The “B” Word

If you want to become financially independent, you have to have a strong handle on income and expenses. In the near term, it’s hard to change your income level. However, expenses are something that can be managed every day, and should be. With a simple tool, I’ll wager you can increase your savings without feeling like you’ve sacrificed. That tool is a budget.

How can a budget help you increase your savings without sacrificing? With a budget you have a plan for your money. You can allocate your income for your regular expenses, plan your discretionary spending, and set aside money for your future. If you want to make a large purchase, you can save gradually for it over time, and avoid using your credit cards to make the buy. If you anticipate irregular expenses, such as car or home repairs in your budget, by setting a little money aside for them monthly, you can avoid jeopardizing your ability to pay your regular expenses when these irregular things come up. Here are a couple of examples where folks could benefit from a budget.

We have some friends who are a hard working couple with two kids. I’ll call them Steve and Andrea. They make decent money but not a ton. They have trouble setting aside money for an emergency fund, let alone retirement. Steve told me everytime he had a few hundred dollars set aside, something would come up, like a car repair. In fact his latest stash had been eaten up and more by the need for a new set of tires. He had to put them on his credit card. Tires are a pretty predicatable need, even if they are an irregular expense. A different way to handle this would have been to assign a small amount of money out of each month’s budget to set aside for the “tire fund”. If planned far enough ahead, the bite out of any one month’s budget is small, and far less painful.

Another friend, let’s call her Katherine, was frustrated by the fact that the holidays left her with a small mountain on her credit cards to pay off. Katherine could take a two pronged approach to holiday spending. She could set aside some money each month for the holidays as a first step. Then, before shopping, assign a dollar limit to each person’s gift that lines up with the money she set aside throughout the year.

I use the dollar limit technique with our daughter Kaye too. High school dances apparently require a new dress for each dance, because everyone saw the last dress at the last dance. Who knew? Kaye has a clothing allowance, so the dresses come out of her budget. Before she goes shopping I ask her how much she plans to spend on the dress. This helps her make choices and shop where she can find a dress in her price range.

Need some help getting started with your budget? Visit The philosophy behind the tool is rock solid. YNAB prescribes four rules for getting your spending and savings on track, but the foundation of the philosophy is to give every dollar a job. By giving every dollar a job, you’re less likely to inadvertantly spend money you’ll need later. I know budgeting sounds tedious and boring, but if you could net some extra money without giving up anything important, wouldn’t it be worth the time?

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