A recent survey by GOBankingRates cited creating and sticking to a budget as one of the top financial New Year’s resolutions for 2017. Yet as I talk to people, many have abandoned their budget. When I recently asked a friend why she ditched her budget, she told me that she just was not good at budgeting. I told her that maybe it was not that she was bad at budgeting, but she was using the wrong methods to budget. Intrigued, she asked for more details and I went into the top 7 reasons why I feel budgets fail:
1. You only use the budget to write down your bills, not your overall monthly spending. I find that most budgets fail, not because of the bills, but because of the other unaccounted for expenses. A true budget accounts for ALL of your spending in the month.
This means having a category for all of the areas you spend. You can use broad categories for spending such as entertainment to account for movies, plays and sporting events. This also means saving monthly for expenses that you know will happen during the year but just not when, such as auto repairs/maintenance and home repairs. If you have children, include a category for child expenses such as field trips, clothing and school activities. Websites like Mint.com offer free budgeting templates based on your lifestyle that you can use as a guide to creating your budget categories.
2. Not tracking your budget. I normally tell people that there are two parts of a successful budget. One is forecasting your spending needs for the month and writing down your spending plan. The other is actually tracking your spending. Tracking your spending holds you accountable to sticking to how you want to manage your money. It also helps you to understand how you are spending and forces you to prioritize.
3. Not tracking the spending you do on credit cards. A credit card is not an excuse to avoid your budget. If you categorize $250 for eating out for the month, no matter how you spend, you still have a $250 budget. Track your spending no matter what source you use—cash or credit—and commit to paying off the balances of your credit cards monthly. If you carry a balance that you cannot pay, consider using cash only for future purchases until you’ve paid off your credit card debt.
4. The numbers you use in your budget are unrealistic. Websites like ValuePenguin can help you gauge how the average household spends. If you find yourself constantly spending more than you budgeted in a particular category, consider increasing how much you budget in that category.
I had a friend that tried to budget $350 a month to feed a family of 7. I told her that I admired her effort but unless she wanted really skinny kids, she should consider increasing her food budget. If you know there is no way you are giving up your favorite latte or massage then put those amounts in your budget.
5. The percentages you spend in each budgeting category are "out of whack". If you find yourself going from one financial crisis to the next despite having a realistic budget, consider looking at what percentage of your income is going into different categories. It is rare to have the exact same expenses every month so account for high spending months like holidays and birthdays as well as higher than average utility bills such as gas in winter and electric in summer.
In addition, if you do not have margin in your account for savings, then there is no buffer between you and a crisis wreaking havoc with your budget. I recently worked with a woman that had a budget and was diligently following it so she was confused as to why she did not see an improvement in her finances. After reviewing her budget, I noticed that over 50% of her income was going towards her mortgage and another 30% was going towards her car. This left no room in her budget for saving for unexpected expenses. She decided to get a roommate, which cut her costs in half.
6. Using a budgeting system that does not match you. If doing your budget feels like doing homework in a class you hate, consider changing the method you use to do your budgeting. If you struggle with technology then ditch the online tools and go back to basics. Use a budgeting worksheet or an Excel spreadsheet to create your budget. To stay on track, either keep your receipts in an envelope and update your actual spending daily or weekly, jot down your expenses in a small notebook, or use cash at a minimum in the areas where you overspend.
If you are somewhat comfortable with technology, start with your bank’s online budgeting software program since it’s already linked to your accounts. If you want more features then explore the various online budgeting software programs and find out which matches how you want to budget, create budget categories, and track your spending. (Do you want to pull up reports of spending in certain categories?) Some software programs only track banking. Others track everything, including investment accounts.
7. Perfectionism. Rome was not built in a day and neither will your budget. The first budget you create is a best guess. The longer you budget, the closer your budget will be to your actual spending. As you track your spending, you will make adjustments and typically within a few months, your budget will more closely match your spending. As your life changes, so does your budget.
As you can see, budgeting is not a one-time event. It involves finding the right method that works for you, giving yourself time to understand your spending, and tweaking your budget along the way. A few changes can go a long way into making 2017 the year you conquered the budget!
The above material was prepared by Forbes.