Getting Money with Budgeting, Part 2
by Jane Chidester
Out with the Old... The envelope method. This system has been around for a long time and
has been used by many people. The idea behind this method is to use envelopes
to divide your pay into categories, with each category targeted toward a
specific expense. The basic ideas behind this system are good ones: money
is reserved "up front" for expenses and discipline is enforced in following
an established budget. One problem with this method, of course, is that it
was designed for a time when most transactions were handled in cash. Safety
is another concern. Even worse is the fact that money sitting around in envelopes
isn't working for you-you want those funds out there making more money!
The "wish list" method. This system can be simply described as "good
intentions, bad results." The basic scenario here is that a family sits down
and agrees on "spending limits" for certain categories of household expenses.
"We won't spend any more than $450 a month on groceries," they might say.
All of these decisions are carefully documented on paper. That done, the
list is carefully filed away, and the family goes out and begins their
spending.
The problem here is there is no easy way to enforce the budget plan. When
someone takes a trip to the grocery store, they have no idea how much they
are "allowed" to spend. Furthermore, rarely do grocery bills come out to
exactly $450 a month. If the family spends under that amount, the extra is
never seen or heard from again. If they go over budget, where does the extra
money come from? Soon, the frustration of not being in control of the situation
sets in, and the list is forgotten.
The "list-in-the-pocket" method. This system is an attempt to put
some control on the "wish-list" method. Instead of filing the "wish list"
away, the family carries it around in pocket, purse, or wallet. Then, every
time some money is spent, the amount is deducted from the appropriate category.
With this technique, some feedback is available as to how things are going.
But still, there are problems. What does the family do if they need gasoline,
and there is no money left in the gasoline budget? What if both husband and
wife happen to stop at the grocery store while running separate errands?
Do they carry separate budget lists? Do they have to spend time reconciling
their lists at the end of the day?
In with the New...Taking it to the 21st Century
What are the characteristics of the budget for the future? It should be designed
to let you divide and reserve your funds, and remain in control of them,
without a lot of extra work. It should allow easy transfer of funds among
budgeted items so you won't starve if you happen to run out of grocery money.
And it should provide a single reconciliation point so that all family members
can use a single budget plan.
The Concept of an Overlay
An overlay allows you to see the way your funds are divided up and reserved
for special purposes-it imparts organization to your finances without changing
them or the way you handle them. To illustrate this idea, suppose you were
given an aerial photograph of a town that you had never visited, and asked
to pick out a few locations of interest: the park at the corner of Elm and
Main, or the bank at High and Third. Pretty tough assignment, right? Now,
suppose you were handed an overlay printed on celluloid-that clear plastic
material used for overhead projector transparencies and animation drawings.
A map of the city, with all the streets clearly marked, would be printed
on the celluloid. Placing the map on top of the photograph, you could pick
out that park and bank with ease! Notice that the photograph itself would
not change at all, but your understanding of it would be significantly enhanced
with the use of the overlay.
Working Hand-in-hand with your Checking Account
The budget of the future works hand-in-hand with your checking account to
provide an overlay of your checking account balance. Normally, when you look
at the final line of your checkbook balance, you don't have much of a clue
as to what that money is for. How much of it can you spend on groceries?
How much do you need to reserve for all your utility bills? The overlay system
will give you those details. You will always know the disposition of every
penny, all without changing your checkbook, the way you pay bills, or the
way you write checks.
Focusing Attention Where Needed
Another idea central to the future of budgeting is that it allows you to
focus your attention where it is needed. The daily, routine assaults on your
checkbook as you pay monthly bills and take care of mundane expenses can
get in the way of truly managing your money and concentrating on financial
strategies. A good analogy here might be to put you in sole charge of a daycare
center responsible for 20 active four-year-olds. To add complication, suppose
that one child had a special need that day-perhaps she had suddenly become
ill and required lots of special attention. Stranded by yourself, this situation
would be very difficult to deal with. But what if you could enlist some helpers?
Suppose you could call in additional workers to watch the other children
while you administered the special care. You could devote your attention
where it was needed.
Handling the Routine Aspects of your Finances
The budget of the future can be your helper to handle all the routine aspects
of your income and payments, allowing you to concentrate on the important
things: investments, savings, financial growth, important purchases, or whatever
your priorities are.
A Budget is a Tool, not a Dictator
This means that a budget is something you should use to control your finances.
It is not something that should control you!
About the Author:
Jane Chidester is the author
of
BudgetYes!
21st Century Solutions for Taking Control of Your Money Now! She conducts
seminars and is a published columnist on personal budgeting topics. Visit
her website Budget Central: Personal
Budgeting Information and Resources Repository of information and resources
on personal budgeting, financial planning, and household money management
-- a complete budgeting education.
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