The need to become more financially literate seems to be growing by leaps and bounds. World financial crisis, recessions, high unemployment, credit card debt, national debt, foreclosures, bankruptcy, outsourcing, etc. create a scary financial environment. It seems that almost everyone has financial problems and is struggling to solve them. The search for a “silver bullet” that can solve most financial problems seems continuous. Of course, we all know that complex problems usually come with complex solutions.  Seldom does one action make everything better and this is true in financial matters as well. There is one action, however, that almost all of the personal financial literature identifies as critical to financial fitness and that is creating and living on a budget.

Application Insights-Should I Focus On Creating And Living On A Budget? accepts the need for answering the question affirmatively and builds on the view by helping people decide how detailed their budget should be and how committed they should be to its recommendations. Because people value things differently and have varying life’s goals, their respective budgets will be substantially different. In reality, people also differ dramatically as to how complete and thoughtful their budget is and how much they employ the budget directions in their life. Creating a budget and related plan because someone told you to and not using them in your life is, frankly, a waste of valuable time. A thorough review of these related budget questions will help you feel comfortable that you understand the benefits of the budgeting process and that your level of commitment is consistent with your personal values.

• As stated earlier the questions relate to how detailed your budget should be and how committed you want to be to its directives. This Application and related Insights concede the need for budgeting and the related action.  It is not a whether question but a how much question. This perspective focuses on marginal thinking and asks the question of what are the additional expected benefits compared to the additional expected additional costs of each level of detail and strength of commitment.
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• Knowing your values and having a clear understanding of your life’s goals now and in the future will help build a complete and useful budget. If travel is a highly valued activity, for example, your budget must have a travel category and, upon reflection, it must have a realistic designated resource commitment. If clothes are not that important to you, the percentage of your income designated to this item could be substantially lower than most other people your age. This thought process needs to be employed for all possible expenditures.
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• Once you are satisfied that you have a complete budget-all of your life’s categories are listed, identify alternative resource commitments for each. This is a time consuming task and the more time and energy you employ the more you will feel comfortable with your decision regarding how much you will rely on your budget for everyday choices. Remember to be sure to look for high price and lower price ways to meet the items listed in your budget.  Is travel by car and camping along the way valued highly or is your travel defined as five star hotels with air travel. The more complete your list of alternatives, the more accurate will be your weighing of your options.
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• As is often is the case, most alternatives will have expected benefits and expected costs. Your job is to identify these measures and weigh them against each alternative. Be sure to include opportunity cost in your cost calculation. Camping may not be as great as that five star hotel taken alone, but adding a better car to the mix due to the savings earned by making the camping choice may nix the Marriot Hotel via Delta. Note that as your list of alternatives begin to narrow as you conduct your evaluation and cost and benefit weighing, you may start to change some of the resource amounts originally placed in your beginning budget. Yes, these changes will allow you to rethink many things. Does this ever end? No, but the more you are involved in the process the more you will make good choices regarding how much you will follow what the budget dictates.
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• This question gets more time consuming and more interesting/complete when input from others is added to the mix. Just remember that a complete budget that is connected to your life’s goals is a true reflection of who you are and who you want to be. It is personal.
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• So yes, you want to construct a budget following all of the general guidelines. The question is how detailed and how committed are you to your creation. Chances are the process you just completed has elevated the position of budgeting and consequently your commitment to it.

   
ADDITIONAL SOURCES

1) Budgeting 101.