How many times have you reached the end of the month, paid all of your bills and found that you’ve overspent your budget. Mistakes happen and unexpected expenses can certainly challenge even the most dedicated leading to a failed budget. But if you find this happening to you more often than not then maybe you need to look at your budget and see if you’re making one of these five common mistakes.
1) Unrealistic expectations
One reason that budgets fail is setting unreal expectations of expenses. This tends to happen more with variable expense items such as eating out, groceries and other expenses that can vary on a month to month basis. Here’s where an unrealistic expectation can set in. If you know that in the past you’ve spent $500 a month on groceries, is it realistic to trim that down to $200? There are times that you have to trim from certain areas aggressively and you should. But, you need to keep your targets realistic. My preference is to inflate my expenses slightly. I’d rather have some surplus at the end of the month then not enough. Besides, whatever is left over, if you’ve left some room for errors, can be used to pay down some debt or go towards saving and investing.
2) Not Planning for All your Expenses
For most of us, the easiest way to budget is to do so on a monthly basis. But what about those expenses that come due on a quarterly, bi-annual or even annual basis? Car insurance, taxes on your vehicles, sanitation fees, are just a few examples of expenses that come due in intervals greater than a month. Uneven utility bills are another expense that can vary greatly from month to month. My electric bill varies from $125 to $250 depending on the time of the year. If you’re not taking these into account then you’re bound to have shortfalls periodically. I cover these types of expenses by using an envelope budgeting system. For my utility expenses, I look at last year’s overall utility expenses, divide it by twelve and then budget that amount on a monthly basis which gets deposited into the utility “envelope”. Using the envelope budgeting method makes this easy to do and gives you an additional benefit. creating some buffer by building up some cash in your account during the months when these type of expenses are low or not due at all
3) Not having a buffer
Another reason that budgets fail is not having a “buffer”. I’m a firm believer in building a buffer into your budget. Having a buffer can help cover unexpected expenses as well as expenses that vary greatly on a month to month basis. This does not mean that you have to create a “buffer” category in your budget. Having a buffer can be as simple as increasing the amount you budget for individual items and building a small surplus in those items. Or you can create a separate category for your buffer, putting a small amount into it on a monthly basis to build up “some breathing” room. One potential benefit of having a separate budget item for “buffer” (or whatever you want to call it) is that you can set a target max for it. Once you reach that maximum amount you can take the excess and apply it towards, debt, savings or even a treat of some kind for yourself. It’s especially important to have a buffer if you are budgeting for items that vary greatly on a month to month basis.
4) Not tracking What You Spend
I think the chief culprit here is the debit card, at least in my personal financial world it is. It’s far to easy to whip the debit card out and pay for something. Fortunately, I keep all of my receipts and carefully enter them into my check register. Unfortunately, sometimes I let them build up in my wallet. When that happens I usually end up with a few receipts that I really don’t have a budget item for (the buffer helps with this) or worse, that I’m well on my way to overspending a category. This one really comes down to discipline. Discipline in spending habits and more importantly, discipline in tracking what has been spent! The same can be said of credit cards, I use a credit card to pay for budgeted items such as gas and household supplies. Luckily I am far more disciplined about tracking that particular credit card and always pay off what I’ve charged to it that month.
5) Living a Lifestyle Beyond Your Means
Here’s one reason that I think potentially causes many budgets to fail. Fixing this takes a lot of thought and introspective into your lifestyle choices. It never fails to amaze me how some folks don’t see that the amount they spend and what they spend it on as being unreasonable relative to their income. The best way to describe this is to share some highlights from a recent post in freemoneyfinance. The topic of the post was that a reader wanted to know if they should withdraw money from a 401k to pay off debts.
The reader described themselves as a household of three, Husband, Wife and a baby. He listed their income and all their expenses. Their income amounted to $6200 a month and they had a shortfall of several hundred dollars every month which was adding to their debt. One inviolate expense item was $1000 a month in tithing. I respect everyone’s religious choices. I believe that contributing to the religious institution of your faith is admirable. But if your contributions negatively affect you financially then something is potentially out of kilter.
It doesn’t end there though. When I read through the readers “Variable Expenses” I think my head spun once or twice. Here’s a short list of what their budget looked like:
- Car (oil changes/repairs) – $144
- Food – Groceries – $680
- Gifts – $155
- Clothing – $235
- Travel/Transportation – $74
- Parking/Tickets/Tolls – $54
- Home Supplies – $260
- Shopping/Target – $440
- Personal Care – $40
Do some of these items jump out at you as being unreasonable? Isn’t $680 dollars a month for groceries and $235 a month for clothes a bit high? What about $440 a month for Target and $260 a month for home supplies? Something is fundamentally wrong with their budget! I shared this with my wife, Joel, and after we discussed it for a while she summed it up by saying they have a serious “shopping” problem. I agree with her, they do, and would add that they are most likely living a lifestyle beyond their means.
Personally, I dislike being overly critical of anyone that is honestly looking to better themselves financially. But in my mind, this is a classic example of what living a lifestyle beyond your means might look like from a budgeting perspective. If you’d like to read the entire post (and the scathing comments) you can find it here: Help a Reader: Withdraw 401k to Pay off Debts? I hope that this particular reader learned where they were failing in their budget and took corrective action.
If you are having problems with your budget, one of these five budgeting mistakes could be the reason for it. There are other reasons that budgets fail, but in my experience, these are the ones that have caused me problems in the past. I’d be interested in hearing what budgeting mistakes you’ve made in the past and how you’ve fixed them.