Personal Budgets

[Suraya Yasmen]

Personal Budgets

Individuals and families can have budgets, too. Creating and using a budget is not just for those who need to closely monitor their cash flows from month to month because "money is tight." Almost everyone, even people with large paychecks and plenty of money in the bank, can benefit from budgeting.

Budgeting is a wonderful tool for managing your finances, but many people think it's not for them. Below is a list of budget myths – the erroneous logic that stops people from keeping track of their finances and allocating money in the best way.

1. I Don't Need to Budget
Having a handle on your monthly income and expenses allows you to make sure your hard-earned money is being put to its highest and best purpose. For those who enjoy an income that covers all bills with money left over, a budget can help maximize savings and investments. If one's monthly expenses typically consume the lion's share of net income, any budget should focus on identifying and classifying all the expenses that occur during the month, quarter and year. And for people whose cash flow is tight, it can be crucial for identifying expenses that could be reduced or cut, and minimizing any wasteful interest being paid on credit cards or other debt.

2. I'm Not Good at Math
Thanks to budgeting software, you don't have to be good at math; you simply have to be able to follow instructions. Many of these programs are free and legitimate. If you know how to use spreadsheet software, you can make your own ledger. It's as simple as creating one column for your income, another column for your expenses and then keeping a running tab on the difference between the two.

3. My Job Is Secure...
No one's job is truly safe. If you work for a corporation, being laid off due to downsizing or a takeover always is a possibility. If you work for a small company, it could die with its owner, be bought out or just fold. You should always be prepared for a job loss by having at least three months' worth of living expenses in the bank. It's easier to accumulate this financial cushion if you know the amount you're bringing in and spending each month, which can be monitored with a budget.

4.  ...And If It's Not, Unemployment Insurance Will Tide Me Over
Unemployment compensation is not a sure thing. Let's say a bad situation at work leaves you with no choice but to quit your job. Unless you can prove constructive discharge (that is, you were virtually forced to resign), your departure will be considered voluntary, making you ineligible for unemployment insurance. Besides, the benefits may fall well short of the wages you're used to: for most states, they average between $300 and $500 per week.

5. I Don't Want to Deprive Myself
Budgeting is not synonymous with spending as little money as possible or making yourself feel guilty about every purchase. The aim of budgeting is to make sure you're able to save a little each month, ideally at least 10% of your income, or at the very least, to make sure that you aren't spending more than you earn. Unless you're on a very tight budget, you should be able to buy baseball tickets and go out to eat. Tracking your expenses doesn't change the amount of money you have available to spend every month; it just tells you where that money is going.

6. I Don't Want Anything Big
If you don't have any major savings goals (buying a house, starting your own business), it's hard to drum up the motivation to stash away extra cash each month. However, your situation and your attitudes likely will change over time. Perhaps you don't want to save up for a house because you live in New York City and expect that renting will be the most affordable option for the rest of your life. But in five years, you might be sick of the Big Apple and decide to move to rural Vermont. Suddenly, buying a home becomes more affordable and you might wish you had five years' worth of savings in the bank for a down payment.

7. I Won't Qualify for Student Financial Aid
Yes, the catch-22 of student financial aid is that the more money you have, the less aid you'll be eligible for. That's enough to make anyone wonder if it isn't better to just spend it all and have no savings in order to qualify for the maximum amount of grants and loans.

But that catch mainly applies to earned income. Whether you are an adult student going back to school or the parent of a student headed to college, the Free Application for Federal Student Aid (FAFSA) form (used for Stafford Loans, Perkins Loans or Pell Grants), does not require you to report the value of your primary residence (if you own a home) or the value of your retirement accounts. So if you want to save money without compromising your financial aid eligibility, you can do so by using your savings to buy a house, prepay your mortgage or contribute more money to your retirement accounts. The savings you put into these assets can still be accessed if you face an emergency, but you won't be penalized for it.

Even if you employ all the available legal strategies to maximize your financial aid eligibility, you still won't always qualify for as much aid as you need, so it's not a bad idea to have your own source of funds to make up for any shortfall.

8. I'm Debt-Free
Good for you! But being debt-free without any savings won't pay your bills in an emergency. A zero balance can quickly become a negative balance if you don't have a safety net.

9. I Always Get a Raise or Tax Refund
It's never a good idea to count on unpredictable sources of income. This may be the year your company may not have enough money to give you a raise or as much of a raise as you'd hoped for. The same is true of bonus money. Tax refunds are more reliable, but this depends in part on how good you are at calculating your own tax liability. Some people know how to figure how much they'll get in refund (or how much they will owe) as well as how to adjust this figure through changes in payroll withholding throughout the year. However, changes in tax deductions, IRS regulations or other life events can mean a nasty surprise on your tax return.

10. I Just Don't Have the Discipline
If you're still not convinced that budgeting is for you, here's a way to protect yourself from your own spending habits. Set up an automatic transfer from your checking account to a savings account you won't see (i.e., at a different bank), scheduled to happen right after you get paid. If you are saving for retirement, you may have the option of contributing a set amount regularly to a 401(k) or other retirement savings plan. This way, you can pay yourself first, have enough money for the transfer and pay yourself the same predetermined amount that you know will help you meet your savings goals.


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