Name ___________________________ Class _____________________ Date __________
BUDGETING: WISE CHOICES FOR YOUR MONEY
The Trouble with Budgets
3
Budgets can be difficult to stick to, but learning to use them is an important part of fiscal
responsibility. ◆ Read the article below, and then answer the questions that follow.
your fixed costs (rent, utilities, etc.)
and then allows you to determine how
you want to spend or save the leftover
money—your discretionary income—
every month.
By comparison, most people use their
budget just to get a rough idea of how
their fixed costs—those big, monthly
items such as a mortgage, rent, car
loans, and utilities—match up against
their income. Then they try to cram the
remaining dollars into categories based
on historical patterns. The thinking goes
something like this: “If I spent $100 a
month on average last year on magazines
and newspapers, I had better budget for
that this year.”
Never mind that you rarely read the
daily paper during the week. Maybe
instead of budgeting that $100 by default,
you should find a more productive use
for the money. That’s where the spending
plan comes in.
A spending plan shows you exactly
how much money you can spend each
month on variable costs for dinners
out, spur-of-the-moment purchases, a
wardrobe makeover, and newspapers and
magazines, or how much you can funnel
into savings or toward paying off creditcard and other debt. Knowing exactly
what you have to spend—and, more
important, where you spend it—gives
you power over your money by providing
the analysis necessary to stop spending
wastefully and start spending smartly.
That’s the spending plan’s biggest
advantage: You’re in control of your
money instead of feeling as though your
money controls you.
Many guides to successful budgeting
like to pump you up by describing how
“Budget” is the four-letter word of
personal finance.
People despise budgets, and they despise
the word because it immediately conjures
feelings of confinement, as though it’s
because of their budget that they can’t live
the life they think they deserve. So even
though everyone generally recognizes that
they need a budget, budgets are, like New
Year’s resolutions, usually abandoned
fairly quickly.
Yet budgets don’t have to feel
constricting. Budgets can be liberating.
They show you exactly what you’re
spending on things that aren’t really
important to you. And working with a
budget can help you realize that you can
afford the more important things if you
let up a little on the less important things.
Let’s start this lesson on budgets by
rethinking the word itself. Instead of
“budget,” think in terms of a “spending
plan.”
A budget and a spending plan share
the same goal: to help you manage your
income better. However, how your
brain relates to money psychologically
determines how successful you are in
sticking to your budget. If your brain tells
you that you feel frustrated with a plan
that doesn’t let you spend what you think
you can afford to spend, then your budget
isn’t going to work. If, on the other hand,
your brain tells you that you’re feeling
satisfied, that you’re using your money
the way you think it should be used, then
you’re far more likely to stick to the path
you’ve established for yourself.
So what exactly is a spending plan, and
how does it differ from a budget?
In essence, a spending plan matches
your known income each month with
Copyright © Pearson Education, Inc., or its affiliates. All rights reserved.
35
Name ___________________________ Class _____________________ Date __________
BUDGETING: WISE CHOICES FOR YOUR MONEY
The Trouble with Budgets (continued)
3
For instance, friends invite you to join
them on a weekend ski trip. The trip, you
figure, will cost about $200. You take a
quick peek at your spending plan and
see that you had penciled in $250 for new
clothes to update your wardrobe. So now
you have a choice: clothes that you can
put off buying until next month or later in
the year, or a ski trip with friends?
Without the ability to see such choices
in black and white on their budget, most
people simply do both, either taking on
debt by whipping out their credit card
or dipping into their savings. They do so
because the human brain has an immense
ability to compartmentalize. We spend on
the clothes we need and immediately put
that expense behind us, forgetting about
it because it’s in the past. The trip is in the
future, so that comes out of future money
that will come in our next paycheck. We
book the trip; we can afford it. The
problem is that both the clothes and the
trip come out of the same pot of income
for the month.
For the first few months, putting
together a spending plan will seem
tedious as you get used to the process. By
the third month, however, you’ll know
the process; by then, many of the variables
won’t change and you’ll be able to track
your plan in very little time.
easy it is to cut excess expenses from your
budget by, say, simply resisting the urge
to buy a $5 cappuccino every day.
And that’s great—if you can stifle that
yearning to caffeinate. But that’s precisely
the problem. Budgets don’t drink coffee;
you do. Once a budget starts making you
feel guilty for spending on small pleasures,
you’ll quickly abandon it; this, in turn, will
probably leave you feeling as though you
failed again at corralling your finances.
Fear of failure can make you just forgo
budgeting altogether, an attitude that
makes you financially vulnerable, because
you’ll have trouble saving for what you
really want and preparing for emergencies,
possibly causing you to become dependent
on credit to fund your life.
Spending plans are more user-friendly.
They can be complex, or they can be
simple. Whatever the case, the secret to
sticking to your budget is spending your
discretionary dollars on what is most
important to you and eliminating what
you know you can live without. When
that happens, your budget becomes
integrated into your thinking about
money, and you inherently know how
unexpected purchases will jibe with your
spending plan. That’s where spending
plans really stand apart from budgets.
Since you draw up a spending plan at
the beginning of every month, you have
the flexibility to switch your plan on the
fly without throwing off your spending.
—Jeff D. Opdyke, The Wall Street Journal Classroom
Edition, December 2006
Questions to Think About
1. What are three financial goals that you
really want to achieve that you just aren’t
making progress toward?
3. What changes can you make to your
spending priorities so you can get the
things you really want without getting
into debt?
2. What are three items that you regularly
spend money on that you either don’t
use much or don’t care that much about?
Copyright © by Pearson Education, Inc., or its affiliates. All rights reserved.
36