Well, it wouldn’t be the New Year if we weren’t reminded that one of the top resolutions that will be made and inevitably abandoned is financial in nature. “Improve financial condition” is once again the number two resolution for 2012 in the annual Franklin Covey New Year’s Resolutions study, and the only surprise is that it’s not number one!
But no matter what year I’m asked the question, “What’s the most important thing I could do to improve my personal finances?” the answer is never going to be about tactical asset allocation, navigating the alternative minimum tax or conducting a Roth IRA conversion. Regardless of your income, your net worth, your age or employment status, the clearest determinant of a successful financial plan for ALL of us is the implementation of an effective cash flow mechanism, or its less sexy if not diminutive synonym—the budget.
So in my first Forbes post of 2012, I shared the shocking story with which you may already be familiar, about my affluent friend who found himself on a path to spending over $1 million at Starbucks, to rebut the common misconception that rich people don’t have to budget. But here I’d like to address the more honest, unspoken question that I believe leaves most people among the ranks of the NON-budgeters:
ISN’T BUDGETTING JUST AN ANNOYING, BURDENSOME YOKE? ANOTHER TO-DO WITH LITTLE MORE TO OFFER THAN A REMINDER THAT I’M FALLING SHORT?
The short answer: NO.
The less short answer: MAYBE.
Budgeting may indeed be little more than a burdensome yoke destined to be cast off if you don’t dedicate yourself to it wholly. For example, if all you ever do is track your spending after the fact, which can be quite depressing. (“Yup, I spent more than I should’ve…again.”) Many mistake a monthly review of spending with a glance at the bank and credit card statements for budgeting, but a spending review is barely the beginning of a genuine cash flow system. The process is really about setting forth a desired level of spending for the future and tracking spending at frequent enough intervals that your course can be reasonably adjusted. A half-hearted effort at budgeting is likely to net you even less-than-half the benefits.
Although I recommend you find the rhythm that works best for you, my preference is a monthly budget that is reviewed weekly. Each of my budget categories—food, housing, charity, entertainment, and many more—are given a monthly allotment and then we (yes, if your household is a we, it’s almost impossible to make budgeting work solely as an I) review spending weekly and make course adjustments for the month’s remainder. If you’re able to maintain a weekly rhythm of review, the process is relatively painless in the short run and you’ll save yourself more heartache (heartache is not an overstatement for many people) than you could imagine in the long run.[i]
But what really takes budgeting from routine to revelation isn’t merely mastering the mundane, but planning for the unexpected…with margin. With the exception of bills that are identical every period, each variable budgeting category should have a built in buffer designed to weather slight variance. Then you should also have a separate miscellaneous buffer category for emergencies, auto repairs and other occasions that fall outside the bounds of your expectations.
You’ll fall head over heels in love with the boring process of budgeting when the unexpected becomes inevitable, but you’re prepared in advance. No wondering where the money’s going to come from. No turning to debt. No personal financial crisis. Just peace.
Speaking of love and budgets, stay tuned for an upcoming post on How Budgeting Saved (And Continues To Save) My Marriage.
Wishing you personal and financial peace in 2012!
[i] The not-so-secret to any habit I’ve ever maintained successfully is that it has to be in some way enjoyable, so every Saturday I take a cup of green tea upstairs with the wooden box dedicated as the receptacle for our household receipts to my office, choose some good music to suit my mood and run the numbers. WHAT WORKS WELL FOR YOU?