A college memory and budgetary epiphany

Posted on August 20, 2008. Filed under: Uncategorized |

While at university, I befriended a smart, funny girl named Karla. Karla and I became fast friends and at some point our parents got to know each other and would occasionally get together if either set of parents happened to be in the other’s area. One weekend my parents were in Buffalo, NY and met Karla’s parents for dinner. As parents with college-aged children, you can imagine that the conversation centered on the empty nest, major programs, sports, and generally what trouble we kids were getting into.

One day Karla caught up with me in the school union, and she was laughing. I of course had to know what was so funny, and she blurted out “Your parents!” laughing with every syllable. Apparently my parents were making light of my fiscal irresponsibility at the afore-mentioned dinner. Apparently, a comment was made by my father, to the effect of If Pamela saw a sweater on sale for $150, she’d say to the clerk ‘I’ll give you 250!’ much to the amusement of the dinner party!

Well, I have to admit my dad was probably not far off the mark. I was never very responsible with money. This was a well-known fact, and I am ashamed to admit that it wasn’t until my more adult years that I finally got serious about my finances.

Eventually I realized the need for a budget in my life. (Dad’s going to pass out when he hears that.) One thing I realize now that I am reading the McGraw-Hill 36 Hour Course in Finance is that the personal accounting method that I developed for myself is very much like a crude accrual method of accounting. That is to say, I was using the matching principle intuitively, without knowing that such a principle actually exists.

The matching principle, according to McGraw-Hill, requires that expenses be deducted from related revenues in the time period in which they occur. Expenses can either be tied to a revenue, as in selling clothing which you buy from the manufacturer, or they can be tied to a time period, as in paying rent on an office space. My personal budget started out as a simple cash in/cash out balance sheet but I soon realized that I was not accounting for money which was “spoken for” (phone bills, electricity, etc.) but which I hadn’t yet spent. So I amended my budget to reflect better my financial state at any given time.

And voila! A very crude yet useful (to me) accrual method of accounting.

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