I’m a big believer in budgets. I’ve had one since I was about 20 years old. It’s changed a lot over time, but I’ve always had the guide firmly in place so I know what I’m going to do with my money. And so I know where I can “steal” from when the caca hits the fan.
People are always willing to volunteer their wisdom about budgets to me. I’m a Budget-Discussion-Magnet and nine times out of ten, people want to tell me why budgets don’t work. I agree. Most people’s budgets don’t work for a few basic reasons. Here’s my Top 5 List:
1. Wrong Income Projections
You wouldn’t believe the number of people who don’t know how much money they make. I know there are a variety of pay periods: monthly, semi-monthly, bi-weekly and weekly. But all you have to do is look at how much is coming into your accounts to know how much you actually make. If it varies from one month to the next, then you use the lowest income you have as your basic income.
2. Too Few Categories
People generalize their budgets too much to get an accurate picture of where their money is going. I swear if I see one more budget with “spending money” I’ll spit. It’s all spending money. What are you spending it on? You have to have enough categories in your budget to give you a real sense of where the money goes and where you may be able to cut costs.
3. Missed Expenses
Not all expenses come in every month. Insurance bills can come annually. Property taxes can come quarterly. Service contracts, dental bills, health-club renewals are all periodic expenses. But if you don’t include them in your budget, you won’t have the money at the ready when the bill comes in.
People spend cash without keeping track of where it’s going and that throws their budgets out of whack. Some people use ATMs like a wallet, pulling $20 here and $40 there. Then the money flows away without any record of where it’s gone. And if you know you have a bill coming due in a couple of days, but your partner doesn’t, and (s)he goes into the account for cash, then you won’t have the money available to pay the bill.
5. No Plan to Save
Despite how well known the “Pay Yourself First” idea is, people still don’t do it. They wait to see how much they have left to save. And it’s usually ZERO, Zip, zilch! If you’re serious about savings it has to be a line item on your budget, you have to identify a specific amount you’re going to save (both for long-term savings and for emergencies), and you need an auto-deduction to a savings account to MAKE IT HAPPEN.
The very best way to make sure you have the money you need to do all the things you want without blowing up your budget is to stir “planned spending” into the mix.
If there are things you spend money less routinely – think car insurance, property taxes, gifts, sports fees, and the like – you should include a line for each of those things in your budget and set money aside monthly. Let’s face it, if it’s costing you $800 a year to keep your kid in hockey, it’s far easier to come up with $67 a month than to scrape together the $800 all at once. And $100 a month for holiday gifts makes way more sense than heading into a new year with a shopping hang-over on your credit card.
Whenever you need to accumulate money for a particular buy, that’s planned spending, and you should have a separate savings for that money. Each month you total up the amounts going to planned spending and transfer it to your Planned Spending savings account. (For heaven’s sake, find an account that pays you at least 1% in interest. Don’t just settle for your bank’s savings account option paying sweet diddley squat!) When it comes time to use the money, you transfer it back to your regular account to pay the bill.
Now you have a strategy for dealing with those costs that you don’t pay monthly. You’re welcome.