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It’s great to take the initiative to finally write out a budget. You’re taking one of the most important steps toward getting your financial house in order. But your first crack at estimating your expenses may be missing the mark. In fact, it’s almost certain that your initial estimate will need some tweaking.
Creating a budget that works for you will probably take a few months of carefully tracking your money. Here’s what may be sabotaging it, and how to fix it.
1. You May be Underestimating What You Actually Spend.
It’s possible you’re leaving out a few things, for instance:
Transportation – if you’re listing only your car payment and gas, you’re missing tolls and repairs.
Food – Probably the area most underestimated, since we tend to buy food in several ways. If you’re listing groceries but leaving out restaurants, take-out or the occasional sandwich at a convenience store, then a lot of money is slipping through your fingers.
If you’re budgeting $400 per month on food, then one trip for take-out pizza and drinks can blow 25% of your weekly budget. Not to be a party-pooper, but the first few months of using a new budget are when we need to be ultra-aware of everything spent on food in whatever setting.
The food category might be a good reason to start a ‘stockpile’ of foods like pasta or other foods that have a long shelf life, so if you spend a night out you can postpone your grocery trip for a few days.
Other expenses that are easy to overlook are subscriptions to magazines, membership fees for clubs or kid’s sports, utility bills paid quarterly, haircuts or nail appointments, contributions at work or school, or anything that’s auto-drafted from your account.
Store purchases can also throw a wrench into your budget if you’re not careful. Suppose you go to a store like Target and spend $60-$70 for a variety of household items, food or clothing. If you don’t take a few minutes at home and assign each purchase to categories, you’re creating a big black hole in your budget.
This doesn’t have to take long. When you get home and have a minute, just scan down the receipt and write on the back of it, clothes $26, food $18, household $25. You get the idea, then enter those as expenses in your budget.
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2. Is Everyone on the Same Page?
One of the main reasons for friction in a marriage or relationship is when people aren’t in agreement or have different interpretations of your finances. Even if you disagree on your future financial strategy, if you’re implementing a budget for now, then you need to have a mutual understanding on a few things.
- The amount of money coming in each month.
- The amount of your monthly fixed expenses.
- The amount you have left to spend on things like clothes, entertainment or ATM withdrawals.
Your budget will evolve over time as you get a raise or adjust certain expenses. But to get it started and get an awareness and control of your expenses, you need to have an agreement at the outset and the ability to communicate.
If someone suddenly has an opportunity to spend for something that isn’t in the budget and costs more than an agreed upon amount, a simple call or text can ensure you’re both aware and working together.
If you take some time to discuss your future, it’ll be easier to agree on the need for a budget now. And once your budget enables you to get a handle on your finances, you’ll be able to implement longer term strategies, like an emergency fund and saving some money.
3. You’re in the Habit of Over-Spending
Taking the initiative to create a budget is great, but if you’re regularly exceeding it then you can say you have a ‘budget’ until you’re blue in the face. A budget implies that you’ve written down what’s coming in, what your fixed expenses are, and what’s left to spend. If you’re regularly exceeding it then it’s got to be one of two reasons:
- You’ve under-estimated some fixed expenses. In that case, you’d have to adjust the amount in your budget upward, or if that’s not possible, shop for a better rate for that expense. Or adjust other areas to accommodate it.
- If you find that you’re consistently overspending in your discretionary categories, that may call for an attitude adjustment. Creating a budget is one of the most important steps in getting control of your financial life. But for it to work you’ll have to try and ignore the ‘buy it now, pay later’ philosophy most merchants push.
That new couch or big-screen TV will still be there when you save up the cash for it. Your neighbor may have a new 60-inch TV, but how do you know they’re not in debt up to their eyeballs? If you stick with your budget and eliminate debt, you’ll eventually be able to put some money aside. And you will have more cash for purchases.
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4. Maybe Your Budget Doesn’t Fit Your Lifestyle
We all have changes in our lifestyle. Maybe you have a child and become a one-income family, you start a new job with a longer commute or more expenses. So, adjusting your budget is as necessary as checking the weather before you go out.
Once you implement your budget, it’ll become easier when you get accustomed to how much you can spend. But be aware of lifestyle changes and how they affect your spending.
Something like a new car payment, a move to a new town, or taking on a new job will affect your bottom line. But thinking it through and making adjustments will ensure that you’re still in the black each month.
5. You May Need to Simplify Your Budget
If updating your budget is like taking a math test, you probably won’t stick with it. Sure, it may take you awhile to initially write it, getting every category down. But you want to make it easy to maintain.
Making categories as granular as ‘scotch tape’ or ‘the ice cream man’ is a sure way to create a four-page mess that you’ll never want to maintain. Creating ‘office supplies’ and ‘food’ is a much easier way to categorize them.
If you find that you’re consistently exceeding one category, then you can drill down further and itemize it a little closer to see where you’re spending too much.
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6. Are You Working Together?
Like I mentioned in step 2, if you have a partner, you need to have buy-in from both of you when you start a budget. But when it comes to recording what was spent it’ll be easier to have one person take the responsibility.
If you’re going out to dinner, you’d both decide on the destination. But if you both try to steer the car you may not get there in one piece.
So, how can you avoid the budget recorder always feeling like the inquisitor and the other person feeling like the defendant?
That’s why it’s so important to be in agreement up front about the need for a budget. And if you work together to set up categories and record your fixed expenses, you’ll both have an understanding of the need to constantly communicate.
7. Don’t Forget the Category for Saving
One of the quickest ways to blow a hole in your budget is when you have an unexpected expense of several hundred dollars. Your car needs a brake job, or your clothes washer dies and you don’t have a spare $500.
As tough as it is, try to set aside a small amount each week for emergencies. The best way may be to open a separate account and have an amount direct deposited into it. Even if it’s $20-$25, within a few months you’ll have a cushion against emergencies.
8. Don’t Forget to Build in a Few Rewards
Let’s face it, we create a budget because there’s just not enough money to go towards everything we want. So, implementing a budget is a great first step in getting control of our money.
But those first few months can be tough. We’re trying to be ultra-careful to make sure we’ve allotted the right amount to categories, that we have enough categories, and that we don’t over-spend.
If you can, try to build in a category for entertainment. Even if initially, it’s only enough for a movie night or ice cream. You can always adjust it as you gain better control of your income. But having a guilt-free night out once in a while, even if it’s a small splurge, makes the rest of the week easier to handle.
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It’s easy to get discouraged when you realize you need a budget. Not having enough money to pay for the things in your life is frustrating. But rather than feeling discouraged, you should feel empowered that you’re taking the first step to gain control of your finances.
Once you nail everything down and gain control of your budget, you’re putting yourself in a much better position to succeed.
One method that may work as you create your own budget, is Dave Ramsey’s Every Dollar method. The idea is that every dollar should be accounted for. So, if you’re bringing in $1000 per week, and your recorded budget says you’ve spent $890, where did the rest go?
Taking the time in those first few months to account for every dollar can make all the difference in the world for your budget. And once you have control over your budget, you’ll have the knowledge and the confidence to take even bigger steps.