You know what? My first budget was a total and unmitigated disaster. It was badly constructed, poorly executed and it never did what a budget is supposed to do, help me manage our money better. Yep, don’t be surprised. Many will have you believe that budgets are for saving but they are not so much about that as it is about sound money management.
Now this is something that my first budget never achieved; it felt like a straight jacket rather than a comfortable, worn out shoe and eventually I rebelled. But let me tell you about the evolution of The Money Principle Budget(ing) from the very beginning.
To the loyal readers who have been following The Money Principle for some time and have already gleaned something of my past, it is already obvious that I did not have even a hint of a budget in my hedonistic past. In fact, it was worse, much worse. Most people roughly know how much they earn; I didn’t. Most people check their bank statements at least once a year, I didn’t look at a statement for close to nine years – I only knew we have completely run out of money when the ATM machine refused to give me cash for lunch.
And even people who know approximately what they earn and have a vague idea of what they spend are as far from budgets as they are from the sky. For me, budgets were a universe created by a bad science fiction writer.
Then I had my crisis, I had my epiphany! This came in the form of £100,000 ($157,000) worth of debt (this we paid off in three years, in case you were wondering). Everywhere I turned – which was mainly to friends, books and the almighty internet – there was one advice that kept cropping up. Start budgeting! Set yourself a budget!
How is someone who doesn’t know how much approximately they pay for a pint of milk to set a budget? By doing some research and making many assumptions.
What I ended up with, was a normative (prescriptive) budget that was set-up like this:
- I looked at how much our income is per month (I);
- I checked how much we pay on mortgage (M) and regular debt repayments (RDR);
- I looked at a bank statement, talked to my husband and worked out how much we pay monthly on other bills (B).
After that I decided that we are allowed a certain amount per week (ApW) that was to cover food, small expenses, son’s lunches and all else that may crop up. Hence
M + RDR + B = I
(At the time we had a negative cash flow that was so high that the first task is to get to a zero budget.)
After the initial feelings of self-righteousness and satisfaction the real disaster hit home. Real disasters are rarely about money – they are about the feelings that our dealings with it bring about. In quick succession I went through:
- Panic that living within the stated amount per week is not possible, my children won’t be able to go to school because they don’t have shoes and they are most certainly to go hungry. Also there was no budget-fat left. How were we to make it if something unexpected happened?
- Paralysis in that there was nothing further that could be done. Life had to go on, shopping for food and paying for services had to be done in the same way these were always done – with little awareness or choice. At the same time every time I had to spend something my stomach went into a spasm and my hands, with a will of their own, refused to go in my purse.
- Despair that we will live like that for a long time – feeling deprived and scared, with nothing to look forward to. No fun, no treats, no good times; from middle age we will slide into senility with no memories.
- Fatalistic acceptance of things as they are and the conviction that I have done something really bad to deserve this lot. Childish I know!
- Abject and complete failure when at the end of the moth it was impossible to reconcile our budget, our spending and our bank account. Even more seriously there were only two of those to reconcile – our budget and our bank account. We had no knowledge of our expenditure.
As I said at the beginning, this budget was a total disaster.
I believe, I made three mistakes that were later corrected.
- First, this budget was prescriptive and inflexible. My focus was on numbers and on fitting our dynamic lives within the set budget lines.
- Second, I didn’t have the information necessary to decide what is realistic spending.
- Third, I didn’t have any idea what is ‘normal’ for us and how to change this ‘norm’ (if necessary.
In other words, I focused on the limits that a budget can establish rather than on the opportunities for managing our money that a budget offers. Once I realised that, I developed The Money Principle Budgeting Tool: a money management tool to record income and different types of expenditure (some in quite a bit of detail), establish the ‘norm’ for spending under different budget lines and compare ‘budgeted expenditure’ and ‘actual spending’. This tool meant that I had, and still have, sufficient information to manage out personal finances efficiently and effectively.
Three years later we were debt free. Now our financial focus has changed somewhat but I still use TMP budgeting tool; and our lives never felt constrained or less nourished.
What is your experience of budgets?