Posted by Tim Stobbs on June 8, 2009
Budgets despite being common in just about every business in existence seem to have problems being used by lots of people for their personal finances. People try them like diets over and over again and keep failing. Yet why do they fail? Well I’m not an expert on this but here are my thoughts of what I’ve seen go wrong.
- Too Much Change. People often try to go from overspending to underspending by huge amounts in record time and then get frustrated by the entire process and quit. It’s sort of like a crash diet. It doesn’t work that way for most people. Phase it in slowly. Stop over spending and break even for a month or two then start to devote a bit more to paying down debt. Slowly change your life and you will see results.
- Not Enough Data. Another major issues budget fail is people assign numbers with no idea with what they are really spending in a month. So instead of just trying to create a budget from a canned magazine article, make one based on how you actually spend. Just track your spending for a month and then use that as a template for a budget. It won’t be perfect the first time, but it will be closer than than a canned budget.
- Not Expecting Changes. Budgets are not static numbers in a sheet, especially in the first few months of using one. Don’t worry about having to change the numbers that is a normal part of a budget till you get a good handle on what your spending is. I track changes on ours and update the version number (eg: version 1.4). Minor changes only get a decimal number (like adjusting the power bill), while big changes get a major one version (the new baby). I’m currently on version 8.3.
- No Controls. Budgets don’t work unless you have some sort of controls on some areas of your spending where you know you are likely to go over. That is why I use cash for certain items in a month like spending cash. Otherwise I would have no idea what I’ve spent so far. Cash makes it easy to track those minor transactions and do some quick planning by looking at what cash you have left. For example, I’m going out on Saturday night and down to $40, I guess I shouldn’t go out on Friday as well.
- No Misc line or float. Life happens when you don’t expect it. It’s a fundamental rule, unexpected things keep showing up all the time and often with a bill. So rather than getting frustrated by it, plan for it. Keep a $100 a month or more around for those things that just happen. If you don’t spend it carry it forward, but often it will just get used up.
That’s my thoughts, if you have failed at a budget what went wrong for you? Or if it worked, what made the difference?