and for prescriptions
Gasoline
Car maintenance and repair
House maintenance and repair
Clothing
Entertainment
Gardening supplies
Walter's allowance - for his expenditures on items in this category like food, sundries, clothes, entertainment, etc.

This is by far the most flexible category we all have. If I know I'm going to have more medical expenses than usual, I'll spend less on other items like gardening supplies. Like any careful shopper, I can alter my food purchases too; ditto for clothing, whatever.

At the end, we come to *Variance.*

Variance is a term I use loosely and a little incorrectly here. That's not material. The important thing is, I subtract the expenses from the income and see what that number is.

Unaccountably, in real life, I've met ever so many people who do keep a budget - but never do that vital final calculation!!! Why in the world don't they want to look? The bottom line is the whole purpose of the exercise!

If you're running negative, you need to change the numbers. Okay? Spend less and/or make more money.

Just doing THIS MUCH of a budget tells you a great deal about where you stand each month. The point is - KEEP TRACK. If the HH/Meds *allowance* gets used up early, stop spending until the next pay period.

Which is how most people do it. Except, to my utter astonishment, they don't write it down first. Or even track it very well. This often means they have a troubling sudden Event, where they find themselves out of funds, and without enough food or pantyhose to last until the next pay period.

That means your financial life is not really under your own control. It leads to awful feelings like embarrassment and hunger and fear. Or losing the car to the repo man, or getting evicted from your apartment. Or spending money on ridiculous bank fees for overdrafts and bounced checks. Now there's a real waste of money. Every time you throw $30 away on a bank fee, think of what fun you could have bought with that $30 instead.

Why would anyone voluntarily go that route? People. It doesn't make sense.

I love to look at my budget. When I do, I don't see a prison or a trap. I see accomplishment there. I see two people who met, long ago, in these conditions: One, with no income or possessions, not even a car, permanently disabled, with no prospects for the future, no health insurance, and $8,000 - $10,000 per year in medical expenses; the other, with few possessions, not even a car, and making a wage of $7 per hour.

These two people are way imperfect and made some dumb decisions, and also had a lot of unforeseen setbacks, things that truly were not in their control.

I see those same two people today with a paid-off car, and a house with a relatively low mortgage payment, and a tiny stash of mad money against a rainy day. They're still living on *tight money* and paying off debt. But they have a roof over their heads and food in the fridge and health insurance, and they no longer live in the daily fear they used to do.

They got that way by taking that tiny amount of income and managing the hell out of it. The tool they used was a simple and ordinary budget. It helped them make much better decisions.

This is YOUR life. YOU be in charge, okay? It's your right, and it's also your responsibility. It's YOUR money. If you take control of it by budgeting, you rule it, instead if it ruling you.

6 comments:

Granny J said...

Very nice piece, k -- you almost have me convinced!

prettylady said...

I SO needed this, just at the moment. My problem is that my income is so unpredictable as to be virtually random, and my baseline expenses nearly always exceed it. So I just spend as little money as possible, put the rest on credit, close my eyes and grit my teeth. But this is a monumentally sensible thing, which I will have to do. Slowly. When I can stand to look.

Interestingly, I was much better at sticking to a budget when my income was predictable, no matter how small it was. It's the randomness that does me in. When a client unexpectedly dumps a large wad of cash on me, I'm far more likely to go out and buy that frivolous item that I was drooling over, instead of socking it away for next month's bills, or paying off some credit. Kind of like a rat that receives random electric shocks. You stop trying to control things and live in the moment.

pepektheassassin said...

AAARRRGGGHHHHH! Speaking of money and such--someone stole my credit card while I was in Oregon and used it in LOUISIANA--anyway, to make a long story short, I've had a bunch of crap to contend with because of this, not to mention NOT HAVING MUCH MONEY while I was up there...WHY can't people just be NICE, and HONEST????

Nancy said...

'Pup has us on a budget. My bro and his wife, who were in the same position we're in now...(laid off), not only did not have a budget, they didn't track expenses.......and my sis in law never knew how much or little money they had. So, they pretty much lost it all.

They're having to start from the bottom up again, a little wiser this time.

k said...

Thank you, Granny J! I have an idea that you're a person with one of the most accurate mental-picture budgets around. Why? For one, because you're such an astute shopper. That says a lot right there.

Pretty Lady, you just outlined a couple of vital basic principals of financial analysis, right there: Risk, and a thing I sometimes call *Lookit.*

Now, I may well be saying things you already know, but here I go...Risk is from variability. Uncertainty. A near-random income is the most uncertain income of all, and thus carries the highest risk.

Humans feel that emotionally. It's a hard and scary way to live.

It alters behavior.

One way it does that is, it makes you not want to look at it: it affects your *Lookit* muscles. While you're far from an ordinary human, that's a common and ordinary human reaction. I get it too, believe me.

Walter and I were both struck by your comment about having a steady income vs. the unpredictable one. See, way back when, I told him this: Give me a steady income, no matter how small, and I can do miracles with it. I asked him last night if he remembers when I said that and he said, Yes.

That stability, the greater certainty, provides so much.

Miss Assassin! I am SO sorry to hear about that! I just HATE crime. It's so mean and so violating. That happened to me once, too. Learning where they were using those cards just creeped me out. At the same time it seemed to raise my comfort level a bit, just by knowing something certain about what was happening...it returned a tiny feeling of control to me.

I hope they catch the jerks. I hope you're not out of pocket on any of it. And, my condolences on how it affected your trip. It's just nasty and rotten and that's all there is to say.

Nancy, it's always hard to watch that happen to someone you love. I think it's worse when they don't learn from that mistake, you know? Then you're afraid their lives will never be better for them.

So 'Pup's your Budgetmaster! I was wondering which of you two it would be and I couldn't guess for the life of me. It seems both of you are eminently qualified, both in knowledge and emotionally, to take on that role.

Nancy said...

lol

We agreed early in the marriage that 'Pup got to be Chief Financial Officer........I got to be Chief Procurement Officer, and it took two votes to okay any major expenditures (other than Groceries).

cross your fingers (not the cut one!) and hope.. 'Pup's up for a temp job: 6 to 8 weeks at 50 to 75 an hour for financial analysis.