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Budgeting
Changing Your Spending Habits
By Henry V. Kaelber
President, Chief Investment Officer, Hoffman, White & Kaelber Financial Services, LLC
My colleague Dr. Dan Elash preaches: ”If you want to change any habit, change the actions that produce the habit. More folks start self-improvement programs to change personal habits at the beginning of year than at any other, but it seems fiscal habit-change fits right in all the time.”
Dr. Dan starts out by discussing how the concepts of success and attitude play an important role in changing habits. Regarding “success” he states, “…SUCCESS is a progressive realization of worthwhile personal goals…success is a journey and not a destination…goals must be worthwhile and personal…they cannot be someone else's goals…they must be yours and they must be of value to you…success is a developing attitude of achieving goals.”
I’ve always followed the belief that a person becomes what they think about. And Killian uses that same concept when he suggests how people can change their [spending] habits. He says: “An attitude is the way we think or feel about a subject which then causes us to act in a certain way…therefore, we act and react in relation to the thought patterns which we have developed…an attitude is caused when we think about something the same way over and over until it becomes automatic…change the habit of thought and you change the attitude...change the attitude and you change the resulting action.”
Dan counsels our clients to consider: “Success is on ongoing journey... not a destination. The only time you fail is when you quit or never get up after falling down. “
Setting Up Your Budget
In my opinion, the best and least traumatic way of preparing a budget would start with looking at how much your current lifestyle has been costing you. Seeing how you've spent your money in the last year or two can help guide your spending plan for this year. You might consider doing some or all of the following to get you started:
Using your checkbook(s) and credit card statement(s), construct a historical record of how you spent household monies over the past year.
It is best to organize this information by month and by spending category.
Using spreadsheet software can be a great time saver!
Also, you can use our Financial Planning Questionnaire, pages 11 and 12, for help with types of common spending categories.
Next, you’ll want to accurately project what your household income will be in the coming year. You should have included income taxes in your spending numbers. So, the number we’re after here is before tax income.
Now you’ll need to compare income versus spending. Income should exceed spending by anywhere from 5% to 15% of your expected income. More is obviously better if you can make it happen!
If spending exceeds income, that phenomenon can’t last for long without problems surfacing. This is a clear signal that changes have to be made.
I often recommend that family members, those participating in the budget process, take a copy of the spending record and go off in separate rooms to work on their recommendations for “cutting the budget”. Take care to avoid any heated debates!
After sharing thoughts with one another, repeat that exercise as often as needed until you arrive at your household’s desired savings level. Your desired savings level will be based on your family’s long-term goals.
Once you’ve accomplished your savings rate, now you need to keep track of your expenses and follow your new budget! At first it will be difficult, but the longer you keep to your budget, the easier it will get. Knowing where your money goes each month will give you the confidence to adjust your new budget as you see fit.
Concluding Thoughts
The importance of budgeting is to enable people to achieve a life style which can provide financial security and generate family wealth.
Your specific goals are likely to change over time as you change jobs and as your life changes. Some goals, such as saving for your retirement or your children's education, probably won't change, though. Remember, if you spend all your money now, you won't have it to spend later.
If you follow your budget and adjust it responsibly, you'll be able to find the necessary money if an emergency arises or if you see an item you wish to purchase. Having a budget can make it easier to take on additional debts because it tells you exactly how much extra money you have available.
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