Thursday, July 19, 2012

Budget is NOT a Four Letter Word: Knowing the Difference Between Discretionary and Non-discretionary Spending

What does the word budget mean to you? Do you immediately have a negative reaction and feel as if a noose is tightening around your neck? Many people have a negative emotional response and thus, the word budget is not often seen in a positive light. In fact, some people can't create and/or stick to a budget, simply because of what the word means to them.

Budget is not a four-letter word! And considering the challenging economy we're in, it should be a word that is not only embraced, but spoken loudly and without embarrassment, trepidation or fear.

Why is a budget important? Because more likely than not, you are among the more than half of workers out there living paycheck to paycheck and wouldn't it be nice to know where your money is really going? Wouldn't it be nice to have more control over your hard earned dollars and save for retirement and pay off debt? And maybe even take a nice trip or two and not completely panic when the water heater dies (because you've budgeted for home repair)?

The key to starting a budget for yourself or your family is knowing the difference between discretionary and non-discretionary spending.

Non-discretionary spending is what you MUST spend each month to keep a roof over your head, the lights on, and food on the table. Housing is usually the largest chunk of everybody's non-discretionary spending. And while we are less able to change non-discretionary spending over the short term, your decisions do play a major role in how much this is (i.e. do you really need a 5,000 square foot house for 4 people or 2 new leased cars every 3 years?)

Discretionary spending includes all the extras trips to Starbucks, entertainment, premium movie channels, vacations, etc. After you've paid all your bills, do you know where all your money goes?

To find out, start writing down what you spend. Carry a small notebook in your pocket or purse and write down the amount each time you make a purchase, either in cash, on a debit card or on your credit card. At the end of the month, total the amount in the notepad.

I know many people who have done this exercise over a few months and were completely surprised (and a bit depressed) about how much they were spending and how little they had to show for it. Spending a month on fancy coffee drinks, 0 on lunches out, or 0 on shoes and accessories that are hardly used is not uncommon. The people who I've talked to who have done this exercise often begin to question many of their purchases because they start to think of other ways they could be spending their money and having it work for them.

There's nothing wrong with spending a day on double latte if that's where you want your money to go. But you may decide that you'd rather spend that 0 a year on a new couch, use it for that trip to Paris you've always wanted to take, or save it for next year because you know little Johnny is going need braces.

If you have spending or saving goals and really want to meet them, knowing where your money is really going is the best place to start.

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