I have been working on personal budgets for 47 years when I was 18 and decided to go to university in London, England. Before I left Jamaica, where I was born, my mom and I sat down and developed a detailed budget for the first year. After looking at my needs for food, clothing, housing, limited entertainment, books, transport, we decided to pay £30 per month.
My mom taught bookkeeping, accounting, and other clerical courses to secretaries at a business school. I watched it for years and knew that when you created a budget, you continually adjusted your lifestyle to live within it. Constantly trying to complain about wanting more money is the victim path which she rejected which impressed me. Consequently, I made a commitment to my mom to live within my monthly budget. In four years in college, although it was challenging, I did it.
In those days, I learned a lot about budgeting. I learned a general lesson, and knew that to achieve it, I needed to avoid three significant budget traps.
The simple but profound lesson I learned early on was that there is a limit of money available each month, and I must respect that limit. Obvious, but often ignored by people. Thirty pounds meant that was all he could spend in a month, unless he spent less in previous months. To date, I have never carried over a balance on my credit card to the next month and therefore have never paid interest on my credit card.
In order to stay within my budget, I understood that there were three possible dangerous traps that I needed to avoid:
- Money in the bank trap
- only trap
- I know what I spend cheating
money in the bank trap
When you work with a budget, you often have to look at two different views. First, continually compare what you have done with what you planned to do. This helps you identify and keep your eyes on money drivers. Second, compare the actual cost to the comparable budgeted cost. If you planned to buy two DVDs at $30 each and bought one for $45, using my method, you know you have a potential problem. You could spend more than your budget. You needed two DVDs at $30 each. Now, you can buy a second DVD, only if it costs $15 or less.
I learned this lesson early, when I bought two Otis Redding records. I had budgeted £6 for three albums and spent £6 for two. However, since I hadn’t purchased other budgeted items, my bank account looked healthy; I had about $15. Instead of looking at my individual budget for money drivers, I bought another record for three pounds, only to find out later that the money for tube tickets and other budgeted expenses was sitting in the bank account, waiting. be spent. I adjusted my lifestyle: reduced travel, ate less, to stay within my budget that month.
The important thing about this is to always look at the money drivers for each budget item, never look at the money in the bank to decide how much to spend. In my examples, the number of DVDs and record albums were the drivers of money.
Only Trap
I think one of the most profound quotes that affects the way we spend is this quote from Benjamin Franklin: “Beware of small expenses. A small leak will sink a big ship.” How many times have we decided to buy an item because it only costs one, two, five, ten dollars. We forget that these amounts add up. My second lesson was to never spend when I decided it was only a small amount. I learned from this that I was spending not because I needed the item, or even wanted it, but because it was a small, insignificant amount. This was a simple but profound lesson to keep me on track.
I know what I spend cheating
This is the hardest thing to convince people. We are sure we know how much we spend monthly and on what. I quickly learned that I didn’t, and my experience suggests that you don’t either. However, you think so. When I first recorded every item I spent and my spending motivation, I was shocked at the size of the leak! This is related to the previous trap, especially when we spend loose change.
I decided early on that I needed to track my spending regularly, because small leaks would sink my boat!
Today, I use computer software to help me track my expenses. Also, I regularly take stock of where I am and compare it to where I should be, and adjust my behavior as needed. Is this difficult and time consuming? Conversely, when you know where your funds are going, you have peace, confidence, no financial stress, and spend less time figuring out where it is. Try it; You will be pleasantly surprised!
I encourage you to avoid the three budget traps before taking control of personal finances.
Copyright © 2012, Michel A. Bell