Balancing Household Budgets: Mission Impossible?

- While debate on President Obama's national budget continues to rage, many American households struggle to balance family expenses with family income. A recent New York Times article argues that budgets don't work because they're too difficult to stick to. Host Michel Martin discusses effective budgeting with regular Tell Me More personal finance contributors, Alvin Hall and Louis Barajas.

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MICHEL MARTIN, host:

I'm Michel Martin and this is TELL ME MORE from NPR News.

We talked in the last segment about budget figures that reached the billions, even trillions. Now we want to bring things down to a more personal level. Especially in a down economy, it's difficult for many American households to balance family expenses with family income. A recent piece in The New York Times got us thinking. The piece was headlined "Why a Budget is Like a Diet -Ineffective." So a family budget doesn't work? What does?

To help us, we've called two of our experts on personal finance, our regular contributors, Alvin Hall and Louis Barajas. He's a financial planner. And his new book is called "My Street Money." Welcome back to you both. Thanks so much for joining us.

ALVIN HALL: Thank you.

LOUIS BARAJAS: Hi, Michel.

MARTIN: So, first, I wanted to ask each of you, Alvin, I'll start with you. Do you think that The Times is right that budgets generally are ineffective?

HALL: Yes. I think The Times is absolutely right. I think it's because people don't want to have restrictions on their fantasies and money is hardwired to their dreams, the things they want. And when somebody says, you need to put some numbers on that and decide how much you're going to spend in various areas, people think, well, hold it here. I'm being restricted. I'm being told that my dreams cannot be endless, they cannot be expansive, so I'm going to resist. And I think people fight it purely on an emotional level.

MARTIN: Louis, don't you, though, start out by telling most people to budget? So, do you agree with The Times that budgets are generally ineffective?

BARAJAS: I also thought budgets were ineffective. And, again, I've been a financial planner for over 20 years and hadn't really used budgets in a long time. And this recession got me back to using budgets with the current clients that I work with. They're so enlightening. But when you think of a budget, most people conjure up images of being on a diet, of something not sexy, of having to restrict your expenses.

That's what budget should not be about. They should be about making sure that you're working towards your compelling goals. So I find budgets to be actually very effective.

MARTIN: Well, so, Louis, is the problem the word budget, like diet? That once you tell somebody, oh, you can't have this. They immediately start thinking about it? Or is it the idea of setting spending plans and goals? I mean, because at the end of the day, we have to, don't we? So what do you think is the problem?

BARAJAS: The problem is that budgets have gotten a bad rap, just like diets. And I think people need to start actually being very conscious of their spending habits and how they're using it to fulfill their dreams and their life's mission or purpose and so, you know, it's almost like a vision of doing so much work, of being very detailed, having to write down everything that you spend and it's just a lot of work.

And they're really not a lot of work, but I do believe that actually budgets, the way we've worked with budgets in the past with most financial planners are ineffective in the sense that they need to be expanded and looked at in a different - with a different paradigm.

MARTIN: Alvin, what about that, though? What do you think is the issue? Is it the word itself or is it, what?

HALL: I don't think it's the word. I think it's like the word die or death. You can hardly find people today who will dare use that word. Somebody passes on. They pass. People like euphemisms for things that they find difficult. Budgeting is all about recognizing what your fixed expenses are and where you can let yourself have some latitude with your spending.

MARTIN: Well, but Alvin, though, one of the things that you and also Louis, one of the things that I think is your calling card is that you're good at recognizing the emotions behind money.

HALL: Yes.

MARTIN: I mean, one of the things that you say is that money isn't money, you know.

HALL: It's status.

MARTIN: Money is whatever else it represents. So, what do you think would be better instead of talking about focusing on budget, what would be better? What's a better way to think about it?

HALL: I think a better way to think about it is what do you want to accomplish a year from now, two years from now, five years from now? Give yourself two or three goals that you're working toward and then your money plan becomes the work toward that goal. And then you can focus on what's the reward in the future, rather than focusing on what's being denied to you now.

MARTIN: Now, Louis, you were saying earlier that you've kind of come full circle with the whole budget thing. You started out telling people get a budget, get a budget. And then you said you moved away from that for a while, but now with the recession, a lot of people are finding that they have to cut back. You're back to talking about budgets again. Could you talk a little bit more about that?

BARAJAS: I used to do budgets for myself and they were just very tedious and, you know, I really didn't enjoy them. And so I dropped doing budgets. And then I thought most of the clients that I was working with, you know, when I first started out, people of color didn't have a lot of resources, so they were really good at budgeting, but a lot of it was mental accounting. Their budgeting was in their head.

And so I kind of stayed away from it. And then I realized, well, look, you only make so much money. So you can only spend so much money and let's just automate stuff. But I started realizing when the recession hit, that a lot of the people that I knew that were also earning six figures, that were struggling living paycheck to paycheck as well. And I went back to budgeting.

But I called them, you know, we called it the spending worksheet. And there's a worksheet that we provide on my website that is more of a hybrid between a cash flow statement and a budget. Because we don't take into consideration a lot of things that we spend money on that we're not even conscious of.

For example, birthday parties that our kids go to, birthday parties for our nieces and nephews, birthday parties that we must give. The small little one-day vacations that we take with our families. These are not taken into consideration. And so we're wondering, where's all the money going?

