I’m sure you’ve heard that if you want to be successful in getting or staying out of debt, you should craft a budget and stick to it. Does this really work? I suppose for some people it does, but it’s really never worked for me. That is until I stopped caring so much.
The problem for me with budgeting, as it is usually presented, is that it only set me up for failure. I’m not an automaton. I am capable of setting limits, and staying within them up to a point, but I’m still human. I like to treat myself once in a while. I’m the kind of person who can stick to a minimalist lifestyle for a while, but if things are too tight I eventually splurge. The result is something akin to a the engine of a high performance race car pushed too far and red-lined too long: I explode.
It’s not like test detonating a nuke or anything, but the effect on my budget is painful nonetheless. Then I realized two things:
1. I was being far too strict with my budget.
2. The budget was more useful to me in creating a plan than in actually being the plan.
When my wife and I began budgeting, we sat down with a couple of “budget worksheets” from the web and plugged in our expenses. We pored over every bill from the previous 6 months. When we were done, we took the results to be our baseline expenses. Next we looked for opportunities to cut spending in various categories. The problem is we should have added to certain categories instead of taking away from them.
After about 3 months, we realized that our grocery bill was a bit higher in reality than it was on paper. Add in a few “working lunches” on my part that were little more than an excuse to ditch work for an hour with the guys, and a dinner or two out and we had spending creep. This was a problem because we were so strict with our budget in the first place, we ended up with some pretty big potholes in our cash flow. We’d have to dip into savings about every other month to cover the gap. During those months, we would racked up more credit card debt or even overdraft fees.
Our budget revelation came with the understanding that even though the budget didn’t work for us as a plan, it could be an excellent starting point for developing our a plan. Our budget became a tool for gaining perspective on our spending. Like an x-ray, it allowed us to see details we never knew existed. It showed us where our money leaks were, so we could fix them. It showed us exactly what we spent in car insurance and cell phone payments and other monthly bills that we could shop around or negotiate for a lower amount.
We used our budget to get an idea of just where our money was going, and they created a new line item: Savings. We changed our thinking to build our budget around our savings, and learn to live on what was left. Then we implemented a multi-tiered savings plan. Tier 1 was our checking account. It was interest free, but had no minimum balance requirement. Tier 2 was a long term, high yield savings account at ING or HSBC.
At first, our savings “bill payment” went to the tier 1 checking account. Once this was funded with a modest “overflow” amount, we switched those payments to the tier 2, high yield account. After we had enough to cover unexpected expenses, we began paying off the credit debt in earnest.
Now we run a budget check every 3 months or so to see if we’ve lost our way, but we have enough “padding” to cover any bumps along the way.
So, how does your budget work for you? Is it your plan, or the basis of your plan? Do you stick to it to the letter, or stray once in a while?