February 28, 2009

Part 12: Budget Planning - The Path to Financial Freedom

[Part 12 of 12 in a series on How to Turn Your Financial Goals into Reality.]

My experience as a financial advisor leads me to believe that the vast majority of Americans do not utilize a budget as part of their personal financial plan. This is of great concern, especially when you consider that every successful business operates from an ongoing budget process. If you desire to be prosperous in your personal finances, you should operate like a successful business would, and that means you will need to develop and follow a budget plan.

Establishing a budget is not easy for many people, probably because it challenges our established spending habits. Most prefer to ignore the challenge and spend money as though there’s no real limit to the amount available. However, once a budget plan is implemented, the advantages become very apparent. A balanced budget also brings with it financial peace of mind.

Keeping Track of the Cash Flow

In essence, a budget is a numerical recording of our entire financial life. In order to do this you will need to have a method of making such a complete documentation. Certainly, it is not advisable to keep a budget “in your head”. Tracking income and expenses is best done manually using ledgers or electronically using computer software designed specifically for this purpose.

Because our expenses and our income vary month-to-month, skillful budgeting is an ongoing process and not something you can set and forget. Therefore, an important step in budgeting is to consistently review and sometimes revise the budget numbers. Merely recording your income and expenses is not budgeting.

When starting a budget plan, I often ask clients to record all their expenditures for a month in a pocket notebook, including cash, checks and credit or debit card use. This allows them to easily visualize where their money is going, what form it is being spent and whether it’s going out in large chunks or small drips and drabs. This information becomes the foundation of the new budget plan and should be written in the budget ledger or entered into the budget software program and reviewed more thoroughly.

For example, after one client recorded expenditures in a journal for several weeks, he discovered how to save $80 per month by taking a thermos of coffee to work rather than buying it at a coffee shop. Without the journal entries, he may not have noticed this fact. It became obvious as he examined the numbers. This is just one way a budget works for you.

The Ultimate “Means Test”

Following the principle of living within your means is critical for successful budget planning. Some people think of this as being unduly restricted in their spending choices and always having to do without. But living within your means is more about determining what you can spend and is liberating in many ways. One way I’ve heard this expressed is: “When you live within your means, the only thing you have to live without is financial stress”.

When we honestly decide to keep expenditures within the framework of what we earn, we are beginning to live within our means. This allows our budget to become an effective tool in planning our financial future. It also permits us to confidently spend for those things which we‘ve pre-determined by careful consideration are in our best interest.

First Things First

Something else that causes some people to struggle with a budget is failing to distinguish between a financial need and a personal want. Real needs are vital. They encompass those goods and services that are essential to our day-to-day living and peace of mind. Everyone needs food, clothing and shelter as well as other things such as basic utilities and medical care. If you are without any one of these essential needs, you will most undoubtedly experience a loss in quality of life.

All of us resist cutting back on our favorite wants when we can easily justify them as important needs. After we have made sure that our budget can cover the most important necessities and a healthy savings plan, then we can selectively add some of the creature comforts and other luxuries that are most appealing to us.

Get Control of Your Financial Life

Some people are eager to set a budget plan while others resist it fervently. The choice is always yours, but foregoing this vital planning step is likely to place you in a financial crisis at some point. Make the decision to be in control of your future, rather than allowing the future to control you.

Establishing a proper personal budget and faithfully adhering to it is the pathway to living in financial freedom. It serves to liberate us from the daily strain of wondering if our current or future need will be met.

Dale A. True, Registered Investment Adviser
True Financial Strategies, LLC
March 2009

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