Monday, February 09, 2009

Budget Making - the whys

I'm a grad student. That amounts to someone who does not have enough money to satisfy their every whim and fancy. Oh wait! That amounts to someone who does not have enough money to satisfy a bit more than their whims and fancies. Though I'm covered for food, shelter, clothing and of course studies, I can't really go out for a night and buy things off my mind. Or even if I charge it to my credit card, I can't pay it back in full and would start a horrible debt cycle. So, the only recourse to that is to make sure that the dollars I have stretch to their best and give me enough cushion to do that one-day-shopping-bling-thing.

To tell the truth, I was brought up in a family where I can have any amount of money in my hand provided I gave the right reason for it. Being a kid(and an obedient kid at that ;)), I didn't have much necessity for money to spend on my own. Further, in India, you didn't have that many opportunities to spend too(esp when I was in school). In college, though, I could spend the money I had and could just ask my mom for more. But, I was overloaded with courses and projects and organizations that I didn't have much time for other things. So, all this left me with little or no experience with handling cash within a set limit.

When I went to do my internship, I got a good amount of money but the days were very set and we didn't get many opportunities to really spend a lot. And, I always hung around with friends and we made sure that the things we did were inside everyone's budget. Funny, but that was the first time I really thought about budgets. However, since my scale of comparison was my friends and since one of my friends' budget was inside mine, I really didn't have to do a budget for myself. I just went along with what she said and that worked well for me(didn't have to rack my brains - she did the number crunching) and my wallet(I didn't see any big dents here). So, there too, I didn't have to do anything with a budget.

Fast forward to my grad days. The first year and my second internship period was a repeat of my first internship period. So I really didn't have to care about it. But my second year was different in that I changed jobs inside campus(went from a relatively high paying one to a low paying one) and changed my apartment. And a few friends graduated. Some went for internships, all of us left back here started becoming serious about finishing our degrees. Slowly, that led to changes in my lifestyle as well. I had to look for different ways of having fun. Its not something fancy but I had a goal as to not ask my family or others for money. And it was not a hard thing to do. Rather, it was fun. I learned a lot out of the process too.

Now I have a simple budget that works for me and helps me live a satisfied and fun filled grad life(yeah, with that one-day-shopping-bling-thing). But I know that a number of my friends and readers don't do it often. So, here is a short series of posts about budgets. This would also help me revise mine and see if there are any changes I can make into mine.

Five simple reasons to have a budget:
1) It tells you where exactly your money goes. Whether you a Wall street banker or a sweeper, you earn money in exchange for your time. Time that can never be earned again. So, it makes sense to know what you do with the money you got.

2) It tells you how close you are to your goals. You can be a poor grad student(like me!) and dream of going on a world tour before you turn 50. Or you can dream of getting that penthouse with an awesome view on top of a 50-storey building in NY without any strings attached(mortgage, for example) before you turn 35. Or, you can even dream to have your honeymoon trip to space. For all that, it is important to know what exactly do you have now to get to where you want to go.

3) It reminds you of the resources that you have and consciously tries to make you spend within it. For example, if you have an income of $1000 and an expense of $800, then you live a way better life even with lesser stuff than with an expense of $1200 and more stuff. (yeah, you can charge it to your credit card but that brings my next point!)

4) It tells you the amount of debt you still have. Debt is like shackles and chain, it comes with you wherever you go. So, the higher the debt, the more constrained you are from living life as you want to. The lesser the debt you have, the more risks you can actively take in your life and gain more returns. Suppose if I get into my head to go to Bahamas tomorrow, I can do so if I don't have any debt and wouldn't be setting any legal action against me. But if I had $10000 as debt with me, then I'd have to settle that first before making my move to Bahamas. So I can't live life as I wish it to.

Charging things to your credit card is easy to do at first but then, you pay more than the price you see. For example, say you see a cute valentine's gift for $500. You decide to charge it to your credit card with 10% interest(there are very less cards with this rate now). And you decide to pay it in terms of $100. At the end, you would have paid close to $730 - An increase of $230 over the price. Naturally, the actual price of the gift goes up by $230. For that, you could've paid cash for $730 and bought a better gift. Or, used cash to pay for $500 and kept that $230 for some other purpose. If you decide to pay $200 each month, that comes to a little over $600. So, you get to pay only $100 more. So, try not to carry a balance in your credit card/debt. Or if you do, try to maximize your payments to it so that you have to pay only a slightly higher amount.

5) It shows you how much more your resources(income, savings, etc) should increase to make your life more satisfactory. Suppose you decide that you want to blow away $100 a weekend. So, that comes to $400 a month. And, assume you are already spending the money you get and don't have money to spend for your weekend flings. You can look to raise your income by $400 a month so that you can spend them without any worries of getting into debt.

I had read about budgets earlier. But then, I had thought that budgets were a bore and kept you inside a particular boundary. You can't do as you wish. However, I found that it wasn't true. Rather, budgets liberated you from boundaries like credit card debt and helped you achieve whatever was your dream. My goal is to finish grad school without any debt. I went close to getting into debt and my budget was the tool that pulled me out of it. So, I'm relying on it to keep my goal going till this May(hopefully I don't have to stay another semester at school).

Do you see any other reasons for doing a budget? Or do you see any reasons for not doing the budget? What are your experiences with the B-word?


Sudipta Chatterjee said...

It depends a lot on your spending habits as well, doesn't it? I never had to do a big budget decision in grad school, because I knew mentally such and such were the definite expenditures, and so never went over budget. :)

Arun said...

Having a budget is always good.

But having a debt in school is not that big of a deal. I know many ppl who had debts and theres no difference at the end of the day, its better to spend when the time is right. College life wont come back. As long as the debt is in 4digits, it can be recovered in few months once u start working. Being broke in life is also a good thing. It will teach some good lessons I guess. But then you dont want to learn too much :)

alpine path said...

Sudipta, true. If you already know your expenses and are sure that you won't rack them up, then a mental budget is much more easier. But I guess I had this huge shopping-spree-expense that quickly bit into my regular expenses. Though I didn't spend a lot every time, I did so many exchanges that I had to really KNOW what is happening :D Otherwise, I'd have been in total confusion.

Arun, true! I do spend with my friends. But nowadays, we find it easier to have a potluck than go out to check out new restaurants. It might also be because all of us got busy with our studies(after all, we have to study atleast in the last year of our grad school :D) but our wallets sure did thank us for the change. And my changing jobs needed it as well.

More than being broke, the journey to and back from normal to broke is what is peppered with lessons. :) And yeah, learning too much takes the fun out of living!