Finance Wanted.

By David Lewis

There are numerous methods of budgeting, which include simply balancing your checkbook and making sure you keep track of all of the checks you write. There are software programs like MS Money and Quicken that allow you to see where your money is being spent. There are a few pencil and paper methods where you are told to write down everything you spend your money on and make sure that that never exceeds your monthly income.

The common trait among all of these methods; however, is that they take a pragmatic approach to budgeting. Rather than relying on principle, they treat each expense or โ��budget problem as unique. As such, there can be many different methods to budget your money, and the success or failure of a particular system depends on whether it works� (at least in the short-term) regardless of the long-term consequences of the method. It is not surprising, then, that we see several different popular methods all claiming to be the right one� or the best�.

These methods are also 100% reactionary. Which means you are passively reacting to your money, your bills, and your financial life in general. The system depends on you reconciling your checkbook, or your spreadsheet, or whatever you're using after you've already made purchases. These methods can only record and track your spending history, not help you control your current and future financial situation.

Then, there are what I call the "inspirational" methods. These are budgeting "tips" which set unrealistic expectations on you such as "just cut back on going out to the movies" or "always buy the generic brand" when grocery shopping. These methods attempt to control your lifestyle and dictate your wants and desires.

It is no surprise that, usually, these systems fail for most people because they present you with a dichotomy (a split) between "needs" and "wants" that makes life generally unpleasant. I'm not saying that there aren't things that you should cut back on or that you don't need to change your lifestyle in order to become financially successful. But, whatever changes you make to your life should be your choice, not your advisor's.

Envelope Budgeting

You've probably heard of "the envelope method". With "the envelope method", each expense is written down on an envelope. Your entire paycheck is divided up into each envelope according to when each expense is due.

When you take money out of that envelope, it's gone...so it's rather easy to keep track of how much money you have left. However, it's not always clear how much money you've spent, or how much money you are actually spending on a particular area of your life.

How do you come up with a sensible grocery budget? Do you spend too much money on cigarettes? Going out to eat? On entertainment? How do you start cutting back on gasoline use? School clothes for the kids? Groceries? Do you alter your lifestyle now in exchange for a better life later? The envelope method can't really help you do this.

Abstract Budgeting

Abstract Budgeting reduces and simplifies all of the many financial problems in your life by using objective principles of concept formation and sound financial theory that actually works in practice. The budget is basically on "autopilot".

Think about your gas and electric bill for a moment: Most utility companies offer their customers a "budget" that automatically ensures that they are paying the right amount of money every single month. It's easy. it's simple. You don't have to think about how much gas and electric you are using. The same thing happens when you consolidate all of your outstanding debts into one easy payment. Part of the reason you do it is because it's EASY.

The funny thing is...you can arrange your entire financial life this way. There's no willpower involved...except perhaps the willpower to get started. You don't need software, you don't need to micromanage your life, and you don't need to spend hours balancing your checkbook. In short, Abstract Budgeting allows you to manage your money instead of the other way around.

David Lewis is a member of the International Association of Registered Financial Consultants and an expert on budgeting. He also offers free information about financial planning.