So your finances aren’t going quite as well as you had hoped, the bills are rolling in and despite earning an okay income you never seem to save us much as you would like.
You have been thinking about it for a while, you have been putting it off but desperate times call for desperate measures (deep breath) – it is time to set up a household budget!
Excellent decision, if you do it properly a household budget will rock your financial world, you will always have the money to pay your bills as they turn up, you will be able to pay off your debt, save consistently and achieve important financial goals…. BUT!
But you need to commit to doing it properly!! We all know we should budget, in fact most people have tried budgeting at some stage in their life and failed because they didn’t take the time to get in set up thoroughly.
So what I want to share with you now is three most common reasons peoples household budgets fail and what you can do to avoid these pitfalls.
Pitfall # 1 – Failing to take enough time to understand your expenses
Nothing undermines a budget more than ‘unexpected expenses’, you know those big bills that turn up just as you were starting to feel on top of things.
You have finally managed to tuck some money away in savings, only to find that the car needs a new set of tyres or that your little darlings have grown 5 inches over summer and need a new school uniform! It can be so frustrating to have to pull that money back of savings just when you felt like you were getting ahead.
While you will never be able to budget for every eventuation it my experience as a budget coach that most ‘unexpected expenses’ really aren’t unexpected they were simply just ‘forgotten’ when we set up our budget.
The foundation of a successful budget is a thorough understanding of what ALL your expenses are. Whenever I take on a new budgeting coaching client I give them my budget worksheets and the following three tasks to help them identify what all their expenses are:
- For weeks record every dollar you spend so you can identify where all the little bits go, the bought coffees, the iTunes purchases, the take away, quick trips to the supermarket. The $10 here $20 there all really add up.
- Go back through 12 months of bank and credit card statements to identify, what your expenses are, how much they are, how frequently they occur and where relevant when they are next due. This sounds like a lot but typically only take a couple of hours.
- Complete the Gifts list worksheet to help them identify how much they spend on presents for people throughout the year.
These three tasks ensure that they have the data they need to complete the budget worksheets thoroughly and will dramatically minimise the incidence of ‘unexpected expenses’ derailing their budget.
Pitfall # 2 – Failing to prepare for ‘looming’ expenses
The glass jar budgeting system that my Grandma taught me was really very simple and effective. Identify all your expenses, work out how much each expense costs you on an annual basis and then set aside 1/12th of each expense on a monthly basis so that as each expense turns up the money is sitting there to pay it.
This system works brilliantly but there is one big problem for new starters, can you see what it is?
Putting aside 1/12th of each expense is great if all your big bills occur in 12 months but what if, say your annual car registration is due in 6 months? Putting aside 1/12th will only get you half way there’ leaving you with a rather large hole in your budget. At Grandma’s Jars, we call this hole your ‘budget shortfall’.
Just about everyone will have a budget shortfall when they first start budgeting so you need to take the time to work out what your shortfall will be.
The simplest way to do this is to list all your expenses that occur less frequently than monthly ie quarterly, half yearly and annually etc, look at when they are due and how much you will have saved by the due date if you put 1/12th aside each month. Of course, the number you really want to know is how far you will fall short of covering each expense by its due date.
Knowing what your shortfall is half the battle however the two strategies we use are either to:
- If you have saving or can get your hands on some extra money top up each expense from the start so that putting 1/12th aside will be adequate.
- Or instead of putting aside 1/12th each month you might put aside 1/6th until the bill turns up for the first time and then revert back to 1/12th from that point onwards.
As I said above knowing that you have a shortfall is half the battle. Over the years we used ‘Budget shortfall worksheets’ to help our clients identify their shortfall, these are free to download here if you would like to use them.
Pitfall # 3 – Not having a system to track your spending
For many people and maybe you are one of them setting up a household budget consists of writing down your income, writing down your expenses and then cutting back your discretionary expenses until your income exceeds your expenses …… and that’s it!
Now that’s is an excellent start, the golden rule of money management is that simple – “Your income must exceed your expenses” but what how do you know if you actually are sticking to what you allocated to each expense?
It is one thing to have a surplus in theory but without a system from tracking and recording your spending the theoretical surplus is unlikely to every become a reality.
A good budget should guide your spending, to do this is must tell you 4 things:
- What you have accumulated towards each expense over previous months
- How much you allocate towards each expense each month.
- How much you have spent so far this month, do this you need to be able to record your spending as it happens, and most importantly.
- Your budget should be able to tell you exactly how much you have left to spend without blowing the budget.
Unless you have a system that will allow you to record your spending and give you feedback in real time you are unlikely to stick to it, no matter how determined you might be!
So now you have made the decision to budget commit to doing it thoroughly, setting up and living to a household budget doesn’t need to be hard but preparation is the key to success.
Take time to truly understand your expenses, download our budget worksheets and go through the three tasks I have outlined above. Once you have gathered the data work out your budget shortfall and decide how you are going to deal with it. And find yourself a system of budgeting that allows you to record your spending as it happens so you always know exactly how much you can spend without blowing the budget!