I have been working with personal budgets since 47 years ago when I was 18 and decided to go to college in London, England. Before leaving Jamaica, where I was born, my mom and I sat down and developed a detailed budget for the first year. After looking at my needs for food, clothing, shelter, limited entertainment, books, transport, we decided on 30 British pounds monthly.
My mom taught bookkeeping, accounting, and other administrative courses to secretaries at a commercial college. I observed her for years, and knew that when you created a budget, you adjusted your lifestyle continually, to live in it. Trying to complain constantly about wanting more money is the victim path she rejected, which impressed me. Accordingly, I committed to my mom that I would live inside my monthly budget. In four years in college, while it was challenging, I did.
In those days, I learned a lot about budgets. I learned one overarching lesson, and knew that to achieve it, I needed to avoid three significant budget traps.
The simple, but profound lesson I learned early was there is a limit to money available each month, and I must respect that limit. Obvious, but often disregarded by folks. Thirty pounds, meant that’s all I could spend in one month, unless I spent less in earlier months. To date, I have never carried forward to the following month, a balance on my credit card and so, I have never paid interest on my credit card.
To stay in my budget, I understood there were these three potential hazardous traps that I needed to avoid:
- Money in the bank trap
- Only trap
- I know what I spend trap
Money In The Bank Trap
When you work with a budget, regularly you must look at two different views. First, continually compare what you have done, with what you planned to do. This helps you identify and keep your eyes on money drivers. Second, compare the actual cost with the comparable budgeted cost. If you planned to buy two DVDs at $30 each, and you bought one for $45, using my method, you will know you have a potential problem. You might overspend your budget. You needed two DVDs at $30 each. Now, you can buy a second DVD, only if it costs $15 or less.
I learned this lesson early, when I bought two Otis Redding record albums. I had budgeted six pounds for three albums and spent six pounds for two. However, because I had not bought other budgeted items, my bank account looked healthy; I had about $15. Instead of looking at my individual budget for money drivers, I bought another record album for three pounds, only to discover later that money for Tube tickets (subway tickets), and other budgeted expenses were in the bank account, waiting to be spent. I adjusted my lifestyle: reduced traveled, ate less, to stay in my budget that month.
The take away from this is to look always at money drivers for each budget item, never look at money in the bank to decide how much to spend. In my examples, the number of DVDs and record albums were the money drivers.
I think one of the most profound quotes that affects how we spend is this Benjamin Franklin quote: “Beware of little expenses. A small leak will sink a great ship.” How often have we decided to buy an item because it is only one, two, five, ten dollars. We forget that these amounts accumulate. My second lesson was never to spend when I decided it was only a small amount. I learned from this that I was spending not because I needed the item, or even wanted it, but because it was a small amount and insignificant. This was a simple but profound lesson to keep me on track.
I Know What I Spend Trap
This is the hardest to convince folks about. We are sure we know how much we spend monthly, and on what. I learned quickly that I didn’t, and my experience suggests you do not know either. However, you think you do. The first time I recorded every item I spent, and my motivation for spending, I was shocked at the size of the leakage! This relates to the earlier trap, especially when we spend loose change.
I decided early that I needed to track my spending regularly, because the small leaks would sink my ship!
Today, I use a computer software to help me record my spending. As well, regularly, I take stock of where I am and compare with where I ought to be, and adjust my behavior as needed. Is this difficult and time-consuming? On the contrary, when you know where your funds are going, you have peace, confidence, no financial stress, and spend less time figuring out where you are. Try it; you will be surprised, pleasantly!
I encourage you to avoid the three budget traps as a prelude to taking control of personal finances.
Copyright © 2012, Michel A. Bell