Many times in the course of my business I ask clients–both individuals and businesses–if they have a budget. Probably about a 1/4 of the initial answers are “no” and 3/4 are “yes”. I then pose the question to the 3/4 that say “yes”, “Is it written down?”. Most of the answers to this question are “no”, which basically means they should have answered “no” in the first place. The reason is that a budget must be written down or else you’re keeping it in your head, and if you’re keeping it in your head, then it will not be a correct budget. It won’t be correct because 1) human error will cause too many mistakes in this “mental” budget and 2) we are too biased for a budget in our head to be effective. By biased, I mean that when we want something, our first impulse is often to justify getting it. We therefore start to “shift” things around in our mental budget–for instance, “I won’t spend so much on groceries this month (or on the movies, or on eating out, etc.) and THAT’s where I’ll get the money to buy this new item”. We then purchase the item, and although we think we’ve cut back on these other expenses to compensate, we typically have not–because we’ve forgotten to, or some other such reason–and because we’ve kept the budget in our head, we never realize we’ve overspent (although we keep asking ourselves why we have no money when we’ve been budgeting). Now, in all fairness, it can be tedious to keep up with a budget–even for accountants–but it’s such a useful tool that we can’t afford to ignore it. So why do we never put a budget (or our existing mental budget) to paper? Part of it truly is that we are busy, that we don’t know where to start, that we don’t know whether to use our computer or simply use paper, or that we don’t know how to come up with accurate amounts. But before all of this, I find from speaking to clients (although they may not say it directly, or may not even be aware of it) that they are afraid of what the budget will tell them: “I don’t want to create a budget, because it will show me how much money I DON’T have”. This can be a powerful fear to overcome. But it helps to realize, that although we may see a negative number at the bottom of our budget (but hey–we might not!), it is just a starting place–a starting place from which we can begin to improve to a positive number. If that realization doesn’t help, we can combat the fear of budgeting with a worse fear: that without a budget, we may actually be driving toward the edge of a cliff, knowing that we’re going to drop off, but not…quite…knowing…juuust when exactly…we’re going to drop off–maybe it’s 1/2 mile, one mile, five miles (1/2 month, one month, or five months). In future blogs, I’ll be sharing some of my ideas for how to get started on a budget. In the meantime, please see my website www.edanielmillercpa.com for services I offer, or please feel free to contact me at dmiller@edanielmillercpa.com.
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