Every November, families begin looking forward to a sumptuous meal — marshmallows with yams, stuffing, tossed greens, turkey and pies. These also happen to be key ingredients for a budget that works!
In 1972, Stanford University's Walter Mischel conducted a famous self-control experiment with preschoolers and marshmallows. Each child was placed in a room and given a plate with one marshmallow. They were each told that they could eat the marshmallow, but if they waited for the researcher to get back, they would get an extra marshmallow. The average child lasted three minutes and then ate the marshmallow. However, 30 percent had the self-control to wait the 15 minutes it took for the researcher to come back. Follow-up studies on this group over the decades found that these people were more successful in life. They did better in school, got better jobs as adults and had more stable relationships.
The "marshmallow mindset" is a key to budgeting. People who don't budget are like the little kids who want the marshmallow now. They think a budget is like a straitjacket that limits their options. In reality, a budget is a sign of self-control, and it will pay big dividends. You can skip the budget and eat your marshmallow now, or you can do a budget each month and maybe, someday, become a marshmallow millionaire.
A budget is not tracking what you spend each month, nor is it a general idea of what you think you will spend during an average month. The best budget stuffs all your expenses (including the money you've allotted for savings) into the income you expect for each month. Your November budget will be different from your December budget which will be different from your January budget, etc. Identify your income for each month, and then identify all the expenses that you will incur, accounting for all the places your monthly income will go. No leftovers — because leftover money, without a purpose, will spoil your budget.
Most people get in trouble with their budget by overspending on clothing, entertainment and food. This is because it is easy to "impulse spend" on these items. If you buy things using debit cards or credit cards, it can be challenging to track whether you are spending within your budget. The easiest way to put an end to this budget busting is to toss some green into your wallet or purse. Start using cash for budget categories where you tend to overspend. Set up a separate envelope or colored paperclip for food, entertainment, clothing and mad money. Each payday, take out the cash you would like to spend for these categories and divide it up. When the cash is gone, you are done spending until you get paid again. These "low-cal tossed greens" will definitely trim your spending.
In order to make a budget work, you have to "talk turkey" with your spouse each month. There needs to be a monthly discussion planning out your budget. You can have one spouse set up the budget, but both spouses need to agree to the final version before you start using it. Couples not used to having a scheduled budget discussion each month may feel uncomfortable starting this new habit, but it can be a key to avoiding money arguments later on. Work together, as a team, to decide how money will be spent. Don't make this a meeting where you beat each other up about past mistakes. Those football teams playing on turkey day have a game plan, working together as a team to win. You need one, too.
If you think doing a budget is mainly a math problem, you are doing it wrong. A budget that works involves P-I-E-S. There is a physical, intellectual, emotional, and even spiritual element to a great budget. A budget has to be a physical document. It can't be something you just keep track of in your head. It needs to be an intellectual exercise that includes all areas of spending. It needs to account for emotional issues that will arise because there will never be enough money to spend on everything we desire. And your budget will benefit if it includes a spiritual element. Best-selling financial author, Dave Ramsey, suggests that prayer can help you deal with financial issues. Involve all four elements of the "PIES," and you will have a great budget.
If you are not doing a monthly budget for your household, start now. You will especially thank yourself during the holiday season — since this is a time of year when many people make regrettable spending choices. You'll be thankful to finally have a budget that works and keeps you financially sound month after month.