Budgeting

Do me a favor and stop me if I am way off base here but I need to put something out in the world. The concept may be a little strange, especially in today’s society, but budgeting is a key component to the beginning of any new relationship. So your probably going to take me up on my offer to stop if I was way off base but I was just kidding about that, because budgeting is very important. There is something to be said for paying cash for the things we buy daily and not overextending ourselves to the point that we often create a financial black hole in our lives. What I mean is we begin spending too much money, it creates the black hole, and next thing we know everything we have starts to get sucked into the void. Sure, it was fun when we got the new big screen television, the car that was way out of our price range, and took that vacation to Mexico but what happens when the bill comes due? We have to pay is what happens. This begins the loud sucking sounds in our lives which is when the money begins to disappear. Once that happens stress pokes out its ugly head and starts to mock us daily. “You shouldn’t have done that, you shouldn’t’ have done that!”

This is where I stepped in usually, trying to bring people from the brink showing them possible ways out of the black hole. Once the path was laid it took many months or even years to get back out because of one major thing: we only have a finite amount of resources available to us to work with. I could be wrong but you only make so much money in your life barring, of course, raises, new jobs, and possible lottery wins. We only have the potential to earn so much in our lifetimes. I want you to do me a favor and do a little exercise for me. Take your gross earnings right now and assume that you will never get a raise or a bonus again (In this day and age it is pretty certain that the extra money will come sparingly). Now assume that the average age of retirement is 65, subtract your age now and then multiply your earnings yearly by that number. Here is the equation: (retirement age) – (current age) x (Yearly gross earnings) = (rough earning potential until retirement). That is the sum total of your earning potential while you are in the job market bringing the dough in to the household via a paycheck. My thought is that once you retire you will earn less and spend more. Look at that number and think about it, think real hard.

The answer to the question that I have not asked yet is this: once you start to spend more than you will ever make there is an issue. That issue is the black hole. The answer to the problem is budgeting. It is a very simple concept but hard to practice. Budgeting is like dieting for money. We all know we need to eat right and exercise every day to keep healthy and fit, but what often happens is we have one too many Big Macs and the weight creeps onto us and next thing we know we have love handles (by the way I know a guy named Joe that can help you with the Big Mac Problem over at chautauquafitness.com). Joe can help you with body fat and toning. However, I am talking about the weight of debt and how to avoid it. Budgeting is a simple practice of recognizing what your realistic earning potential is and making sure that you live within those means. If that means skipping a few dinners out a month or downsizing into a smaller car so you can afford the monthly payments then so be it. Start to trim the debt a little bit so you can fit a little more comfortably in your day to day life.

Society today has given people the ability to live outside of their means. So over the last few decades the idea of budgeting has eroded into a very forgotten practice. While we watch television, walk down the street, read a magazine, surf Facebook, and watch the previews to a movie in the theater we are bombarded with advertising that shout, “Buy More, Buy More, Buy More…!” And inevitably we do. That trendy clothing store offers you a credit card at the checkout saving you 10% on your purchase. It sounds like a good deal but what is the real cost to you? It is the interest charged monthly because you continue to use it for future purchases because it is more convenient. I am reminded of the story of a young couple looking to buy a house. Having limited resources and jobs that were decent they thought it was time to buy, to actually own something themselves. Having some knowledge of budgeting to begin with and looking at what the final mortgage cost would be they new the price range they were looking for and the monthly payment they could afford. The comfortable purchase price was about $50,000 or under. They sat down at the bank and filled out the paperwork for the pre-approval for their home. Astonishingly the pre-approval was for $125,000 purchase price, more than double what they could afford. They opted to buy the home for $50,000 because they understood budgeting and what would happen if they went for the larger house.

My point is this: Rely on yourself to make the proper decisions on what you can and cannot afford because there are very few out there that will do it for you. It is very simple to let money slip away into the black hole never to be seen again. I look at financials all day long trying to determine how to reposition money to make it work more effectively within the limited resources that people have. If you budget first and spend after you will always be ahead of the game. In the examples previously if they spent first and budgeted after they would have had a pending foreclosure and a bankruptcy on the horizon. Not a good start for a life together. The formula for success is knowing your realistic earning potential and spending within your means. So I implore you take the time and sit down and have this conversation, put pencil to paper, and crunch some numbers. Monitor, in a month, every penny you spend and where it goes so you can determine if you have a black hole or if there is one on the horizon. Once those numbers are crunched make sure you follow the plan and you will be on the road to success. Like I said budgeting is important.

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