Budgeting 2012 - Part 2

Returning to a favorite topic of members of the association, I continue with Part 2 on "budgeting."

I would think I've posted more than enough on this subject, but apparently not. It's somewhat like a commentator who was giving an opinion on the corruption in Chicago and the state of Illinois; recently Chicago was awarded the dubious distinction of being the "most corrupt" city in the U.S. In that radio broadcast it was stated that "we can make rules, but common sense is another thing."

So what's the problem with budgeting? Is it common sense? The fact that it is work? Or, is it that as a consequence of budgeting, one will discover their financial limits, which flies in the face of a "just do it, and you deserve it" mentality?

Well, first, it is something that some of us do practice. It's also something that some of us do not. For those of us who do budget, we have great difficulty understanding why others do not. This post will shed some light on that, and will provide some incentive to those who don't.

On the other hand, like a rebellious child, some of us will take the position "I won't and you can't make me...So There!" For those, you are absolutely correct, no one can ever make an adult do anything. I'm not even going to try. My purpose here is to provide a few insights, some reasons and benefits for budgeting and to say "If you choose to take a certain path in life, you won't find sympathy from me."

The Professionals
Some of my associates like to watch Ms. Suzie Orman, and I do on occasion listen to her radio program. I only have a "basic" cable TV package which excludes the premium channels and so I only see Ms. Orman on TV during one of her PBS fund drives. Ms. Orman, as you may have noticed, has had a successful career extolling the viewers and listeners to practice a budget.

I consider the fact that she has made a successful career on television as a "financial consultant" and has written several books to be ample evidence of the need for financial advice. On the other hand, the TV shows may be indicative of the need for entertainment at the expense of the misery of those on the broadcast.

Budgeting is like a riding a bicycle. Once you learn how, you never forget. I don't see people on television teaching or promoting the advantages of bicycle riding. However, I do see people such as Ms. Orman, and others, who appear to be making a nice living preaching and teaching "how to budget." I conclude budgeting is a problem.

I again apologize to those who do know how to budget, avoid debt, and have some practical investment knowledge. But here is a secret. Knowing and doing are two different domains. Most of us know what we have to do. Some of us simply don't do that. I don't know why.

Returning to the professionals, what Ms. Orman provides is entertainment first, and information second. I mean, how many times do I have to be told to "skip the morning latte, put the proceeds in a jar each day, and after a year you will be able to take that vacation you have NEVER been able to take!"?

So I apologize to those who will find this post to be simply another rehash of timeless concepts.

The Straight Talk
We live in a consumer society, and we are bombarded with commercials and sales pitches. Some are subtle. Some imply that it's a basic American right to "just do it" or "have fun" etc. Most of these commercials are designed with one and only one purpose; to convince the watcher to part with her or his money. There are all kinds of salesmen and saleswomen. Some are on television, some are in nearby stores. They include our friendly neighborhood Realtor, who may turn around and sue you. Hey, it's a litigious society, which means if you aren't being sued, you are suing someone else, or you are concerned about being a target in a law suit. But too many say "Nope, it would never happen here! Okay, as they say "Being oblivious is bliss." What does this have to do with budgeting? Well, if one never does their homework, it allows them to do whatever they want under the false pretense that "I can afford it." Only someone who does a rigorous budget can know with any certainty at all, if they can in fact "afford" whatever it is they are doing.

Other impediments to budgeting and promoters of the consumer society include friends, neighbors and relatives who promote their personal positions and life styles. "Keeping up with the Joneses" became an American tradition, although the expression can be traced to many English speaking countries. But here in America, we made it an art form, and it made us a consumer society.

Here's an example of "the sales pitch." I've got basic $20 a month Comcast cable and it includes two "shopping channels" which market computers, cameras, electronics, watches, jewelry, clothing, purses, makeup, kitchen ware, kitchen accessories, prepared foods, exercise equipment, tools, vitamins, etc. etc. Viewing these channels is asking for trouble. There is a lot of nice stuff for sale out there. It's useful to be aware that there are experts who do nothing but dream up new and better stuff to sell you and I each and every day. There are billions on the planet making it. It would be easy to go broke attempting to buy all of this "wonderful" stuff. So unless you have an iron will, I suggest you watch something else on television.

That might be step one of budgeting; develop some resistance to "the sales pitch," and just say "no." Oh, but you are "entitled" you say?

Consumptive Habits
What we spend is determined by our consumptive habits and the prices of goods and service in the market place.  Habits may never change but, due to inflation, prices invariably go up, and up, and up. Part of budgeting is recognizing this inflation in the price of goods and services, and then determine methods to  balance this with our ability go generate income. Those on a budget look at the cost of their consumptive habits, and if income falls short of the projections, they then reduce their consumption.

