We all have different attitudes toward money that shape how we spend it and what we spend it on. For instance, some people take the approach that we only live once so we should spend money to be as comfortable as possible and have as much fun as we can. Others are committed to living frugally and spend as little money as possible for living, trying to save as much as they can. When it comes to creating a balanced budget, either extreme is problematic.
Spending every dime we make, and sometimes more, has led to a debt crisis in America. We are sinking in piles of bills we can no longer afford to pay. Even if the debt is well-intentioned, like student loans or business investments gone bad, we find ourselves increasingly strapped in a financial bind that is tough to break. This scenario is all too common and has led to a revolution against debt.
Financial teachers like Dave Ramsey and Suze Orman have led the outcry against unfettered consumer spending and debt loads that seem insurmountable. The message is a noble one of wise budgeting and debt-reduction. Still, if this perspective is taken to an extreme, it can lead to an over-emphasis on saving that fails to recognize money for what it is – a resource to be used in a variety of ways.
At the other end of the spectrum are those who use their money to enrich their own lives. They buy toys, clothes, vacations, and more to increase their comfort and pleasure. Their spending is often somewhat self-centered and takes a short-term perspective without proper planning for the future. They have embraced the principle that money is a resource to be used, but they may find themselves over-extended in the long-run.
The secret to taking a balanced view is in recognizing the three-pronged approach to using money. Money should be used for spending, saving, and giving. Each area is vital to creating a balanced budget and maintaining a proper perspective on finances. Like a three legged stool, these three areas work together to support a comprehensive approach to managing money.
Spending: We all have to spend some amount of money to live. We need food, clothing, and shelter, which all cost money in varying amounts. Of course, we don’t need extravagant food, the most expensive clothes, or the biggest house, but we do have to pay for our basic living expenses. But spending goes beyond living expenses to things that bring pleasure as well. For instance, spending money on a well-earned vacation or simply purchasing a new music CD can enrich our lives in meaningful ways. While these expenses aren’t necessities, they are worthwhile expenditures when properly planned and accounted for.
Saving: Putting money aside in savings on a regular basis allows us to plan for the future, prepare for the unexpected, and build a surplus for spending later on big ticket items like houses, cars, or educations. Most importantly, saving cultivates a long-term view of our finances that reminds us money is not just about today. Plus, when we save money, we gain a sense of security and achievement as we move toward the future.
Giving: No budget is complete without the vital area of giving. Our money should not be a purely self-centered resource. If we use our money only for ourselves and our families, we are missing a major part of the way money can connect us to a larger community. First, we should give to support those in need. It is important to use our resources, including money, to benefit others. Second, we should support community activities to stay active in our neighborhoods and community networks. By investing in our communities, we are building a stronger social fabric for everyone. Finally, we should give to causes that are important to us. Whatever we are passionate about, or whatever breaks our hearts, these causes should receive a portion of our resources. This connects us with a greater good and empowers us to participate in changing the world.
When we create a budget, the key to taking a balanced view is in allocating our financial resources in each of the three areas: spending, saving, and giving. The amount that is allocated in each area will be different for each person depending on existing financial obligations, like mortgage or rent payments, and the amount of money available (net income). But the goal is to make sure each area is being addressed in some amount. If you have a lot of debt, you may be paying more bills and saving less at first. As the ratios in your budget change, you will be able to re-allocate your money to spread it more evenly between the three areas.
A good starting point to work toward, or budget now if you can, is to spend 80%, save 10%, and give 10%. For some this will be easy to do, but for others it will take time to work up to living on 80% of their income so they can give and save the rest. The important part is to do what you can now. We all have to start with the resources we have. Recognizing the importance of spending, saving, and giving will equip you with the right mindset to use your money as a resource and create a balanced budget.
What do you think? Please let us know in the comments below. What is your biggest challenge in creating a balanced budget? What tips have helped you budget your money wisely?