by David John Marotta | 03-28-2005
Dieting is difficult when the rest of the family is still feasting. Living on a budget without the help of your family is impossible.
Get the whole family behind the budget. It takes communications. Children as young as four years old can contribute and learn from the process. There's no stigma to living within your means. Wealth is not what you spend but the result of what you are able to invest because you saved.
The guiding principle of budgeting is proportional living. (See previous article in this series or use our Budgeting Tool at http://www.emarotta.com/budget.php ). Proportional living is not simply living within 100% of your take home pay. Take the white space out of this article and your thoughts wouldn't be able to breathe. Our lives need margin.
Keeping control of your finances means that you can have more fun with your money.
Your day to day financial spending should be approximately 65% of your take home pay. The other 35% should be set aside for longer term savings, and spending this money should be done as a family. Putting 35% away may seem extreme, but it allows a family to spend their money more deliberately to meet the financial goals they value most.
10% for others. There are many ways to get rich. The economic principles of giving are universal. Somehow, those who give generously are often blessed financially. We agree.
10% percent should be put toward retirement savings even if the entire amount cannot be tax deferred. If you have this amount deducted before you even see your paycheck you probably have stopped thinking of this money as part of your "take home" pay. That's the power of automatic savings. If you can apply that principle to the entire 35% you are on your way to real financial freedom.
5% should go into taxable savings. While retirement savings are important, there are restrictions on their use while you are young. Taxable savings can serve as an emergency fund, down payment on a home or to start your own business.
10% should be set aside for large unexpected expenses. The most important principle of budgeting: You can't plan for everything! Families who go into debt usually do so not because of regular spending but because of unexpected spending. If you are living hand to mouth, then your budget can not handle large unplanned expenses such as the car breaking, the roof leaking, or emergency medical bills.
When a financial crisis strikes you will be glad you have such a fund. Then, after using the money from your emergency fund, see if the expense could have been anticipated and adjust your plan accordingly. My wife and I learned this way to budget each month for the inevitable expense of buying our next car. If you can anticipate these expenses, then your big purchases category can fund discretional big purchases instead of financial emergencies.
My wife and I started keeping such a budget when we were first married. Since we were anticipating most of our financial needs, we had the luxury to pick one item off our wish list each year. We did this each spring around our anniversary. After our first year of marriage we put a down payment on a house. Housing prices in Oregon were depressed at the time with 35% unemployment resulting in a once in a lifetime buyer's market. Because we had a few thousand dollars saved we were able to assume the mortgage on a house that would have been foreclosed on otherwise.
Our second year we bought a computer, and our third year we bought a used car. We able to make these purchases without incurring credit card debt because we were saving over 10% for big purchases.
In addition to talking about very large purchases, my wife and I had a dollar amount that we did not spend unless we talked together. When we were first married that amount was under a hundred dollars. As our finances have grown, that amount has also grown proportionately.
That principle can be applied to smaller amounts as well. Most purchasing decisions do not need to be made on the spur of the moment. Waiting until you talk with your spouse helps eliminate impulse buying, which represents a large share of budget shortfalls.
Many who are wealthy have achieved that status by developing the habit of postponing spending until they are sure they need a given purchase. There is always next week, and over half the time you won't remember what made the purchase seem attractive in the first place. When I see an impulse item I would like to buy, if I am not certain, I wait a week. When I see it again, if I am not certain, I postpone the decision another week. Sometimes I end up buying an item after a month of such deferrals, but the habit also saves me multiple wasted purchases.
Keeping control of your finances doesn't mean that you don't have any fun with your money. In fact the opposite is true. Families who aren't living within their means can't buy new homes, computers, and cars. A family in financial trouble resents every dollar that is spent. But if you have a budget, the dollars spent within the budget can all be enjoyed. And every budget has small slices for entertainments and frivolous purchases.
Finally, a budget allows you to create a plan that spends money in accordance with what you value. When your finances are spent in sync with your financial goals you lose that feeling that your finances are out of your control.
People who are financially overextended often reward themselves by spending more. This is the equivalent of drinking because you're depressed about being an alcoholic. Ask what kind of person you would like to be. Examine your reward system. Avoid rewards that set you back and indulge in rewards that move you forward. Try something healthy like jogging, a bubble bath, a walk in the woods, an hour of reading, or a set of tennis.
Some feel a budget is just too restrictive. Nothing could be further from the truth. In reality, a budget provides more freedom to choose how you spend your money. Careful spending plus foresight savings is a strong formula for financial independence.
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Marotta Wealth Mangagement, Inc. of Charlottesville provides fee-only financial planning and asset management. Visit www.emarotta.com for more information. Questions to be answered in the column should be sent to firstname.lastname@example.org or Marotta Wealth Management, Inc., 1000 Ednam Center, Charlottesville, VA 22903-4615.