Sunday, June 21, 2015

KISS Type Budgets are for Everyone

Budgets are necessary tools for responsible personal financial management. Employing the KISS (Keep it simple, Stupid!) method of personal budgeting is both highly useful and absolutely appropriate.

That's because unlike government, We the People as individuals don't have the power to tax nor do we have the power to print money --- at least not real money.

And contrary to government officials, we certainly don't have unlimited borrowing ability. In fact, it's the inattention to routine and habitual borrowing that often ends up putting us over the edge. By then it's too late, and we've become unable to service the debt obligations we've undertaken one at a time and over a lengthy period of time.

Here's the key --- how much of our income is required to service our debt obligations (both principal and interest) in relation to after tax income --- that's the crux of the matter. And if we accumulate high and unaffordable credit card balances in addition to the other debt obligations we've acquired along the way, our ability to tap into unused credit capability becomes tapped out. As a result, our ability to borrow is gone --- just when it's needed most.

Accordingly, we should take the utmost care to make sure that any credit card balances are paid in full each month. Setting aside the high and unconscionable interest rates related to outstanding credit card balances, large outstanding balances also mean that we're perhaps only one unforeseen large bill away from financial catastrophe. Such things as medical bills, home or car repairs, and other similar 'recurring non-recurring' expense items can then become the catastrophic game changer

You're Never too Rich for a Budget contains worthwhile personal financial advice for one and all:

"You may be earning $1 million a year, but if you’re also spending $1 million a year you’re still broke. Establishing and maintaining a household budget to ensure that spending remains under control and money is being set aside for savings is critical to accumulating wealth. Astonishingly, according to a 2013 Gallup poll, only 32% of Americans maintain a budget.

Below are some basic guidelines to creating and sticking to a budget. 

Getting Started: When sitting down to write a budget, keep it simple. Try to only list a handful of spending categories. Things like rent or mortgage, utilities, savings, food and commuting expenses. Anything left over falls into the “other” category, which you can spend as you please. Focusing on only a handful of categories isn’t as onerous as drilling down into each expenditure and you’ll be more likely to stick with it.

How much should you be setting aside into savings? A good rule of thumb is 20% to 30% of your pretax income. Naturally, it may take time to build up to this, especially if student loans or credit-card debt are still in the picture. If this is the case, earmark those funds for long-term savings once those debts are paid. After all, you’re already accustomed to living without that money.

Maintenance: Once you’ve created a budget, make it effortless by putting some basic tools in place. First, automate as much as possible, especially your monthly contributions to savings. . . .

Statistics show that those who monitor their budget on a regular basis are significantly more likely to stick with it than those who don’t. . . .

If you are targeting a particular goal (say, getting out of consumer credit-card debt), let your friends and family know your progress. Money has a bad reputation as a taboo topic, but everyone faces many of the same challenges with money. You may be surprised by just how supportive your friends and family are of your goals, and you may even inspire them in the process.

Beware of lifestyle inflation. Finally, don’t let celebrities, glossy magazines, and television fool you; most self-made millionaires don’t look like millionaires. Their secret: Living below their means. Take advantage of job promotions and raises to increase your rate of savings. Each time you receive a raise, allocate at least half to savings. You’ll still see a bump in your checking account, and you’ll ensure that increases in lifestyle don’t outpace your nest egg.

One of the tenets of building wealth is living below your means, and the most painless way to do this is by keeping your lifestyle in check."

Summing Up

Budgets need not be formal to be effective, but they do need to exist.

The simple reason for recommending budgets for everyone is that if we don't know where we're going, any road will get us 'there' --- wherever 'there' may be.

And 'there' isn't always a pleasant place to go, especially for out-of-control debtors who could and instead should have been in-control debtors.

It's always best to decide for ourselves where we want to go and then head 'there' directly.

Budgeting amounts to nothing more than charting a course of where we want to go, then keeping score with respect to where we are, and continuously making small adjustments to stay on track and take us to our desired destination.

That's my take.

Thanks. Bob.

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