Budget Basics
Dollar Discipline
Budgeting isn’t glamorous. But with a national savings rate of less than 1 percent, it’s time we all started monitoring our money. Here’s how.
by KRIS FRIESWICK
January 2006
On the day that money was invented, some cheaper-than-thou type suggested that perhaps
it might be wise to sock some of it away for a rainy day. His friends moaned and
ignored him. Ever since, people’s eyes have glazed over at the sound of the word
“budget”.
Mr. Frugal was right, of course. Today, it’s pouring on millions of us. The rate
of credit card late payments hit an all-time high in July, the savings rate is -0.6
percent (which means we spend more money as a nation than we make), and a reformed
bankruptcy code has slammed shut the window of absolution for many of those in the
tightest financial sneakers. Suddenly, budgeting is starting to look like the new
black.
For those bravely sailing into the world of financial discipline, the range of budgeting
theories and books
available can leave you understandably confused about where to
start. Theories on budgeting range from the parsimonious to the perverse. One budget
theorist recently floated a concept that suggest that you figure out your total
annual expense for a particular line item – say a magazine subscription – multiply
that amount by 25, and put that amount of money into an interest-bearing account paying 4 percent. Voilà! The interest will fund the expense in perpetuity. Dude,
if we had that much money in our bank accounts, we wouldn’t be worried about paying
for a magazine subscription, would we? Such theories are much of the reason why eyes continue to glaze to this day.
But like it or not, budgeting is a necessity got even the wealthiest among us.
“You can do financial planning actively or you can have it done for you,” says Dr.
Bill Gustafson, director of the Center for Financial Responsibility at Texas Tech
University in Lubbock. “Just try to not make your car payment and see what happens.
Even people who don’t have a budget still make choices everyday.”
The difference between active budgeters and passive budgeters is that active budgeters
have a goal. For some, that goal is putting food on the table and paying the bills
each month. For others, the target is paying down debt, funding a college education,
building a retirement consumers account, or saving a down payment for a first or
second home. Some experts try to make budgeting seem less ghastly and non0fun by
reminding people that creating and adhering to a budget can make your dreams come true faster and more completely that you ever imagined, if you simply make the behavioral
changed necessary. Of course, when one realizes that this means an end to Mall Assault
Saturdays and Thursday after-work pizza and beer parties those faraway goals don’t
seem quite so compelling. And so we spend far, far past our means, usually on one
or more credit cards, those thin plastic implements of financial destruction that
many consider a form of supplemental income.
Keri Crawford (not her real last name), from Royal Oak, Michigan, knows firsthand
what can happened when budgeting leaves the building. Rather than create a business
plan and budget for a recording company she started with a partner after college
she charged all the expenses related to the business, racking up more than $40,000
in credit card bills, as did her partner. The resulting $1,500-$1,800 monthly payments
threatened to prevent her from building any savings for the future and were restricting
her ability to make ends
meet.
“It’s so easy to use a credit card; you don’t realize you’re spending it,” Crawford
says. “Then one day you say ‘My God, I paid double for that item when you add in
the interest charges.’ I was young and dumb and just out of college.”
She finally conceded that she needed help to dig herself out. She contacted
Consolidated Credit Counseling Services, a Fort Lauderdale, Florida-based, no-for-profit
organization that helps negotiate on behalf of card customers to achieve lower rate
and better credit card payoff terms. Crawford now write a check for $800 a month
to CCCS (which includes CCCS’s monthly fee of $25), which in turn makes her payments
a much larger percentage of which are going toward principal. The plan also forbids
her from getting any new credit cards while she’s in the program and this has forced
her to make some attitude changes.
“I’m much more cognizant of what I buy now. My life is much simpler,” Crawford says.
She has embraced her new world order. She’s learned to sew in order to decorate
her apartment, and entertains friends at home rather than going out. “I feel very
comfortable living on what I live on,” she adds. Changes like creating and sticking
to a budget.
Howard Dvorkin, founder of CCCS, sees people like Crawford all of the time:
college-educated professionals from all walks of life who have never learned how
to take control of their money. “We see everybody,” Dvorkin says, “Debt is the greatest
nondiscriminatory of all time. It goes after you and doesn’t let you go until you’ve
made drastic changes.”
