The Nasty Thing We Hide Away

Budget.
Scary word isn’t it!? Or is it? It seems to affect all of us differently:
- Many of us dislike the word, let alone the concept itself — to the point we simply choose to pretend there is no such thing!
- Others, though, actually do have a budget. However, many of them also pretend it doesn’t exist, hiding it away where it’s least likely to be seen again (*).
- And then there are those unusual characters, who aren’t scared of the word at all. In fact, they even seem to like the term.
(*) Years ago I found a business’ budget at the bottom of the third drawer of the Finance Manager’s desk. I don’t think it had been used, other than to fill space in the drawer.
Q. Why is this?
A. I believe it’s because we’re not taught the value of a budget. Consequently, we do not see it as the tool it really is.
About now you might be asking whether I’m talking a budget for a business or a budget for personal finances. The answer is ‘both!’.
Before I go any further, I should probably define the word ‘budget’. Wiki explains the noun as meaning:
“an estimate of income and expenditure for a set period of time”
Wikipedia expands this slightly for a business:
“A budget is a financial plan for a defined period of time, usually a year. It may also include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.”
Barack Obama added to the above definitions when he stated:

This might still sound a bit scary. After all, many of us got put off anything to do with numbers before we earnt our first dollar. So, discuss the simpler version — the personal budget.
These are normally for a year. But let’s shrink the window — say to a month. How much easier would it be, when making a decision to purchase something we need that’s a little out of the ordinary price-wise if we knew:
- We had the money available in the bank already? Or
- We would have the money available within the next month?
How much better would that be than to just buy, then spend (pun deliberate):
- The next few weeks worrying about whether the money would be available when we have to pay for it? Or
- The next few months paying interest?
In other words, when we really drill down our spending decisions — leaving aside our determined attitude of ignorance of the word ‘budget’ — they are a balancing act:
- Between peace of mind (knowing we have the money) and fear (worrying about whether we will have it), and
- Between a one-off transaction from free cash and a purchase that keeps on costing us into the future.
You will note that I mentioned earlier that we are talking about something we need. When it comes to something we want we should not actually be buying it unless we have the spare funds — and they are not being held for something else. As William Feather puts it:

Dave Ramsey puts it in a more positive light, like this:

You see, the biggest thing about a budget is the discipline required to actually stick to it. Perhaps that’s why so many of us act like it’s a dirty word. However, Dave also says:
“Having a budget doesn’t mean you can’t have fun. It means you make a plan and don’t let your expenses get out of control.”
So, what does a (personal) budget/financial plan entail? Well, it’s not really that scary. While they are done as an annual plan, I recommend you break your annual numbers down into your pay periods. This makes it much easier to get your head around.
Where do you start? You start with your income — your gross income, i.e. before the Infernal Revenue has taken its grab. Then you take off everything your money goes on, starting with the necessities before moving to the optional spends, to arrive at your excess/surplus.
Charles A. Jaffe made a good point when he said:

But what does ‘everything your money goes on’ include? Well, it could be a long list and will vary according to who plan it is. However, it is likely to include the following:
- Tax. It’s not like you really have an option here. And, if you’re an employee, it will be deducted before you receive your net pay. If you are not an employee, then it makes sense, right at the beginning to put aside an amount to total up across the year to the amount of tax you will need to pay — to make sure it is there when you need it.
- Savings. Yes, set a savings goal, and start putting that money aside. First. Whether you are saving for:
- Retirement/superannuation,
- A new/replacement family home,
- A new/replacement vehicle,
- An investment you are planning,
- Your children’s education,
- A vacation,
- A wedding,
- A rainy day, or
- Anything else.
Warren Buffet put it this way:
“Do not save what is left after spending, but spend what is left after saving.”
3. Accommodation. This will depend on your circumstances, but could include:
- The rent you are paying, or mortgage you feed,
- Property Insurance — I’d include Contents insurance here too,
- Property taxes/rates, and
- An allowance for property repairs.
4. Food. It’s no good having somewhere to live if you don’t eat, so you actually do live. I would suggest this component of your financial plan includes eating at home. Not takeaways, café’s or restaurants. Those are optional spends that can come out of the funds left after the necessaries are taken care of.
5. Transport. In order to earn, to live, you probably need to travel. So, this could include:
- Bus/tram/train/ferry fares.
- Vehicle running costs:
a. Petrol,
b. Maintenance,
c. Registration,
d. Insurance, and
e. Parking.
6. Other Utilities. This would include:
- Water,
- Power/Gas,
- Telephone/Internet.
7. Medical. This might be bills you are paying, or insurance premiums (so you don’t have bills).
8. Life insurance. Okay, this could be seen by some as a luxury, but it sure gives comfort to you (now) and your loved ones (later) to have it in place — at the very least to cover the costs of your passing.
9. Clothes. You will appreciate that we are slowly moving from the necessary to the optional. Obviously, we would regard clothes as necessary, but just how many, and what labels they bare is where we start moving into the optional. So, for this aspect of your plan, you should include what you need, only. For those of you with a shoe fetish, they would be included here too, under the same rules.
10. Gifts. I don’t know about you, but I’ve discovered that between parents, children, friends, children’s friends, Christmas, birthdays, special occasions, this topic can add up, if not well-managed, to a big-ticket item. So, include what you need, based on shopping wisely.
Erma Bombeck wisely said:
“Before you try to keep up with the Joneses, be sure they’re not trying to keep up with you.”
11. Donations. Many people like to give donations of one kind or another to support the work of charitable organizations, often on a regular basis. Consequently, this too must be built into your financial plan.
12. Other optional spends. This can include:
- Extra clothes/shoes,
- Takeaways/cafés/restaurants,
- Subscriptions — to clubs (sports or otherwise), or other organizations, and
- Entertainment.
Ideally, your budget will include some of those optional items. After all, the idea is to manage your finances, to use your money wisely, and to have some fun along the way.
If you have an irregular income, the budget and adherence process becomes trickier, but the same principles apply. Those fortunate enough to have an extra (possibly irregular) income should endeavor to simply bank this as an extra — i.e. to treat it as belonging to the savings component of the plan. Similarly, if you are fortunate, your income less all of these deductions will still leave a surplus. This should also be kept aside — to top up your rainy day fund (commonly recommended to be three months’ income), or simply to bolster savings/investments.
At risk of being a doom merchant, remember your income may not always be at this level. So, if ‘life happens’ you will certainly be pleased you put that amount aside.
For many, though, the income will run out somewhere on the way down the list. And this is where the plan comes into its own. You see, by having and adhering to this plan for your financial future, you know where that point is. You know what you can spend money on, what savings goals you are achieving (if slowly), and what temptations to simply ignore — so as to avoid the regret (or other problems) which would ensue if you have to give up on meeting your goals when you want to.
What about a business budget? Well, it’s essentially the same. Once again, you look at a year’s income and spending, based as much as possible on known facts/KPIs. Then you manage the money accordingly. The mechanics of the budget, though, would take a lot more space to cover than we have here.
So, what’s the point of a budget? In a sense, you are putting your future before the present, preparing for the unknown with resources that are known. To go back to Dave Ramsey:

Ashleigh Brilliant is quoted as saying:
“I’m not yet desperate enough to do anything about the conditions that are making me desperate.”
What about you? Will you make the necessary changes? Now.
Or will you hide the nasty thing away?
Originally published at beanstalkknowhow.com on September 5, 2018.
