BUDGETING

Budgeting

Budgeting is a skill that could help almost anyone.  As long as a person’s income is finite and a person’s enjoyment is increased by his spending of additional money; budgeting can help that individual to spend his limited money wisely; therefore, maximize his enjoyment of life.  Budgeting is essential whether a person’s income is extremely high or extremely low or whether or not a person has extravagant tastes.  The key to budgeting is to choose between different consumption goods with a person’s limited income.  Successful budgeting is spending a percentage of one’s income on fixed costs which refer to costs that can’t be avoided; consequently, to spend the remaining income on variable costs; costs that must be rationed by the budgeting individual.  A person does not have to spend all of their income in the present:  He can save some of his income for future time periods.  Furthermore, a person can borrow money in order to consume more products than his present income would otherwise allow; with the assumption he would pay back the borrowed finances in a future time period along with a certain amount of interest that depends on the interest rate.  The interest rate can be assumed to be positive.  Nobody would loan money if the premium was greater than the accumulated return.

Essential living expenses must be included as fixed costs, because a person must pay these expenses in order to reach the following time period.  Food items are definitely necessary consumption products.  However, there is some flexibility among substitute essential consumption costs.  For example, a person could either spend some of their fixed expenses on turkey or beef; furthermore, a person could choose to spend on grilled or rotisserie chicken.  Transportation expenses are certainly essential expenses; however, the type of transportation is flexible.  The cost for riding the bus is a fixed expense; whereas, the additional price to take the subway or a taxi is variable; therefore depending on the budgeter’s desires.  Whether or not an expense is fixed or variable depends on how broadly a category is defined.  The consumption of food is a necessity; whereas, the quantity of turkey consumed varies from individual to individual.  Effective budgeting includes making choices on variable expenses; expenses that can be controlled. Wealthy individuals certainly spend a larger part of their income on variable costs than less wealthy individuals.  However, they still are constrained by their limited income. 

All individuals should attempt to have some margin for error when constructing a budget.  It is better to have money left over after spending than to run out of money before accumulating additional income.  Poor budgeting can lead to utility shutdowns, hunger, and loss of independence.  Income can be in the form of social security payments, unemployment benefits, pensions, loans, and wages.  It can be predictable or it can be unpredictable.  Obviously, it is easier for an individual that is budgeting from a predictable source of income to budget than one who is budgeting with unpredictable income sources.  For this reason, employers must pay an additional salary to an individual if the employee’s income is unpredictable.  Budgeting takes time and energy; therefore, more difficult budgeting requirements must be compensated for by additional salary.  Those individuals that live month to month on limited government assistance lose much of their independence to choose their form of consumption.  In reality, this decreases their need for budgeting rather than increasing it.  The only choices they must make are between substitute goods such as pork, beef, or chicken.  They have no need to decide what percentage of their income to spend on food as a whole.  The same applies to transportation:  All government subsidized individuals must rely almost exclusively on public transportation.  They lose the ability to choose between different alternative expenses.  Budgeting varies depending on the location:  Individuals living in rural and urban areas must consider their location when constructing a budget.  Consumption in the present is always preferred to consumption in the future.  This discrepancy is known as the discount rate.

By Michael K.