Budgets are a common personal finance tool, and they are also the source of much negative feeling. Most of this is likely because people often try to create a budget and follow it to the letter only to have some unexpected event derail them. The result is often not unlike falling off a diet, only much more costly.
Here are 5 common reasons why budgets fail, and how to avoid it happening to you.
1. Forgetting long-term, reoccurring expenses.
It’s easy to factor in the grocery bill, or the utility bill because those are things you pay every month. Often times, the once a year costs get lost. Tax bills, insurance bills (homeowner’s and sometimes auto) are two easy to forget bills. When creating your budget, go back over your past records and look for this once a year expenses, then divide them by 12 and add that amount to your budget. This is particularly effective if you take that monthly value and route it to an ING (or similar) savings account. For example, I have 1/12 of my property tax bill deposited every month to an ING savings account I set up just for that. The result is that I can forget about it until I get the bill, but I’ve already saved the money over the past year so it’s not a painful as it used to be when I’d realize I hadn’t saved up for the bill.
2. Not preparing for the unexpected.
It’s impossible to know every dollar you’re going to have to spend every month. Stuff happens, and you simple can’t know about everything in advance. That’s why an emergency account is critical. To budget for emergencies, determine how much you can save per month and set that aside in a savings account. Most experts recommend 3-9 months of living expenses, but for a lot of people that’s too daunting. So start with what you can, and increase every couple of months – something is better than nothing!
The most important part is to treat this as you would your rent/mortgage or utility bill. The reason most people fail to save money is because they take the “save what’s left” approach. This never works, because there’s always something new to spend money on and what’s left isn’t enough for a cup of coffee.
Make your savings at least as important as your housing payment – it’s your freedom at stake.
3. Forgetting the small stuff.
It’s easy to remember the car payments and rent, but don’t forget about lunches or the morning coffee. We’ve all heard of the Latte factor, and those small costs can add up pretty quick. Track your daily spending for a week, pocket all receipts and add them up at the end of the week to get an idea of any small but frequent expenses that may be absent from your spending radar.
4. Not doing it.
Seriously. I know a lot of people who say they have a budget, but they’ve never actually written one down! What they mean is that the like to think they have some general idea of what their big expenses are, because that’s really all you can have without doing a detailed budget at least once a year to see where you’re really spending your money. Be sure to write yours down.
5. Not being flexible.
This one dooms many a good intentioned saver. You put all this hard work into your budget and track everything down to the penny, but discover a few months later that you either forgot something, or under estimated an expense. This is a watershed moment for your budget. How you handle such events is going to determine whether you are success in your budgeting. You need to remain flexible in your budgeting to compensate for such inevitable events.
To aid in budget flexibility, try grouping your expenses into absolute, hard fast necessities (rent, car payment, etc) and other expenses like discretionary or bills that are flexible in amount like utility or dining expenses. This way, if you find that surprise expense, you can shift some cash around to make that payment. It may mean eating out less or turning the heat down another degree or two, but you can do almost anything if it’s temporary.
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