Descriptive budgeting

Budgeting can be a real downer if you've never done it before, since it seems to limit your freedom to do what you want with your own money.

However, let me point out an important budgeting fact: everyone has a budget; it's just that many people don't know what theirs is.

If you've ever wondered why your income doesn't afford you more savings or a better standard of living, the first step in budgeting is to look at it as descriptive rather than prescriptive. What I mean is: don't start by designing a budget to control your expenditures; rather, simply write down what your expenses are.

In the first draft, it doesn't even have to be that accurate; just include the expenses you can think of off the top of your head: housing, groceries, utilities, entertainment, transportation, etc. Then, for a couple of months, make your purchases by debit card, or (a bit more dangerous for those who aren't good with money) credit card, so you can track your expenses and see whether they match your prediction. Adjust your prediction until you get to a precision that satisfies you, call the remainder "petty cash", and now you've got a good picture of your cash flow.

The bigger the petty cash account, the easier it is to write the budget, but the less precise it is. If you're ok with not knowing where, say, 20% of your income goes, that's fine. Hey, it's your budget.

Once you have a budget that matches your actual situation, you can look at it and decide whether you are getting the results you want from your hard-earned money. Only if you are unsatisfied with your budget do you need to modify it and change your spending habits, making your budget increasingly prescriptive until you like what you see. Start with the biggest expenditures, since changes there will have the largest impact on your bottom line. You can refine your budget as you go until you get the effect you want.

And take it easy: unless your debt is spiraling out of control, there's no big rush. For our family, we took a leisurely 7 years or so to refine our initial descriptive budget into our current budget. We tweaked it every time we felt we weren't getting the results we wanted. Encouraged by watching our savings grow, we've now got quite a detailed budget, with just 3% of out income going to petty cash, and the rest accounted for.