Ahan Analytics, LLC

Budgeting Is Hard

Budgeting is the challenging nexus connecting what you WANT to do, what you SHOULD do, and what you CAN do. The first step toward success in budgeting involves understanding and aligning the roles each of these points play in your life. What you want to do reflects your values. What you should do represents your reality. What you can do reveals your possibilities.

Values, Reality, and Possibilities

Your values and reality must be compatible. If your values extend beyond your reality, the resulting discontent will work to undermine your budgeting efforts. For example, if your reality demands 60% of your income go to rent, food, and childcare, then you are well-served to value these necessities enough such that you do not spend more than 40% of your income on anything else (60% + 40% = 100% or all of your income). When your values and reality are aligned, then you can clearly and soberly budget for your possibilities. When your values and reality are aligned, you will tend to prevent your possibilities from undermining your budgeting. For this simplified example, 40% of income is the potential budget for possibilities; possibilities are NOT 100% of your income.

Success in budgeting also requires an understanding of how your financial decisions and actions impact other people in your life. How do those people define your values, reality, and possibilities? Do these people understand how and why your decisions and actions impact them? You can answer these questions clearly and soberly when your values include accepting accountability for your financial choices.

Accountability

Accountability does not require that others agree with your decisions, but accountability does mean that you accept responsibility for the results and impact of your financial decisions. If you expect other people to accept responsibility for the results of your choices, then you will include them in your decision-making process. If you cannot accept that participation, then you cannot expect others to address the problems that arise from your choices, whether the problems were anticipated or not. Deflecting accountability and responsibility on to others compromises your budgeting ability and reduces your ability to take control of your finances.

How to Handle Budgeting Uncertainties

Budgeting is hard and becomes even harder when staring down the uncertainties of the world that can destroy the best made plans. Uncertainty can come from the inability to earn enough income to meet realities. Uncertainty can come from making decisions with a significant range of potential outcomes. Regardless, you can prevent uncertainty from paralyzing you or demotivating you from accepting responsibility for your choices. Here are some general but key principles for managing uncertainty in budgeting…

• Maintain a specific and clear understanding of your income streams and the amount of uncertainty in accessing that income. The more uncertain the income, the less you should plan on using it.
• Prioritize budgeting around known income streams if the income uncertainty is particularly difficult to quantify. As much as practical, fund the possibilities with the uncertain portion of income. So if income comes up short, possibilities can be delayed with minimal disruption to your life. In other words, choose disappointment over destitution.
• Target using no more than your most certain income streams within the timeframe of that income. “Use” is a combination of your expenses, savings, and charitable giving. If your income is monthly, then your use of money needs to be planned on a monthly basis. Plan to spend uncertain income only after it materializes.
• Make a habit of assessing the range of potentially impactful financial events in your life, from the certain to the uncertain. If unexpected events keep happening, especially the same ones, start expecting the unexpected and plan accordingly. Practice this forward-looking habit often and diligently such that over time only the largest emergencies catch you off guard (financially).
• Prevent known events from breaking your budget plans. If you know now you do not have the money to fund the event, start planning immediately for how to deal with the shortfall. Do not wait until that event happens to start the planning process.
• Set aside money for anticipated future events. Avoid spending that money on something else unless the future event fails to happen. If the event does not materialize, prioritize sending the unspent money into savings.
• Use savings as your buffer between now and the uncertain future. The bigger your savings, the more financial freedom you can enjoy. The smaller your savings, the more likely you will be derailed by the unexpected. The ideal savings account can sustain your basic needs for at least 6 months. This runway should also give you enough time to recover from all but the worst emergencies.
• Maintain insurance to protect you from catastrophic events. This insurance also facilitates financial freedom.

How to Get Budgeting Help

Budgeting is hard. Clear principles reduce the burden of budgeting. Yet, figuring out the principles that are consistent with current and potential life circumstances can feel overwhelming. Frameworks from data analytics and decision analysis can help. Ahan Analytics, LLC stands ready to apply these methods to help individuals and small organizations work through these difficulties. Contact me for a free initial consultation and evaluation!

Here is to a life of budgeting that is balanced across values, reality, and possibilities!