Budgets

Budgeting Basics: Budgets Matter

Our financial lives can be summed up by a very simple equation:

Money Earned – Money Spent = Money Saved + Money Given

Everything about personal finance boils down to this.  All the talk about debt, credit cards, 401(k)s, IRAs, investing, stocks, bonds, asset allocation, mutual funds, frugality, simple living, DIY, budgeting, high-yield savings accounts, and additional income has as its goal the enlargement of this sum.  It is an unavoidable necessity.

Some of these topics attempt to generate more money - like investing – while others seek to reduce expenses - like frugality.  I think both are incredibly useful, but it is my belief that those who can reduce the amount of money that they spend have a long term advantage over those that simply focus on earning more and more money.

A case in point: eating.  Once you learn to eat on under $2  a day (reduce expenses) you experience a cost reduction that can be life long.  A reduction of food costs from $4 to $2 a day will reduce the lifetime expense on food for a 26 year old male by $54,020.1   I would need to earn an average of $1350.50 more over each year of my working life (up to age 66) to make up the difference.

Alternatively,  if I were to cut the costs from $4 to $2 a day and I were to earn that additional $1350.50 each year I would see an net swing in my available cash of $2810.50 (the $1460 saved on food expenses plus the $1350.50 earned).  Over a 40 year period of doing this I would see a nice tidy sum of $218,272.73 – assume a 3% rate of return per year. This sum would feed 299 people for a single year!  Obviously earning more and cutting costs is much, much better than just doing one or the other.

To me, budgeting is a way to give yourself this “both, and” perspective that is so important to the financial equation of our lives.  We need to focus on both our income and our expenses so that we can maximize savings and the amount of things we can do to improve the collective condition of humanity.

Budgets only really matter because they help us maximize the use of our money.  Budgeting for budgeting’s sake will never satisfy you or make tracking your income and expenses anything other than a chore that you want to avoid.  It is only when we see budgeting as a tool that helps us do something great will we ever take budgeting seriously.

Increasing earnings and reducing spending is good for you and good for others.  This is a mighty bold claim – but I really, really believe it. 2  A life that primarily seeks the earn more to spend more (consumerism) is an empty and shallow life by any serious/coherent worldview.  Instead, we3 should view our ability to create wealth for adding little-to-no objective value to the universe as a great privileged by which we can add real, objective value to the universe by alleviating suffering and promoting social justice.

Budgets, though simple and extremely personal, can have a large impact on the common good.  Budgeting is not the only financial tool that can be used to acheive the ends of greater savings and greater giving, but it is a useful tool for many people who want to become much more concious of their financial habits.

  1. Assuming a life expectancy of 100 years and relatively constant food prices – this is assuming a lot! []
  2. Just because I believe it doesn’t make it necessarily true, I am just saying it because I want readers to know that I don’t just think it but I order my life and my actions that way.  I do it imperfectly, but I do do it. []
  3. We – meaning the vast majority of Americans who make lots of money doing silly things like marketing, entertaining, pencil pushing, silly widget making, politicking, etc []