And I started realizing people started making more money, but they said that same thing, where is all my money going? How come I don't have anything to show for it?

And then I started creating a very detailed budget and I started seeing people's eyes light up and they realized, oh my God, I'm focusing on the things that I shouldn't be and I'm not investing towards the things that I should be. And like I've always said, I've never seen a U-Haul behind a hearse. And, you know, people were spending money on things that were just frivolous. And the budget just created this real conscious way of looking at how they were using money for their life.

MARTIN: We're talking with Louis Barajas and Alvin Hall. They're our regular contributors on matters of personal finance and the economy. The New York Times recently wrote a piece saying budgets are like diets. They don't work and we're talking about what might work better.

So, Louis, why don't you pick up the thread there? What does work better, in your view?

BARAJAS: So, you don't start with a budget. So what you do start is you take a step back and you start taking a look at all the whys in your life. You know, why do a budget? And list - give yourself a list of reasons. Is it just for the sake of figuring out so that my wife can find out that I'm spending money on iTunes more than I should have and she's going to be mad at me?

You know, the reason why you're doing a budget is to figure out your most compelling goals. What are you trying to accomplish now in the future? And how will money be used to live a better life? And in bringing back your spending habits to what really is important in your life. So the whys are where I start and then we work on the budget and that's a how. And then we bring it back, how can we use the money to fulfill those whys?

MARTIN: Alvin, what about you? Let's assume that there are people who enjoy budgeting or working with numbers and, you know, they like it.

HALL: Yes.

MARTIN: What about people who really hate it? How do you recommend that they get started?

HALL: You need to divide your money into three groups. One, the essential things you have to pay every month. Make a list of all of those and include in that list an amount of money for contingencies just in case your car needs a repair, something else goes wrong, that's what you must cover.

The second part of your money is what we're going to call your better life money. What money are you going to put away automatically every month? And then the third money is what I call the drawdown account. This is an amount of money, a number you carry in your head every single week. And every time you spend, you simply subtract from that number. That drawdown account becomes the maximum you can spend every single week. And most people can deal with the drawdown account concept because that number is always present in their minds.

MARTIN: So, finally, Alvin, you know I have to ask you, have you ever really messed up the budget?

HALL: Oh yes.

MARTIN: Messed it up? Let's hear it.

(Soundbite of laughter)

HALL: Because I collect contemporary art, sometimes a good opportunity just comes your way at the perfectly wrong time. And I struggled for almost 48 hours trying to resist this opportunity. And I said, you know what? It's only going to come along this time. I'm going to buy this piece of art because I really, really, really want it. But it was a budget buster. And for the next couple of weeks I had to really watch every single penny that I spent.

I cut out all taxis. I would not eat out at all. I would only buy food at the supermarket that was on sale, except for bread and milk. I just reduced everything to the minimum until I could build back up. I don't regret it now, looking back at that piece of art because it sits on my wall and it's really beautiful. But it was something I would never advise somebody to do. It really gave me about, I would say, two months of absolute anxiety, mental anxiety.

MARTIN: So it was worth it?

HALL: Yes.

MARTIN: Because?

HALL: Because the art has appreciated so much in value that it has more than paid for the anxiety, but that's not a guarantee. I just bought this piece solely on instinct.

MARTIN: Louis, have you ever messed up big time and had to get back on track?

BARAJAS: I spend most of my time writing books, talking to people. I don't have time to spend money. And I've done exactly what I've asked other people to do, is that we automate everything. We've created a budget, but we have money taken out from our payroll to go into a retirement plan, for the kid's education, to pay the house. And we realize that if we're going to be taking a trip, we're saving that money and we're saving it in cash and we're putting that money away and we do not take vacations or spend money unless we actually have it. So I have to be a role model for people, otherwise it would be a bad thing.

MARTIN: But the takeaway that I'm getting from this is automate - get the money out of your hands and where it needs to go before you even touch it.

BARAJAS: Absolutely. And as long as you are within reason - for example, one of the things that we've been working on over the last couple of years, that when people bought homes and they were spending, you know, more than 35 percent of their income going towards their house payment, the budget was a way to show them that they were spending too much money.

So you know, automation is fantastic, the budgets also help us look at percentages, how much money is going out to certain areas. And then at the same time we're being more conscious of how we're spending money. So this is a great time to talk about this, especially at the beginning of the year when people are looking at what their year's going to look like at the end of this year.

HALL: And, Michel...

MARTIN: Go ahead.

HALL: ...I don't think people should think about budgets in terms of status and peer pressure. I look at myself, and when I was buying my apartment I followed Louis dictates almost to the bottom line. I could tell you the exact percentage of my income each mortgage payment was. Even though friends kept saying to me, oh, you can afford to buy a bigger house, this is an apartment that would be worthy of you.

So they were almost encouraging me to go over the budget. But I was very, very practical about that. I knew what I could afford under the particular circumstances of my financial life and I resisted that temptation to look at it as a status symbol or to bend to peer pressure.

MARTIN: Alvin Hall is our regular money coach. His latest book is called "Getting Started in Mutual Funds." He was with us from our studios in New York. Louis Barajas is a financial planner. His latest book is "My Street Money." And he joined us from Costa Mesa, California. Gentlemen, thank you both so much for joining us.

BARAJAS: Always a pleasure, Michel.

HALL: You're most welcome.

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