Monday, August 18, 2008

A New Look at Budgeting

I don't know about you but I just hate the word "budget". It's just like that other word "diet". They're both nasty and all about denial and self-loathing. Who wants to spend their life worrying about what they shouldn't do? It's so true that we are the inventors of our own suffering.

That's why I like a little tool that's I've used to teach kids how to be fiscally responsible. It's called the Spending Plan. Isn't that really what money is all about? It was invented for spending.

What's different about a Spending Plan? Well, yes it is primarily semantics, but a spending plan is terrific for setting goals. A basic spending plan divides your goals into short-term, intermediate, and long-term. Kids seem to grasp this quickly. Their short-term goal might be to buy some iTunes. An intermediate would be something a little pricier. And, you get it, the long-term might be a car or something else big.

It's not that different for us grown-ups (I define grown-up as someone who has bills to pay). For us the Spending Plan could look like this:
Short-term: Pay monthly expenses on time
Intermediate: Down payment for a house
Long-term: Retirement fund

Of course for adults there are likely to be several short and intermediate goals. But if you know that you can't give up certain vices, the spending plan lets you go easy on your psyche. Don't deny your spending whether it's for pleasure or necessity.

The real key to success with the spending plan is to work in real dollars--not credit (okay with few exceptions like a mortgage).

But before you can get to the goals of your spending plan. You need to do some work. Just as you might if you putting together that other so called tool.
  1. You need identify all of your income and expenses.
  2. You also need to track your spending for at least a month. This helps you see where all that money goes and why you're not reaching your goals.
  3. Then you get to setting your goals.

Setting a goal like "reduce debt" is not manageable. If your short-term goal is to reduce debt. Review the debt and pick one to attack one first. Try following the SMART rules for goal setting--Specific, Measurable, Attainable, Realistic and Timely.

Try the Spending Plan to breathe a little life into that dull budget.

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