Those who don't budget simply spend until they run out of money. At that point, a decision must be made about who not to pay this month. It is sometimes the HOA association.

We have a choice in our personal lives; we can plan and budget, or not. This is purely optional for individuals, but less so for businesses. In business, we have no choice. If we want to survive we must plan. We also need to track "cash flow" which is a comparison of cash income and spending. It gets more complicated because for a business, the budgeting includes sales projections (income) based on marketing plans. Most businesses can introduce new products, which may be new sources of income. Businesses can also control expenses by choosing different materials, or suppliers. Individuals have less freedom; but we are not powerless. On the other hand, individuals don't have the responsibility to make a business run. That is, unless they are on their HOA board, or involved in upper management of another business.

Your HOA is a businesses, and in Illinois, under the Illinois Condominium Act, our HOA is required to plan and prepare annual budgets. The association is also required to make longer term financial plans and collect additional fees for the reserves necessary to accomplish those plans. In other words, the board must prepare an annual budget for the purpose of maintaining the association.  The goal is therefor not to devise a budget which keeps fees "as low as possible" as the primary goal. Nor is the purpose to design new ways to spend the owners' money. I live in an association where a few of the owners would love to have a clubhouse on the property for parties. But would that be a good use of the owners' money? Spending is consumption and after the basics and keeping agreements, then options may become available. However, in an association, how many owners are willing to pay an extra $50 a month to some day build a "clubhouse?" Not many. Of course, a group of owners can always get together, run their agenda, get elected to the board and hijack the association for their own purposes. It has happened elsewhere, but not here as of today. The future? Well, that's another story.

In the end, the association requires a specific cash flow or income, which is to say "fees" to maintain the standards in the association. If we consider the cash spent as "consumption" then the association is doing exactly what the owners who budget are doing.  Board members of any HOA should be familiar with budgeting and budget practices. Owners don't have to be.

The Value of Budgeting
The real goal of Budgeting is a tool for future planning. It may allow us to keep our promises and agreements and to use our limited financial resources to accomplish the things we really want in life. In an association, those things might require "using other's money" to accomplish my personal goals. What prevents that from happening? Professional management and vows as a fiduciary. However, it is a fact that the professionals are hired and fired by the board of managers. So some associations have great difficulty, and their reserves become "piggy banks" for the personal agendas of the board. I'm not aware of such a situation at BLMH. However, "Where there is a will there is a way." So I'm certain that some owners will one day be elected, and will do their best to spend every dollar in the kitty. Did they do it well? If all of the roofs, driveways and streets are completed, I'd say they did an okay job. If not, then I would say they did it poorly. However, there is a mechanism to correct for these problems or unforseen circumstances, and it is called "special assessments."

Returning to personal budgets, if our personal lives go from bad to worse, financially speaking, then having a budget provides us with information to make difficult decisions. Knowing how we spend our money and knowing how long we can survive on our savings is financially empowering.

If I should encounter unforeseen circumstances in my life, and I do have a good budget, I already know how much I spend monthly and yearly on the "essentials" and I also know how much I spend on the other things, which some call "discretionary spending." Having that information readily available provides one with choices. Some years ago I experienced a terrible financial disaster. I was able to determine almost to the day when I would run out of "cash." I also knew exactly how much I needed to survive. By survive, I mean the real essentials; groceries, basic rent, electricity, natural gas for cooking, gasoline for the car, auto and renters insurance, basic health insurance, and debt (doctors and credit card balances). Everything else was optional. Knowing this gave me the longest possible time I could stretch what money and wages I had. I also had a second budget, which included some "options." If I used that budget, I was going to reach the end of my financial resources much earlier, but I'd have more fun!  I used the "basic" budget and as I paid off debt. Doing so gradually after many months freed up financial resources for some of the "fun things" in life, like a cup of coffee and a donut at the nearby Dunkin'.

Why Prepare a Budget?
The bottom line? One makes a financial plan, and that includes a budget, so as to have some control over one's financial future. That future may be next year, in the case of a basic household budget. However, our lives span decades and our budgets and financial plans must also span decades, and should include various life events which influence our ability to make decisions. Such events include having children, sending them to college, purchasing a condominium and retirement. It should include provisions for one's spouse and young children in the event of untimely or early death.

Why Not Prepare a Budget?
Preparing a budget gives one the information to make informed decisions. The best reason to NEVER prepare a budget was summed up with the expression "to be oblivious is bliss." With a lack of financial information, one can make any decision the wish, and can claim it was a good one.

On that note, I'll end this post. The next one on "budgeting" will continue with "Where to Begin Budgeting."