Traits of A Successful Budget

A successful budget grows wealth and manages debt within an organized framework that easily manipulates and apportions money for maximum financial benefit. The traits of a budget are what help make it successful by providing the basis with which the budget can operate and assist with appropriately managing the budgeter’s life.

• Capitalized

No budget can work without money to budget so a budget must be capitalized to be successful. Examples of sources for capitalizing a budget include income, capital gains, and interest earned from assets. Once a budget has been capitalized, the financial parameters within which the budget can operate are established.

• Prioritized

Another trait of a successful budget is they are often prioritized. In other words, some expenditures and allocation of money may be more important than others. To determine which budget allotments should take priority, consider the affect on basic needs, cost of debt, reduction of debt, and amount of savings. For instance, a good budget accounts for basic short-term needs such as food while simultaneously preparing for longer term financial horizons.

• Systematized

Systematization of a budget is a similar trait to prioritization except its focus is more on the functionality of the budget. For example, a successful budget might distribute money across a number of categorized goals such as retirement planning, emergency savings, high interest debt and so on.

• Optimized

Optimization of money is a key trait of a successful budget because it allows that money to go as far as it can go. For example, if debt can be paid off within six months, and the money used to pay that debt is then re-allocated to savings for another six months will there be more savings over a course of one year than if an equal amount of debt payments and savings contributions had been made?

• Accessorized

A successful budget may also be accessorized, not necessarily by expensive financial software, but rather with useful budgeting techniques. Simple mathematical analysis of a budget is one such accessory. To illustrate, mathematical analysis is a useful if not essential accessory because it allows the budgeter to determine if one use of money has a more advantageous affect on net worth than another.

Since finances and people’s lives are diverse, a budget can vary from simple to complex based on the financial needs of the individual or household. For example, an overly complicated budget may be simplified to better meet the objectives and requirements of a straightforward financial plan. Moreover, successful traits of budgets reflect tailored financial allocations that meet specific needs, and goals using comfortable and suitable methods.

How to Identify Needs vs Wants In Your Budget

Identifying needs vs wants in your budget helps determine if budget items are essential or non-essential. Doing this allows the possibility of improving a budget for lower costs and greater savings. When distinguishing between needs and wants, determining if you can survive without significant to change to your life can be helpful.

On the other hand, adjustments to budgets based on identification of needs and wants can also affect quality of life and standard of living which are within the realm of needs, hence identification of needs can be a little more involved than basic survival.

Becoming adept at convincing oneself that wants are actually needs can cause budgets to suffer. You may need transportation but what kind of transportation do you need? You may require food to live, but does that mean eating at a restaurant is a need? Are potato chips an essential vegetable? What kind of entertainment is essential to meet a need for joy and how important a need is joy?

Needs are generally more important than wants, however, needs can be classified in different ways. Maslow's hierarchy of needs include things like 'Self-Actualization' as the highest order of needs. Most people can live fairly comfortable lives without self-actualization, therefore, the type of needs and the method by which needs are identified can affect how a budget is defined in terms of needs and wants.

Classification and identification of needs vs wants

Identifying needs vs wants in your budget involves a standard or criteria by which needs are distinguished from wants. For example, a new vehicle may be a want if a vehicle is already owned, but the type of vehicle one already owns may also be a want in the sense that not all car types are required to fulfill a need assuming a vehicle is needed.

A system in which budget items are identified by needs priority can help identify which needs are more important than others and which needs are actually wants in disguise. The following dualities can be used to distinguish needs by type.

1. Needs identification by type

• Physical needs vs Psychological needs
• Essential needs vs Non-essential needs
• Empowering needs vs Non-empowering needs

To identify needs vs wants in your budget also involves determining which needs are also wants. For example, some wants may be misidentified as psychological needs; psychological needs such as sense of self-worth may be influenced by certain wants that affect standard of living or status.

If self-worth can be affected by something that is free, that item can be considered the need in relation to the want. To illustrate further, self-esteem may be a need that is not determined by objects of value at all; in such case a healthy attitude about the self may be all that is needed instead of a Rolex.

