2008-04-01

Silly Rabbit, Budgets Are For Kids—How We Do Use Budgets

Okay, so we have a budget. We just don’t really use it for controlling our spending or expenses. We talked about this in our posts, “How We Try To Control Expenses Without Much Of A Budget” and to a lesser degree in, “Thinking Of Your Personal Finance Like Running A Business.” So why bother having a budget at all, let alone updating it?

Good question. The truth about it is we spend a lot less time developing or updating it, especially relative to when we first started really focusing on getting our financial house in order. But when we do dust it off, we try to get the numbers mostly right (or maybe just in the right ballpark for the smaller line items).

At this point, we use our budget for analysis. “Analysis” sounds like more than it is, now that I go back and read it. We use a budget to see what would happen if we were to do something different. We use it for planning—for things we are actually going to do, for things we might do, and for bad things.

We have our budget in a spreadsheet. The nice thing about a spreadsheet or some other kind of software is that you can play with one or a few numbers and see how that ripples through the other numbers. So for our planning, we might add expense items to see how those change our cash flow or savings; or we might lower our income to see what effect that would have. Or if we were feeling particularly cautious or nervous about something, we might see what it would look like if a mini-disaster struck. As examples:

  • When we were looking at different childcare options for our kids, we plugged the different costs into our budget.
  • When we were considering purchasing an investment property, we were expecting that renters would cover most of the monthly expenses. But we put the full carrying costs into our budget to see how it would look if the house sat vacant. We wanted to see how uncomfortable that might feel.
  • One day when I was just feeling particularly less cheerful about the economy, I ran our budget showing what would happen if one of us lost our jobs.

So while we don’t budget to control day-to-day expenses—such as by setting a limit for dining out or other categories of spending—we budget to plan for major expenses. Whether and how we could afford to do something big. Whether and how we could weather a bad situation without dipping into savings.

How we use budgets has also changed over the years. A budget can be many things to many people. The dictionary.com definition of budget lists the following:

1. An estimate, often itemized, of expected income and expense for a given period in the future.
2. a plan of operations based on such an estimate.
3. an itemized allotment of funds, time, etc., for a given period.
4. the total sum of money set aside or needed for a purpose: the construction budget.

For us, our history with budgets is roughly this:

  • Early on, we developed a budget to see what was happening. If we put the numbers down on a piece of paper, were there big gaps? Did we not have enough sense of where our money was going or what we were spending it on? Did we not realize just how much we were spending on something—eating out or whatever?
  • After we had that more in hand, we started using a budget to accelerate our progress toward our financial goals. We could see that we ought to be able to save more. So we increased the amount of money automatically going into saving and investing plans.
  • Now we mostly use a budget to plan for major expenses or potential life changes.

Yeah, this still came out as a post on budgets. Hard to get too excited. Maybe I should have gone more with more of an April Fools angle…

Related Posts
How We Try To Control Our Expenses Without Much Of A Budget
Think Of Your Personal Finance Like Running A Business—Thumbtacks Are Only Thumbtacks

2 comments:

Post a Comment

Comments are what make lots of blogs go 'round. Thank you for participating in this blog by adding a comment!

Also, my apologies. The comment spam coming into this blog has really been on the rise, and the word verification feature does not seem to be slowing it down very well. So for now, I am trying the addition of a registration (OpenID/Google/similar) requirement for leaving comments.

 

Original design by Linda of RS Designs.

Some hacks and functionality added by blog author with tips and code from
Blogger Buster, Hackosphere, and Blogger Accessories.