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Obama's Budget Proposal: Six Lessons for Your Personal Budgeting Strategy

Posted: 03/ 1/2012 12:00 am

President Obama released his budget proposal for 2013 on Feb. 13. While you're listening to the media discuss the implications at the federal level, why not take a moment to rethink your own budgeting strategy? Wait... are those two things even related? Not entirely. Before we continue, you should know that a household budget is an imperfect analogy for a federal budget, despite what some politicians on both sides would have you believe. Nevertheless, there are still a few good spending lessons to be learned from Obama's budget proposal. Is his budget perfect? Hardly, but yours doesn't have to be either. Here are six things you can learn from Obama's budgeting decisions.

1. Spend within your means

Which of your important expenses are "more important" when they all directly affect you and your family's quality of life? In a perfect world, you wouldn't have to choose between a mortgage payment and a car repair bill, but it happens. Obama has to make similar tough choices when drafting a budget, except that his choices affect millions of people. Imagine the pressure! People and presidents try to make everyone happy by spending more money than they have. That's where debt and deficits come from.

Needless to say, that kind of behavior isn't sustainable. That's why Obama has a legal mandate to make wise spending choices. Remember when Congress voted to raise the debt ceiling in 2011? The Budget Control Act allowed the government to take on more debt, but it also limits discretionary spending, which should reduce the deficit by $841 billion over the next decade. Congress met the cap this year, and will have to do again with next year's budget. It's helpful to envision your own income as a "spending cap" too. You always have the option to take on more credit card debt and raise your own "debt ceiling," if you will, but you'll end up paying more money in the long run. It's not a good strategy if you can avoid it.

2. Pay your fair share

Let's be honest; no one likes tax time. But that doesn't mean your taxes aren't important, or not worth paying. We're not saying you don't deserve the occasional tax write-off; these can be a huge help when you have limited income and still need to pay for things like tuition or childcare. However, your top priority shouldn't be to game the system, especially not if you're already living very, very comfortably. This was Obama's inspiration for including the "Buffett Rule" in his 2013 budget.

Inspired by billionaire investor Warren Buffett's criticism of tax loopholes for the wealthy, the Buffett Rule states that no households making over $1 million annually should pay less in taxes than middle class households. Millionaires and billionaires get away with paying less now because they get tax subsidies for all the same things middle class households do, and then some. The Bush Administration passed tax cuts for those with a household income above $250,000, and millionaires who contribute to charity get a deduction that's twice as big as what a middle class family would get. Sure, it's legal, but is it really fair? Don't try to weasel your way out of truly important expenditures under the guise of "saving money." Yeah, you are, but at what cost?

3. Pay back your loans

If you loan someone money, they should pay you back, and vice versa. Remember when your tax dollars bailed out the big banks during the financial crisis? Obama thinks it's time for you to get that money back. The 2013 budget calls for a Financial Crisis Responsibility Fee, which is basically a requirement for financial institutions to "fully compensate taxpayers for the extraordinary support they provided to the financial sector." Only firms with over $50 billion in assets will be required to pitch in. If all goes according to plan, the fees should reduce our deficit by $61 billion over the next 10 years. If you've been avoiding your credit card payments, or your friend that lent you $50 that one time, it's time to confront them and pay up. To make your credit card payments easier, you may want to consider a new balance transfer card to lower your interest rate.

4. Invest in the really important stuff

Health insurance is expensive, and if you're lucky enough to be healthy, it's probably something you'd rather not think about. However, it's an investment that's guaranteed to pay off big over time. According the U.S. Department of Health and Human Services, 58 percent of all hospital visits cost $10,000 without insurance. Do you really want to leave your health to chance? If you can't afford $10,000, you really can't afford $10,000 plus interest. Along similar lines, it's not irresponsible for the government to spend a little money to save money long term. President Obama is putting $364 billion dollars into strengthening and streamlining Medicare, Medicade and other healthcare systems in an effort to reduce wasteful spending, minimize erroneous payments, and boost the quality of existing care. It's not easy to find money for that now, but it would help us save more money overall down the road.

5. Consolidate the clutter

Obama wants to make it easy to do the same thing with government regulatory organizations: keep the ones that work and reform or ditch the ones that don't. He's asked Congress to revive an authority that presidents had between 1932 and 1984. The Reforming and Consolidating Government Act of 2012 would give a president the ability to submit proposals to reorganize the executive branch via a fast-track procedure, as long as it reduces spending.

You can also avoid duplicating your efforts. Do you really need paper and electronic bank statements? Do you save time by having two checking accounts, or does it just make your life more complicated? Over time, the financial services we use to make our lives easier may become less effective. When that happens, it's time to consolidate and scrap what's no longer working.

6. Be patient and learn from your mistakes

Speaking of consolidating clutter, we know from experience that's easier said than done. It's hard to reorganize the government, for example, especially when people don't throw their full support behind a new organization. Take a look at the Consumer Financial Protection Bureau. It's a great idea to have all the government's financial watchdogs in one place, but it's still a new organization, so they've got quite a few kinks to work out, and not everyone believes they can be successful. Finding more efficient ways to do things takes time (and just the right amount of trial and error). The same holds true for your household budget. Plan ahead, be patient, and don't stress if you meet a little resistance along the way.

Tim Chen is the CEO of NerdWallet, an unbiased credit card comparison website that offers a comparison of the best credit cards of 2012.

 

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