After word spread that children were unable to get cancer treatments because the National Institute of Health was shut down due to the failure of Congress to pass a budget or a continuing resolution, the US House of Representatives passed a bill to fund the NIH. After the bill was tabled by Senator Reid, preventing the Senate from voting on the measure, Dana Bash from CNN asked the Senate Majority Leader why. Senator Reid responded, referring to the House, “What right do they have to pick and choose which part of government is going to be funded?”
This question shows a lack of understanding of the separation of powers designed into the US Government by the framers of the Constitution. They purposely made it a requirement that any funding measure starts in the House, designed to be a representative body of the people, then be passed in the Senate, representing the states, and then be signed by the President. The founders knew the dangers of concentration of power, having just finished fighting the British for independence from the King, and purposely designed the system to make sure a majority of the states and the people all agreed before anything became law. They also required that funding be allocated each year to provide a mechanism by which measures that could not receive such consent could be eliminated.
Therefore, in Congress, each house gets an equal vote, as does the President. Likewise, in a financially healthy family each member gets a vote when making a budget. More than just a way to control spending, a family budget provides a means of communication between a couple. They should agree on how much to spend on meals out, vacations, children’s’ activities, clothing, cable, gifts, and other expenses.
Living on a budget is often seen as limiting. There is nothing to keep a family from going deep into debt, however, even with a budget. Witness that the US went into debt by $9 T even with a budget between 1776 and 2008. The US went even faster into debt, however, between 2008 and 2013 when, instead of passing a new budget each year, Congress starting passing a continuing resolution stating that they would spend the same amount as the year before. Because they stopped discussing what to fund and, more importantly, what not to fund, they saw their debt climb another $8 T in just five years, reaching $17 T now. This does not include the large obligations of Social Security and Medicare.
A family that does not keep a budget also tends to find that they go quickly into debt without being able to determine where the money went. Having a budget means making conscience decisions of where and how to spend money. One avoids making the rash purchases that are soon forgotten. Oddly enough, rather than feeling limited, most people who budget each month feel that they actually have more money than they did before. This is because they do not spend money on worthless things.
So, just as with Congress, each party must approve a purchase before it goes on a budget. Often one person will develop the initial budget, as is the Job of the House, but then the other party gets to make inputs and changes, as does the Senate. After the changes are made, a conference is typically done. Note this is the current issue in Congress, where the House is asking the Senate for a conference, but Senator Reid will not allow this until a clean continuing resolution is passed by the House (one in which there are no provisions to strip out Obamacare). This would mean that the Senate gets everything they want, however, and the House gets nothing. This is like the husband demanding that the wife agrees to all of his demands before he will discuss the family budget with her. This is obviously not workable.
For a functional relationship, unlike a dysfunctional one as is seen in Congress, here are the steps to forming a budget:
1. One individual – whomever is more of a planner, develops the first draft. This should list all major purchases expected for the month. Estimates for food, utilities, etc. should be based on experience from previous months. Items such as clothing, entertainment, activities, etc… should be based on needs for the current month. This is where the planning comes in. There should also be a small budget for each party to spend as he/she wants, no questions asked.
Things like investments should be based on how much money is available that month and the plan for the year. On months where other expenses are low, more should be dedicated to investments, and vice versa. If the end of the year is approaching and investments are well below the goals, it is time to start cutting other optional expenses and direct these proceeds towards investments.
2. The second individual should then review the budget at a family meeting. Here suggestions are made, things are negotiated, and priorities are set. If both parties do not agree to a particular item, it should not be funded. Remember that each person gets a vote.
3. Once both parties agree, it should become “law.” From that point, the budget should be followed. If there is a pressing reason for a change, the couple should get back together and make a conscious decision of where to pull the money from.
When both parties agree, great things can happen. As Congress is learning, compromise cannot come without sitting down together.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.