Knowing is half the battle. It is hard to plug a hole when you cannot identify its location. Budgeting shows you the problem by allowing you to see your real expenses… not what you think they are. Unfortunately, we sometimes have selective memories when it comes to recalling just how much that last mall or electronics store excursion cost us. The little things do add up, especially over time. That’s why a budget is so imperative.
Those who win with money generally know what their expenses are, even down to nauseating details. That’s one of the reasons they have real money in the first place. In fact, many can answer yes to each of these three questions whereas most people cannot.
1. Do you know how much your family spends each year for food, clothing, and shelter? 2. Do you spend a lot of time planning your financial future? 3. Are you frugal? (Adapted from Millionaire Next Door)
A dated but relevant article from the New York Times highlighted the fact that many people are not only ignorant of how much debt they owe but that they do not want to know. Here are some sobering statistics according to the 1998 Federal Reserve Board report on consumer finances.
-87% of families whose head of household is between 35-54 have debt -60% have mortgages -50% have installment loans (i.e. car loans) & 50% have credit cards.
Moreover, from 2001 to 2004, outstanding debt rose 33.9% (2006 Federal Reserve Board report).
Often, we do not realize the problem until it is too late. This is the case for many families now. According to the American Banking Association, consumers fell behind on car, credit-card and home-equity loans at the highest level in 15 years (I will provide my commentary on this report this Wednesday) .
For most people, the simplest way out of this problem is to cut expenses. However, you have to first identify those expenses. This brings me back to the budget. A budget is spending every dollar on purpose: giving every dollar an assignment. By both planning your expenses and tracking them, you can make sure that you are reaching your financial goals and identify any hindrances. The budget will show you the way.