11.6: Budgeting

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To develop a budget, make a list of all your fixed expenses which are monthly expenses that are set and do not depend upon your consumer choices. These typically include rent, mortgage payments, car payments, and insurance payments to name a few. Now make a list of other things you spend your money on that relate to household matters. These fall under the definition of variable expenses which are expenses that can change from month-to-month based on needs and wants and which are not fixed expenses. These typically include food, gasoline and car maintenance, pay-per-view, groceries, clothing, etc.

Step 1 in budgeting is to record your income. Step 2 is to record everything you spend for an entire month. Table 3 has hypothetical numbers placed in it to demonstrate how the budget works. It budgets $\$ 1,091$ dollars per month. This would be the amount you spent in the first month in each of your own categories. In the second month, you deduct what you spent from each of these categories.

Notice that three of these budget categories broke even. They are also the three fixed expenses. Notice also that three others had left-over monies. The "Fun" category was overspent by $\$ 40.00$, which could be filled with leftovers from the other categories. When a category is overspent you should decide if it requires more allocation (for example increase Fun to $\$ 90.00$ per month) or control spending to keep it under the limit. This hypothetical month had $\$ 128.00$ left over and it could be saved or rolled into the next month in case unexpected expenses show up.

Fundamentally, a budget tracks where you spend your money, how much you currently have, and how to strategize savings for future plans. Wise college students learn to budget sooner rather than later so that as their family size increases, so does their skills in budgeting.

The hedonistic treadmill emerged as a concept in recent self-help books of financial matters. Hedonism is the pursuit of pleasure as the main goal of one's life with pleasure being the core value of daily life. Many in the U.S. have fallen into the trap of seeing pleasure as the best goal and a purchase as the best way to acquire that pleasure. Thus, they get on a treadmill of purchasing which cannot provide long-lasting pleasure in most cases, and requires new and more varied purchases to renew that short-term pleasure over and over. The hedonistic treadmill would not be a major problem if one were very wealthy; but, for average middle class person, the marketing pressures to buy, the patterns of seeing a purchase as a path to happiness, and the availability of easy to obtain credit make it very difficult to get off the treadmill. This pattern can be very destructive financially and can undermine the family system as a whole. Figure 5 shows a list of financial best practices that can be very useful to follow for stability and security in the family.

It surprises some people to hear that debt can be a good thing. It can be if debt is used wisely. Credit cards are a necessity for most and can be useful in building a strong credit score. To control credit card use is simple. Spend with it very conservatively, pay your balance off every month, never spend up to your limit, and make sure others can't use your card. How well you use and manage your credit card now will influence how well you qualify for car and home loans later in your life.

Table $\PageIndex{1}$: Your First Months' Budget
Rent/ Mortgage	Car Payment /Bus Pass	Insurance Payments	Cell Phone	Food	Utilities	Fun	Savings
$250.00	$125.00	$76.00	$75.00	$275.00	$190.00	$50.00	$50.00
-$250	-$125.00	-$76.00	-$49.50	-$10.00	-$142.00	-$15.00
				-$25.00		-$25.00
				-$17.00		-$17.00
				-$38.00		-$18.00
				-$14.00		-$10.00
				-$12.00		-$5.00
				-$45.00
				-$15.00
				-$20.00
				-$9.00
				-$25.00
Monthly spending= -$250.00	Monthly spending= -$125.00	Monthly spending = -$76.00	Monthly spending= -$49.50	Monthly spending = -$230.00	Monthly spending= -$142.00	Monthly spending = -$90.00
Leftover= $0.00	Leftover= $0.00	Leftover= $0.00	Leftover= $25.50	Leftover= $45.00	Leftover= $48.00	Leftover= -$40.00	Leftover= $50.00

Mortgages are an example of good debt provided your loan is not beyond your means. Homeowners have economic advantages that renters do not have. Mortgage interest can be deducted from taxes. Having a mortgage and paying your monthly payments on time is an effective way to build your credit score.

Guarding your credit score is crucial for your family's financial security. In the 1950's two researchers began a scoring system designed to provide a standardized credit score for everyone in the U.S. The FICO Score is the most common credit scoring system in the world and is named after Bill Fair and Earl Isaac-Fair Isaac Corporation score or FICO. Your credit score is comprised of your payment history, how your credit capacity compares to your usage (not too many unpaid balances), how long you've had credit, which types of credit you've had, and finally how many times your credit was checked. ${ }^{14}$ There are many studies that demonstrate that misusing credit negatively impacts college students' overall lives and experiences. ${ }^{15}$

Strategies and Rules for Family Finance

Beware of materialism (avoid the hedonistic treadmill)
Use debt wisely (Carefully controlled credit card use and secured loans for cars or mortgages)
Guard your credit score (FICO)
Have a $5,10,15$, and 20 year financial plan
Don't buy in a hurry (Rules of Three)
Save for emergencies (3 months)
Don't play the "extra money" game (money is real, plastic, checks, cash, or electronic)
Save, invest, and purchase (buy low and sell high-401k)
Become well versed in your guilt, shame, fear issues about money (Most resemble issues about sex, love, punishment, \& food)
Put your investments in hard to reach places (CD's, funds, bonds, etc.)
Never fall for the something for nothing con game (something always cost at least something)
Get expert help when uncertain (investor, banker, etc)
Treat your money with dignity and respect and it will respond in kind

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