Budgeting – the Necessary Evil

Imagine you have a great income – say $260,000 a year. With this great salary (and the undoubtedly great job that comes with it), you have the normal outlays that everybody has: a house, cars, maybe a vacation house, some real estate holdings, season tickets to the Cincinnati Reds, insurance payments, credit cards, etc. But, every night you go to bed sweating, nervous, unable to sleep. You have a sinking feeling in your stomach – twitchy, irritable, waiting for the worst to happen – because your total debts for the year amount to $370,000. You owe $86,000 more than you make and owe an additional $24,200 in interest on that debt. You are spending 141% of your annual salary. Things get darker, you become depressed, start drinking heavily. You obtain financing to stay afloat at 28% interest rates. Then you wake up from the nightmare…is your reality any better?

According to the Office of Management and Budget’s Proposed Budget by Category for Fiscal Year 2012 (Table S-4), the United States government is in the exact position described above (albeit increased by a factor of 10,000,000). How did the government, and more importantly you, get into this dire situation? Lack of budgeting.

The most basic financial plan that every family, business, or government entity must have is a budget. It can be as simple or complicated as necessary, according to your own personal “nerd-ness.” By this, I mean you may be a more free-spending type that likes to group their money into broad categories or you may be a closeted accountant that feels the need to itemize every little expense down to the nth degree.

The first thing in budgeting is setting priorities. You pay your bills from your income in their order of priority. Here are my suggestions:
1. Food – Simply put, you won’t live very long if you don’t eat.
2. Utilities – We all need water and protection from the heat and cold. Lights are nice too.
3. Mortgage/Rent – Living in your car is not fun. Also, getting behind on your mortgage is a lot harder to fix that getting behind on other debts.
4. Transportation – Another simple one. If you can’t get to work, you can’t make money. This includes gas money, car insurance and registration, and public transportation fares.
5. Life and Health Insurance – If you had a major medical mishap, and didn’t have insurance, how fast would you go bankrupt? Also, if you or your spouse died, how long could you easily survive without some additional money?
6. Car Loans – See item 4. It takes a long time for a repossession to go through and banks are much more willing to work with you to fix things if they get bad.
7. Credit Cards/Pay Day Loans – These are your lowest priority debts. I don’t care if they call you every day asking for money, they are NOT to take the place of putting food on the table – or anything else.
8. Clothing Replacement – Do you really need the latest fad in clothing? Buy “timeless” but well made clothes.
9. Retirement – Your future retirement will be more enjoyable once items 6 and 7 are abolished.
10. Entertainment – There are a lot of entertaining things that are free. Don’t shirk your responsibilities just so you can have fun.
The only possible exception to this would be tax debts. They should always come in at #2. Otherwise, they can take away everything except your food.

Now it’s as simple as plugging in your monthly income and subtracting your expenses in prioritized order (see graphic). Be sure to adjust monthly for expected expenses – you probably use less electricity in the winter if you have a gas furnace. Above all, be sure that you and your spouse agree on your monetary plan. Without this, you’ll be forced to juggle two budgets, which will result in the failure of all budgets.


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