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Why budgeting is like a visit to the dentist

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If given the choice to do a budget or have dental work done, many people would be on their way to the dentist’s chair faster than you can say novocaine. I’m really not sure why so many people avoid doing a budget. Maybe they don’t know where to start, think it’s too much work or don’t want to face any issues that might be uncovered; but from my experience as a financial advisor, I can tell you that it’s easy to get started, not a lot of work to maintain, and that ignorance is most certainly not bliss.

When I first got married, my wife and I sat down to figure out a budget. As a business graduate, I felt it was a pretty straightforward process: itemize our expenses, subtract them from our cash flow and voila, whatever we had left was ours to decide what to do with. Makes sense right? Well I thought it did too, until I realized a vital flaw in my equation: that simply capturing current expenses like cable, groceries, mortgage etc. is really just the starting point. It also didn’t act as a guide for us. What I left out were our future expenses. You see, just because an expense doesn’t hit you right away doesn’t mean it isn’t real.

When creating a budget, once you have designated all your current expenses, spend some time thinking about your future plans and purchases. If you are hoping to start a family in a few years, then you’ll need baby furniture, diapers and a stroller for starters. Add an allocation for it in your monthly budget. Planning on taking a major trip in 12 months? That’s another future expense to be added to your spreadsheet. As you consider your planned future expenses, your budget starts to better reflect the reality of your present and future needs, and your net income (i.e., what’s left over) will probably start to look a little different.

And then there are the unexpected costs -- the things that you don’t see coming. If you own a condo you probably know that part of your condo fees go to a reserve fund. This is money that gets set aside for longer term maintenance or “unexpected” repairs. Using this model, if you own a home, you’ll eventually need a new roof or to replace an old appliance. What about your car? Eventually you will either need to replace or repair it. The funny thing about unexpected repairs is that they really shouldn’t come as a surprise, yet so often it’s these sorts of events that throw us a big curve ball. So when creating your budget, make sure to set money aside in an emergency or slush fund. That way when unexpected things crop up (and they will), you won’t have to scramble to figure out where the money is going to come from.

To put your new budget into action, you’ll need to turn future expenses into current ones. Some people like to open separate accounts for things like vacations or home renovations to track their savings, but you can just as easily keep a column on your spreadsheet.

Another major benefit to including future expenses in budgeting is that it will allow you to prioritize what’s important to you and as a result, you’ll become more mindful of your spending. For example, if you love to travel and plan to take an elaborate vacation each year, once you include the cost in your budget, you’ll be able to see what you can actually afford. If, after allocating for your biggest priorities, you find that you’re in the negative, you’ll need to decide which areas you want to cut back on. If reducing the number of times you eat out each week allows you to enjoy a fully paid trip next year, the decision becomes easy.

And don’t forget to devote a line item to your longest-term goal … retirement. The amount can be $50 a week, $100 or really, any amount that you decide but make it a priority. Consider this: $100 a week at 6% would grow to over $200,000 in 20 years. And that assumes you’re starting from nothing. Save $200/week and you’ll have over $400,000.

A final thing to be aware of is that expenses tend to expand as income goes up. Very often people believe that when they make more money, they will be able to make up for the debts they have accumulated or shortfalls in savings. But what often happens is that as we make more money, we tend to start spending more. Nicer cars, homes, restaurants and clothing all become the new norm and so instead of saving more, debt continues to grow, creating a vicious circle.

When it comes down to it, creating a budget really is just simple math but the benefit is a lifestyle of mindful spending, achieving priorities and living within your means.