Making a monthly budget is not difficult, but for some reason many people cannot create a budget which works. Either due to a lack of education or poor time management skills, these individuals utilize a budget more as a guideline than a monetary plan. If a business entity budgeted without financial knowledge or did not reserve time to make a functional and balanced budget, it would go bankrupt. This same result is in store for individuals and families which budget from that position. This analysis glosses over countless reasons your personal budget may not be working, so a little deeper exploration follows.
Below are ten reasons why budgets commonly do not work. It is not an all-inclusive list but can serve as an entrance exam into a personal finance class. Utilize the list as a way to identify possible reasons your budget is not working. Afterwards, take corrective actions to fix your failing budget.
Reason #1: Your Math Skills Need Improvement
One of the crucial components of making an effective budget is ensuring that your addition and subtraction skills are spot on; otherwise known as “balancing your check book.” Make sure that when calculating how much money is coming in and how much is going out, you use a calculator and check your sums at least once before moving on. The old adage of “checking your work” is pertinent here.
Some people may think that this is too labor intensive but using a calculator and checking your work limits the amount of human error that comes with mathematics. In simple terms, if you do not add or subtract correctly, your entire budget will be thrown off.
Reason #2: Discretionary Income is Factored In
A common budgeting mistake many people are guilty of is factoring in discretionary (irregular) income into their monthly budget. One-time payments, pay based on performance (commission/tips), or other income that is not guaranteed should not be included in your monthly budget; if possible. If your primary source of income pays via tips or commission, underestimation is crucial to the creation of a sustainable budget.
It would be safer to not budget this type of income at all, but for some people there is no way around it. It is always smarter to estimate conservatively when it comes to discretionary income. Other types of income that would fit into this category would be lotto winnings, revenues from on-line articles you have written, EBay sales, and temporary employment.
Reason #3: You Let Others Influence Your Spending Habits
Something many people find happening is “peer pressure” influences them to spend money when they normally would not. A common occurrence is attending an office lunch at a restaurant when it was not included in the budget. The smart choice would be to politely refuse the invitation or eat prior to or after the lunch, but normally succumbing to peer pressure is what occurs.
This is just one of the many examples where peer pressure leads people into spending their money and messing-up their budget in the process. The best fix for this problem is to learn how to tell others “no thank you” with a secondary fix being the allotment of “peer pressure” money into the budget.
Reason #4: No Room for Emergency Spending
What usually occurs when people run into an emergency that requires them to spend money they do not have? Out comes the credit card. If you are a smart individual who does not use a credit card, you cannibalize your budget to pay for the expense. The primary issue is that neither of these options reflects a budget that is working. As a matter of fact, it is a danger sign that your budget is not working at all.
Factoring in some “flex room” in your budget for emergencies (car maintenance, death in the family, medical expenses, etc.) will help you in your journey toward building an effective budget. The best way to fix this problem would be to set an amount of money aside each month into an emergency fund. This pool of money will provide you with some, if not all, of the funds you may need to pay for those surprise situations that creep-up on everyone.
Reason #5: No Support from Your Spouse
If you are married and find that your budge is not working, take a look at the support you get from your spouse. Are you on the same page? Are you operating on the same budgeting and spending principles? If it seems that your spouse does not agree with your budgeting skills or believes money should be spent differently, a “melding of the minds” is need immediately. A key for a budget to work is for the entire family to be on the same page.
Reason #6: You Did Not Budget Every Expense
Emergency spending issues and “peer pressure” spending could be signs of a bigger problem: you did not budget every monthly expense you have. Take a look at your spending records from the previous few months and see if you have normal monthly expenses factored-in. If you find yourself always spending $30 a month on clothes, but do not have it budgeted, start budgeting it.
You need to lay out all the things you spend money on and find a place to get the money from each month. If this does not work with your income, you need to change your spending habits or your budget altogether.
Reason #7: You Have Not Broken Bad Spending Habits
Building off many of the other reasons your budget may not be working, your bad spending habits could be another you may have not thought of. Do you constantly go out to eat and still purchase a full week’s worth of groceries? Do you download songs and books like crazy and do not think of where the money comes from to pay for it?
These questions can go on-and-on but it is simple: you need to identify what habits you have which lead you to poor spending choices. Once you identify these, stop doing them. Your budget will begin working for you once you stop spending money in useless pursuits, on a whim, or money you do not have.
Reason #8: You Did Not Factor-In Inflation
Something everyone needs to remember when constructing a budget is that prices change; and in this economy that means prices are inflating, not deflating. It is hard to estimate inflation, but a good “rule of thumb” is to budget more for the items that are routinely affected by inflation then you estimate you will spend.
This means that you if you normally spend $250 a month on gas, you should budget around $280 to ensure you have enough budgeted for those random 25 cent weekend price hikes. Other key budgetary categories to apply this principle would be groceries and utilities. If you have any excess money over each month, you can have it “spill-over” to the next month, put it into your emergency fund, pay debts off quicker, or treat yourself to something. The key is to use it wisely.
Reason #9: You Have Too Much House for Your Income
A big problem in the United States is that families live in houses that are way beyond their means to own or rent. The number of foreclosures in America is outrageously high, with a primary reason being the improper determination of how much home a specific income allows. Things to consider when purchasing or renting a home include: maintenance costs, homeowner association dues, utilities, rent or mortgage payments, renters or homeowners insurance, taxes, and lawn care.
All of these expenses need to be factored into your budget when deciding how much house you can afford. Chances are, if your budget is significantly off from where it needs to be, the first place to look for the cause is home expenses.
Reason #10: You Do Not Do Your Budget Daily
Many people balance their budget only one or two days a week and cannot understand why the numbers are not adding up. Chances are, receipts have been lost, expenses without receipts have been forgotten, and perhaps overspending occurred because they could not remember how much money they had left in a particular budgetary category. Balancing your budget on a daily basis will help make sure you are always aware of how much money you have and will help mitigate overspending.
All of these reasons may not fit your particular situation but chances are a few of them do. Now that you are armed with this list, explore your own budget and make the appropriate changes to get yours back on track.