Too many people treat their household budget like it is the federal budget, but, unlike the government, you can’t print more money. If you increase spending in one budget category you need to decrease spending in another. Your only other options are to go into debt (read: put it on the credit card at 20% interest) or pay for it with savings (read: retire at age 82).
Deficit spending is when the federal government chooses to increase spending without paying for it by either raising taxes or reducing spending in another area. This is the root of a lot of criticisms and complaints about government spending.
Do you share in (or agree with) the criticizing and complaining?
Ever carry a balance on your credit card? Pay your monthly bills by invading your retirement savings? Take out a second mortgage to go on a vacation or add a pool? Then you are deficit spending just like the government.
The best way to increase spending in a budget category is to fully pay for it by reducing spending in another category. Otherwise, you will be paying for that increased spending with monthly increases to your debt or monthly decreases of your long-term savings.
For example, if you want to increase your entertainment budget by $50/month then you should decrease another budget category like clothing or dining out by the same amount. Alternately, you could spread the decrease amongst multiple other categories as long as the total decrease equals the total increase. Otherwise, that $50/month extra spending on entertainment will become high interest credit card debt you have to eventually repay or a monthly reduction in your retirement savings which will eventually run out. What do you have to show for that extra debt or reduced savings? A couple DVDs and some recorded shows on your TiVO—two things that are sure to bring true happiness and world peace.
The same thing goes for a single, irregular expenditure like going on a vacation or buying a new TV—money doesn’t grow on trees (but you can make a money tree), it has to come from somewhere.
So many people don’t seem to understand this fundamental concept and just spend without considering how it will be paid for.
How do you pay for something like a car or a home remodel without deficit spending?
Assuming you haven’t saved up for that big purchase, you cannot pay for it without deficit spending. If that big purchase truly is worth the additional debt and interest that goes along with it, here are some good ways to handle that within the confines of your personal budget:
- Don’t put it on your credit card or other high interest loan—when shopping for a deal, do you ever look to pay double? It just isn’t worth the final cost.
- Make sure you can afford to pay it off in a reasonable amount of time, generally 5-15 years, but the shorter the better.
- Budget for the monthly payment by reducing budget expenses in other areas by the same amount.