Saturday, September 12, 2009

Budget 101 - Part 2 - Establish a Perimeter

There are probably 3 keys to effective budgeting.  Yep, only 3.  This is not rocket science.

  1. Create a Written budget
  2. Create the budget in the right order.
  3. Implement the budget
Of course, if you're married, there is a 4th key:  Create the budget together.

In our last post, we discussed the importance of Keys 1 and 4.  The next several installments will relate to Key 2, Create the budget in the right order.

Perhaps doing the budget in a certain order seems a bit silly, but I promise you, the whole process usually stands or falls on this step.

A typical budget process goes like this;  A motivated individual, or couple, grabs a sheet of paper and starts jotting down all the bills: house payment, car payment, credit cards, electric bill, etc.  Since the regular amount, or minimum payment is generally known, the numbers are fairly easy to come by.  After all these bills are added up, the sum is subtracted from the monthly income.  Finally, whatever is left over is written down, "for food".  Usually, that number is pretty small.  Already, the once motivated budgeter is a bit concerned.

Then its time to go to the grocery store.  Its amazing, how we budget food last, but go to grocery shopping the most.  Anyway, the once highly motivated, now somewhat concerned budgeter, goes to the store and buys groceries.  At the checkout, he/she is hit right between the eyes with a bill that totally blows their written budget out of the water.  Discouraged, the now disheartened, once highly motivated budgeter, pays for the groceries and trudges to the car.

As she/he loads the bags into the back of the car, the totally defeated, once highly motivated budgeter, says something like, "This is stupid.  Budgets don't work.  It can't be done.  It's all a lie.  Debt in inevitable.  I wish I'd never bought that stupid book."

I know it happens that way, because I talk to people almost every day who've done it that way.  Oh, and then there's the fact that I tried it that way..... several times.  Hey, I never said I was a quick learner.

The order in budgeting is crucial for morale.  But it also helps us align our spending with our priorities.  And most of us need to get our priorities in order.  Our spending patterns synch precisely with the order of what's most important to us.

I think of finances as a war.  It's a matter of survival and conquest.  And I'm determined to win.  My family and my own life are dependent on the outcome of this struggle.  So, just like a commander would be foolish to enter a battle without a plan, we would be equally foolish to expect to win the cash flow wars without a strategy.

The first step is to 'establish a perimeter'.  Most of us have seen movies where the invasion, or defense, force does just that to determine and protect their base of operations.  In the old westerns, it was, "Circle the wagons!"  But it's the same idea; form a boundry that protects what is most important.  Everything behind the perimeter line is mission critical and precious.

We want to build the 4 perimeter walls quickly and in this order (I'll explain the order later):

1.  North Wall:  God
2.  South Wall: Food
3:  East Wall:  Shelter
4:  West Wall:  Transportation

These are the 4 categories that we protect with our lives.  Once we have secured the perimeter, we can build a strong defense and later prepare for an invasion.  Yes, I said invasion.  Our long term goal is not survival, but conquest!

In our next post, we'll start building our perimeter walls.  If you just can't wait, you can get all the details right here.

Oh, don't forget you can always write to us with your questions.