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I remember it like it was yesterday. Once a year, every year, my kind older lady of a boss would come around asking each of us what we needed. Necessary or not, she was looking for expenses because our company’s budgeting process encouraged end-of-year spending. I could tell that she was not a fan of budgets. At first, I thought it was great that at a certain time of the year we could get anything we “needed” in the office, but I soon learned this came at the cost of wasteful spending. I also learned that having a budget means nothing if it doesn’t curb useless spending.
Use it or Lose it Budgets Create Wasteful Spending
The company I worked for at the time was a proponent of the “use it or lose it” budget philosophy. Each department was given a certain dollar amount to base their budgets on for the year. If your department did not spend the amount budgeted, then they would have to forfeit it back to the company. As a result, departments felt obligated to exhaust their budgets and filing cabinets filled up with dusty pens and post it notes. I was working toward my MBA at the time and began to see the waste this budgeting system was causing my company. I went to work looking for ways to become more efficient with our budgets.
Budgets That Carry Over to the Next Year Can Encourage Wise Spending
After thoughtful discussion with my boss we changed our budgeting process. A little investigating revealed the sad reality that many other departments were following the same philosophy with their budgets and it was hurting the entire company. We lacked the money to implement some big changes that needed to occur on an enterprise level and the current budget philosophy was largely to blame. Instead of saving some of the extra money at year end it would either get foolishly spent or would go back to main budget only to be re-allocated for the coming year and spent foolishly then. My probing led to a streamlined budget that rewarded departments for not spending all their money. The new process encouraged wise spending by empowering departments to hold back left over funds for strategic, longer term needs.
Take Your Work Home With You
Can you learn anything about this as an individual? I know that a blog post is not really the forum for asking questions, but I am going to anyway! Speaking from experience, I can say this did impact how I view budgets. I had been budgeting before this, but my work experience helped me see how I could trim the fat from my personal budget. I saw that a budget should not be set and ignored. The experience helped me discover that I love to budget.
Budgets are living, breathing instruments that should be analyzed, interacted with and adjusted. Now, I am not suggesting you analyze them daily, but set some sort of frequency. Be it weekly, monthly or quarterly, find what works for you and go with it. You’ll find ways you can become more efficient and have your money work harder for you. Personally, my wife and I learned several years ago that we don’t spend anywhere near the full amount we budget on our kids for Christmas gifts. So, we save unspent money and spend it on things they want throughout the year. It saves us from wasteful spending, and allows our budget to work better for us.
Comments: What’s your take on budgets? Do you have a love/hate relationship with them, or do you love to budget?
iHB Thoughts: I need to hit on this point more, but yes, budgets are NOT static. Budgets adjust with the changing needs of your life, and require flexibility to actually work. If you think creating a budget one time ever will have you living in perfect bliss without a care in the world, you will be sorely disappointed about 2 weeks in when something in you “perfect” plan changes.
John is the founder of Frugal Rules, a finance blog that regularly discusses investing, budgeting, and frugal living. John is a father, husband, and veteran of the financial services industry who’s passionate about helping people find freedom through frugality. Visit him at Frugal Rules.