Sunday, December 23, 2007

On Basic Money Management

I know people have unique perspectives on how people should budget. Some people say track every penny, some say live a cash-only life, others have personals tricks. JD at getrichslowly.org/blog always says "Do what works for you" and I agree with this. I also believe that people should do what they need, in relation to different times of their life.

As an example, I have never successfully tracked every penny of my budget for longer than 12 hours. However, I learned some time ago that I had to follow my budget, or account for why I didn't. Personally, I do not need to track every single purchase in order to stay within my budget. Yet I understand that someone with debt or spending problems, and no clue with how they are spending their money -- this type of person certainly benefits from tracking each expense.

When I hear about people who are penny-tracking nazis (people who believe everyone should do this, without exception, and with malice for those who don't), I wonder if they just need that level of control over accountability (e.g. so they don't spend too much), or if they are simply obsessive about knowing exactly how much was spent on, say, shampoo or bus tickets, at the end of the year. Though if it works for them, then that's the important thing. If someone has debt and can't find a balance, they will never be debt-free.

I also recognize that as time changes, budgeting and money management skills often change. If someone starts by tracking every expense, they eventually learn where their weaknesses are, and as they work to strengthen those their habits may change significantly enough that they can maintain their budget without the detailed tracking. Or perhaps they have finally learned and been able to implement living with their means.

As another example, when someone's income changes dramatically, their budgeting generally changes, too. When I started working for myself, my income increased greatly. Being self-employed, I also had to worry about saving for my tax bill, and keeping track of business expenses. I also didn't increase my pocket money when my income increased, and this has allowed me to live at the level I was previously accustomed to, and now pay down my debt even quicker. However, when my debt is completely paid down, I've already planned how much I need to invest to meet my retirement goal, and I will also increase my weekly pocket money allowance (which has been the same for probably five years, if not longer).

When income increases or decreases dramatically (let's define dramatically as a 10% or more change), budgeting needs to be re-visited. For me, I have my budget spreadsheet set up in a way that after my basic expenses are covered (e.g. insurance, cell phone, minimum debt payments, pocket money), the balance of what I earned that week is allocated to my savings, IRA and as extra debt payments on a percentage basis. Throughout the year, I do change the allocations, depending on what balances are and what my work situation is like. If my emergency fund is at the level I strive for, I lower the allocation for my cash savings and raise the allocations to my debt and IRA. Alternately, if I know that I will be finishing a project soon and I'm not sure another one is starting immediately afterwards, I will re-allocate my money so that more goes to my savings to ensure I'm fully prepared for not working.

I believe re-allocating on a budget is a smart and wise thing to do. Having a spreadsheet that allows for easy adjustments to allocations is also a factor that makes doing this far, far easier. Being able to easily do this can help in getting through a rough patch (e.g. for me, not working), it can allow you to give yourself some extra money when you take a vacation, it can allow you to save more when your income changes.

The over-arching goal, though, is to find a balance that is appropriate for you and for your current lifestyle. Successful money management is like a marriage: you come together for a greater goal, and yet you realize that you both will change over time and you commit to adapting to the other's needs. Sometimes a partner needs a little reining in, sometimes the partner needs a little more freedom.

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