Photo by: Joop Dorresteijn

Building a Strong Budgeting Foundation

Still Standing

Over the weekend my wife and I had a great conversation with some youth about foundations and roots. We discussed the forces that might be working against a building, or a tree, that might bring them down – and why they would need a foundation (or roots) to withstand those forces.

Our conclusion was that good foundations and good roots need two qualities:

They need to be deep and they need to be strong.

We have many foundations in our lives and our 95% is a big one. It not only “keeps us up” from month to month, but also helps us weather storms and constant change.

The two principles of a good foundation seem to correspond to the two main budgeting principles I try to evangelize here on WithinMeans:

Living Within Your Means Will Make Your 95% Deep

As you use a budget to actively spend less than you earn, your wealth and safety will increase from month to month, a little at a time. Your financial foundation will get deeper and deeper, and you’ll find yourself weathering unexpected costs better.

Budgeting Needs Before Wants Keeps Your 95% Strong

Spending money on what you want, then hoping you have enough for your needs, is a weak foundation at best. If your needs are budgeted first every month you may see some erosion on your wants, but the important things will always have what they need to keep you standing.

How else can you deepen and strengthen  your 95%?

“This here car is the car for you.”

“Yeah?”

“You bet! I can tell from your trendy glasses that you’re a music kinda guy and this baby has iPod interface. All your music at your fingertips!”

“Nice!”

“Plus it has tons of cup-holders, plays DVDs and video games for the kids, has a GPS system, and tons of other fun things.”

“So, where are the wheels?”

“Oh… Did you need wheels?”

Photo by funkblast

Needs and Wants

As a music geek, you might persuade me that access to my iPod might be more important than having wheels while driving, but probably not. There are some basic fundamentals that a car needs to function as a car, and a lot of things it doesn’t need to work. Not even GPS.

When you’re budgeting your paychecks, make sure your 95% at least has wheels. Budget your needs before your wants.

When you fill up your “need” funds first in your budget, you give yourself peace of mind. Instead of lying awake at night running numbers in your head, you’ll know you have money for the mortgage, and the insurance, and the other bills, safely set aside. It’s a lot less stress in your life at a very little price.

That said, I hope your budget lets you have the GPS too.

It’s not about good vs bad, it’s about first vs second.

Own your budget, don’t let it own you.

There’s an electronics store here in the Phoenix area that I dart in and out of once every couple of months. This store has a feature that always makes me laugh – a thousand mile long corridor they shuffle you through before you can check out.

The corridor is lined, of course, with impulse buy items. Candy as far as you can see, iPod covers, pen radios, $5 DVDs of old B-movies, batteries, toys; the sheer scope of last minute temptations along those never-ending walls is impressive, in its own way.

But I’m not going to preach to you the financial pitfalls of impulse buys (maybe later), or the evils of retail marketing for tempting you. Nor will I give you a long list of the psychological motivations behind our impulse buys.

Sometimes impulse buys are fun, useful, or just convenient.

There are honestly times where I could use new batteries, or I really am in the mood to try a “Peanut Butter Twix.”

On a larger scale, my wife and I once stumbled upon the perfect rug for our baby’s room while just browsing. Instead of spending more time and energy shopping around for a better one we decided to nab it. We still love that rug (in fact, it’s migrated into our living room).

Spontaneity can spice up your life, or fill it up with crap.

The trick is really simple: keep your impulse buys within your budget – whether it be creating a “Fun” category or “Misc” or even a flat out “Impulse Buys” category. Just make sure your needs are funded first, as well as other more specific wants that you value more.

Following a budget should not kill the simple pleasure of a good find, a quick treat, or a convenient purchase. Give yourself room for spontaneity and enjoy your budget. If you buy something random, use your “impulse buy” funds and don’t feel guilty about it. When those funds are used up don’t get anything “extra” until you have funded that category again. You’ll start to learn what’s worth nabbing and what isn’t.

Are impulse buys dangerous? Yes, they can be. Just use your head and remember your map.

(Photo by: The Consumerist)