Q: True or false? It is dangerous to encourage people to live with a strict budget. Recording every penny and constantly staying within a predetermined budget causes tension in the home.
A: We disagree. Our experience has demonstrated that in homes with a budget, money is less of an issue than in homes where spending limits are only loosely defined.
This should come as no surprise. Structure creates freedom. For example, in a home where there are no rules or limits, are children happier? In a lawless society, is there less interpersonal conflict? Of course not. Both children and adults crave the security of knowing what is acceptable and what is not.
The need for clear limits applies to money matters, too. In a home where budgetary limitations are not clearly defined, there is more room for disagreement and squabbles over how money is to be spent. When reasonable, predetermined spending limits are in place, people can spend money without fear of a backlash from their loved ones — or from the bank.
Yes, there is definitely a measure of discipline and self-control involved, but there hould be no financial power struggles. Instead of husband, wife or parent having to say, “no,” the budget becomes the authority that decides whether money is to be spent or not.
Consider the following scenario:
Mr. Cohen decides one day that he needs a new car. Mrs. Cohen thinks the old one is just fine and that they cannot afford a new one right now. If the Cohens have a budget, the decision whether to purchase a new car can be made objectively. The issue of “Can we afford it?” should be an easy one to resolve, since the family’s financial balance sheet will clearly indicate if money is available for this purpose.
If the Cohens do not have a budget, the decision probably will be made based on emotion.
When husband and wife decide ahead of time where they want their money to go, they are, in effect, eliminating possible sources of friction down the line. Once a year, or once every few months, when they readjust their budget, they can discuss how they want to spend their money. The rest of the time, money should be a non-issue.
A home is in many ways similar to a small business. At Mesila, we advise businesses to view their finances as a cake. The last, and most important, piece of cake is the profits. Unless business owners carefully plan for that last piece of cake, the cake will disappear quickly, and they will be left holding an empty tray.
The family-finances cake also needs to be apportioned carefully so it does not disappear. A smart parent knows better than to cut big pieces of cake for a few of the children and leave nothing for the rest — he or she will divide the cake in a way that ensures that there will be enough for everyone.
Similarly, the only way to divide the family’s income pie fairly and effectively is to do so ahead of time, setting aside money for basic expenses while allocating reasonable amounts for the needs of individual family members and the family as a whole.
The smart parent will also make sure to leave a bit of cake at the end.
Of course, in order for a budget to contribute to the harmony in the home, it has to be realistic and somewhat flexible. If unbudgeted-for expenses continually arise, or if routine expenses consistently exceed their budgeted allotment, those are indications that the budget is too austere and needs to be reworked. Jt
This column is a regular feature written by Mesila financial planning and counseling experts, mesila.org. Email questions to email@example.com.