Needs and wants identification by affect

The affect items of value have on standard of living and quality of life can also be used to identify needs vs wants in a budget. For example, the type of food we eat may affect both standard of living and quality of life, however, only the most basic of foods are essential needs making everything else either a higher order need or a want. To determine if a budget includes unnecessary needs or wants, hypothetically eliminate those things from your budget to see if the affects meet the following criteria:

• Your acquisition of needs will not be impacted
• The items are redundant
• Quality of life will not be negatively influenced
• Reasonable goals and aspirations are unhampered

To further illustrate the above criteria consider point 1. Mr. Bacchus enjoys a special type of lettuce grown in Costa Rica but this lettuce costs $2.50 extra per head. This lettuce is merely a preference and not a need. Furthermore, the removal of this item from Mr. Bacchus' budget meets the above criteria because 1) the acquisition of needs are not adversely affected, 2) the item is not essential and is replaceable, 3) the affect the lettuce has on Mr. Bacchus' quality of life is negligible i.e. it is a want not a need. And 4) Mr. Bacchus' goal of eating only the best lettuce is unhampered because more cost effective lettuce of high quality is obtainable elsewhere.

Summary

How to identify needs vs wants in your budget is a partially subjective matter determined by one's existing life. That is to say, changes to a budget for person A may not have the same affect on life for person B due to the needs currently met in person B's life. The means by which needs are distinguished from wants can also affect identification of such.

In other words, two different models of needs vs wants identification may classify needs and wants differently and may even determine some wants to be needs when in fact items only meet needs and are not the needs themselves. In any case, needs and wants are separate things that can adversely affect a budget, hence the need to distinguish them.

Source: http://www.deptorg.knox.edu (Maslow's hierarchy of needs)

Why Some People Fail to Achieve Financial Freedom

To claim a single reason why some people fail to achieve financial freedom would be questionable, as semantically, we don't really know 'who' of the 'some' we are referring to. However, taken less literally, and more approximately, there are several reasons why some people fail to achieve financial freedom. These reasons include far more than closely correlated financial concepts such as arbitrage investing, effectively rolling over retirement plans, and taking advantage of available tax deductions.
• Priorities
Some people fail to achieve financial freedom because priorities can compete among each other. For example, if one has a top priority of restoring a car, the cost of that restoration must be lower that than the top priority unless the top priority is amended to include restoring a car within a budget.
The example of automotive restoration accents the importance of integrating priorities so they do not conflict. Thus budgeting, and financial planning ideally go hand in hand with life goals so together they all improve and in the case of money, lead to financial freedom.
• Skill
Growing money is a skill that more often than not requires adeptness at applying a certain amount of know how. Basic principles of money management are essential to achieving financial freedom, but more may be needed to achieve financial freedom. The inability to execute financial skill via an effective financial plan is another reason why some people fail to achieve financial freedom.
In other words, people who fail to achieve financial freedom may benefit from a flexible, productive, intuitive and demonstrable financial plan. If the results of that financial plan cannot be measured as consistently moving toward financial freedom within an applicable time frame, then evidence of a strong financial plan is questionable.
• Adaptability
Adversity can have a dramatic affect on financial goals, even those with financial know how. For example, a successful financial manager who loses a job, a sudden unpredictable tragedy in life, or an error in what may otherwise be a good financial plan can all have a negative affect or result in set backs of the goal of financial freedom.
To deal with adversity it is good to be able to have risk tolerance, accept loss, and have financial resilience. Being resourceful, adapting to change and seeing opportunities in situations where there seems to be none are ways to work toward financial freedom during times of adversity.
• Capacity
Different people have varying capacity to obtain financial freedom. Capacity includes skill, but is not limited to skill. Capacity to achieve anything requires focus, understanding, willingness, and circumstance. It represents the overall probability of achieving financial freedom.
Not having the capacity to achieve financial freedom is a major obstacle to that goal. Some people might not achieve financial freedom due to this. Capacity also includes things like leverage, low costs, career, birthright, and other measures of financial strength. Capacity is not unattainable in most circumstances but is ideally built before implementing a financial plan leading to financial success.
All the above reasons are rather around the point of direct cause and effect relationships that build wealth. That is to say, they are often one or more step removed from actual financial relationships such as consistently investing in an IRA or maintaining a budget and growth investing via a well-optimized financial portfolio. The above are reasons why people don't get to the point of being able to optimize their portfolios that are in some cases among the last steps to financial freedom.