We started our discussion about budgeting in the last post. The question we concluded with, was: What is a budget? I like to keep things clear and simple. We could spend pages defining a budget, but that’s not our purpose here.
A budget is a spending plan! That is it. The more you have to spend, the more important having a budget becomes. It could be a simple spreadsheet, or it could be a 500-page volume.
The budget categorizes your spending, so it becomes easier to track. Then based on historical data (the accounting software we talked about earlier is handy here), the budget “allocates” a portion of the expected income to each category.
Now this is all projection. Why is it important? If you went spending without a plan, without some guidelines, you would, most probably, exceed the limits. Even worse, you might spend more on less-important categories than on essential ones.
Let’s have an example. What is more important than your children’s health? Without allocating enough funds to that category, you may end up taking some of that money to cover a less important area, such as eating out.
This leads to a very vital aspect of a good budget: Weights and priorities. Not all spending categories were created equal! Factor that in right from the start. Let your budgeting software know those priorities as it allocates the funds.
The other important element is allocation. How would you decide that, say, groceries would need $2000 this month? The easiest way is to track your spending for a period of time, that is relevant to the budget’s span. Therefore, if you were budgeting month-by-month, then track your spending for a full month, to get an idea how much you would need for the coming months.
Finally, a budget has a lifetime, like everything else! If you were responsible for creating the US government’s budget, then you would need input concerning, at least, the next 10 years, then prepare the current year’s budget accordingly.
Our focus here is personal/small business. In that environment, your budget should take into consideration your overall mission statement (personal, family and/or business), objectives, values and roles. Budget for a year, and have monthly sub-budgets to help you track more effectively.
Always put your investment money aside before you start this process, as if it never existed. We had talked about this before, but it is worth repeating here: Deposit a monthly percentage of your income in a separate account, which is dedicated to investing/growing your wealth.
The Wealth Maker