Creating a budget is an important component of any household’s financial health. You must know what’s coming in and what’s going out and make sure that the columns match. Some people make their budget but it’s not effective and then they wonder why. Learn what the main mistakes are that people make when they create their household budget so you know what pitfalls to avoid.
When broken down to its most basic components, creating a budget basically means knowing what funds are incoming and what funds are outgoing. Then, you try to figure out how to make those two columns meet (at the very least – ideally you’ll have some spare cash to fiddle with).
To accomplish that, you need to know what goes into each column. It’s generally easy to record what your incoming expenses are – they involve your salary or pension benefits. Even if you’re self-employed you generally have an idea of what you can expect to earn each month.
The only way to ascertain your expected outgoing expenses is to track them. That means that, for the weeks and months before you prepare your final budget, you will need to carefully record all of your purchases.
Look at it like this. If you’re on a diet, you won’t be able to stick to the diet if you don’t identify your pre-diet eating patterns. Once you know what errors you had been making in your food plan, you’ll be more able to correct the mistakes. Same thing with creating a budget. You need to keep track of all purchases, no matter how small, to track your spending patterns. Then you can review your purchases and decide what is necessary, what is extra and what is extraneous.
The best way track purchases is to update your list every night before you go to bed. Another strategy involves carrying around a small notebook where you jot down purchases as you make them throughout the day. You can use your cell phone for your list or download a personal finance app that gives you a tool to help you track all your spending – cash, checks and credit.
Stick to Cash
There’s nothing as helpful in creating and sticking to a budget as limiting your expenditures to cash. If you are careful about only using the cash at hand you’ll be able to resist temptation much of the time.
Take a few envelopes and label them – groceries, clothes, sundry items, etc. Place the amount of cash that you’ve budgeted for the item in question into the envelope at the beginning of the month. Consider the number of weeks in the month (4 or 5) and divide the cash by that number. You will then know how much money you have for that item for each week.
Obviously your big expenses such as utilities and your mortgage payments aren’t included in envelopes but your budget will take that into account as it tells you how much money is available for the envelope-items.
The cash-in-an-envelope trick can also help you avoid buying on impulse. Everyone does some impulse-buying but if you want to create and stick to a budget you will want to stop that ASAP. Some impulse-buying is fairly innocent – buying a pack of gum while you’re standing at the check-out counter. But if you buy a magazine every time that you stand at the check-out counter, when you add up 10x grocery visits per month, that comes to a significant expenditure.
One impulse buy a month (especially if it’s relatively small) isn’t going to make or break your budget. But if you have a pattern of these types of purchases (and you’re tracking your buys, remember?) you’ll notice that you’re racking up some serious money.
That doesn’t mean that you can’t buy magazines. But it does mean that you should plan your magazine purchases. Getting a subscription to that same magazine that you pick up at the supermarket check-out counter can save you almost 50%! So the key is to plan.
Some people have a knack for being frugal while still enjoying themselves while others become penny-pinchers and spend their lives denying themselves simple pleasures. That’s not budgeting, that’s just being cheap and stingy, even just with yourself.
There are 2 problems with scrimping. First of all, you may go through a period of depriving yourself and then become so overwrought that you binge. That will throw all of your hard work out the window. It’s important to reward yourself with a treat now and again – buy yourself a nice item of clothing, play some of your favorite games at the online casino, take yourself (and maybe a friend) out to dinner. Whatever your minor splurge is, go for it.
Just keep those expenditures within your spending limits and you’ll be fine.
In the same way that Weight Watchers brings dieters together at group meetings to discuss challenges and successes, you should have a partner who will help you keep to your budget. Your partner, a friend, relative or even a professional financial advisor or coach can help you stay on track.
Start by considering who you know who manages their own budget wisely. Then ask them if they’ll help you organize your finances. You don’t have to share personal details of how much you make and spend but you can ask them for tips and ideas that they find helpful in managing their own finances.
There are also online and real-life budgeting classes and clubs that can give you the support and advice that you need. Group leaders are there to help you review your expenses as opposed to your income. They will offer personalized advice while other group members provide support.
Most people have a limited income and must budget their expenses to match their available resources. But if you take needed action to balance the two sides of the scale, you’ll find that you enjoy a better overall financial situation and future.