Every January my wife and I convene what I call our annual “summit meeting.” As the name implies, we discuss, negotiate, analyze, arm wrestle, horse trade, argue, make up, and then adopt my wife’s Plan for the Year. It’s my job to convert the summit meeting’s outcome into a family budget.
What is a budget?
A budget describes how you plan to run your life over a period of time. You make assumptions to forecast income and living expenses. The resulting dollars & cents plan is commonly called a budget, but it’s the thinking and planning—the summit, in other words—behind those numbers that’s valuable.
I think smart money decisions require two ingredients: Good judgment and good information. No matter how good our judgment, I’ve found we can’t make sound money decisions without the vital information impossible to get without creating a budget.
You can build a budget with a calculator, a notepad, and a pencil. Or MS-Excel or any other spreadsheet software work great. Or you might like using one of the many web-based budgeting tools, for example:
“Why” is Where It’s At
Budgeting is not about accurately predicting the future. Reality—your actual income and expenses—will differ from your budget. No worries. Budgeting is about understanding the reasons for the differences between your budget numbers and how things actually turn out. This understanding will give you the information you need to make smart money and lifestyle decisions.
Document, Document, Document
No matter what tool you use to help you budget, remember that the key to creating a useful budget is documenting your budget assumptions. Unless you’ve recorded how you arrived at your budget figures, you may not know why reality and your budget didn’t match. And it’s knowing the “why” that’s going to help you make decisions to stay on track and reach your goals.
More in a future post on how we use our budget to help us make money decisions.