Most people do not like to make a budget. Thus, excuses for why they don’t budget abound. Medical students don’t have an earned income, so they think they don’t need a budget. Residents believe they don’t have time to make a budget. Attendings say they make so much money they don’t need a budget. Each of these groups are mistaken.
Who really needs a budget? The right answer is everyone. But that is also not practical as there are people who do just fine without a budget. I believe a budget should be made by anyone who is having trouble with debt, those who haven’t saved as much money as they think they should have, or those who feel they should be able to live a more extravagant life with the money they make. The simplest solution to each of these problems is to make a budget.
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Budgets are not hard, they don’t take a lot of time, and they are very helpful for solving financial problems. But one must avoid the common mistakes made when creating their first budget. Most of the mistakes come about by cutting corners to “save time.” Following are ways people cut corners when making their budgets, which often make their budgets unhelpful in solving their problem.
Dividing categories into fixed and variable expenses
I see this commonly with people who like to lump expenses together. They feel that if their budget only has two categories the budgeting process is much simpler. The problem is that lumping things together doesn’t provide the information needed to find the trouble spot. The more categories used, the more likely one can find and solve the real problems.
The term “fixed expenses” is another issue. Pretending the fixed expenses are fixed, meaning you must spend the same amount every month for that expense, is a big mistake. There are essentially no expenses that are truly fixed. Your electricity bill is not fixed; you can do things to reduce or increase it. Your home mortgage is not fixed as you can buy a less expensive house and lower the mortgage payment or refinance your home to change the mortgage payment. Your car payment is not fixed as you could sell the car and eliminate the car payment altogether. Insurance payments are not fixed as you can change to a less expensive policy.
Having a pretend category such as “Amazon Purchases”
This mistake mostly stems from either being lazy or wanting to hide expenses. If you use a very broad category like Amazon, you only need to make a single entry at the end of the month to record everything purchased from Amazon. But you will never discover where you are overspending if you don’t investigate each purchase. Are you buying too many clothes, gadgets you don’t need, pet supplies….
It is very important to categorize what you are buying so you know how much is being spent in each category. Lumping everything together is also a good way for people to hide their overspending. By burying it in a broad category like Amazon, you don’t need to deal with where the actual expenses should be recorded, and your spouse won’t find out what you have been spending money on.
Using budgeting programs that record the entries for you
This is another form of laziness. One of the most important things you gain from making a budget and implementing it is to see and understand where you are spending your money. If a program just pulls in data from your credit card, you will never understand what you are spending your hard-earned dollars buying. The program may not always even put items purchased into the correct category. Even when I’m the one who spent the money, I sometimes can’t figure out what purchase the credit card entry represents.
Automatic entries should only be used after you have paid close attention for several months and have a good grasp of your expenses. You can then use automation to see how you are doing with your newly established balanced budget.
Checking your bank balance daily
Putting an app on your phone so you can check your bank balance daily is a waste of time. That’s just about as bad as looking at the stock market daily. If you feel the need to check your balance every day, you do not keep enough money in your checking account. Fix that problem, the real problem, and stop wasting your time on the app. Besides, the bank doesn’t know your actual account balance since they don’t know if you have written a check against your balance until the check gets cashed. And the bank doesn’t know your upcoming expenses.
Keep enough money in your checking account to handle the monthly bills and you will never need to check your balance again. Simply balance your checking account once a month when the statement comes and be sure you put enough money into the account, plus some cushion, for next month’s expenses.
Leaving out categories
If you have been having financial difficulties, you already know your budget is in the red. After you have made your first budget, and it turns out to be in the black, you know there must be some categories you forgot to put in.
The most common missed categories include gifts (birthday, Christmas, anniversary), pets, savings, and periodic expenses you forgot about like insurance, property taxes, and vacations.
Underestimating expenses
When making your budget it is very important to start with your actual expenses, not your best guess or recollection. For example, when you look at vacations, go back and look at all the expenses from your last vacation to get a good idea about what you actually spent. Most people spend a lot more than they think they spend.
As you begin, you must track every expense. Don’t leave anything out or trust your memory. Get this right the first time so you can solve your problem quickly.
Not including your spouse in the budgeting process
If you are married, it is very important to include your spouse in the budgeting process or it will not work. When I do my financial makeover coaching program, I insist on both spouses’ participation. Frequently, one spouse wants to budget, and the other does not. I guarantee that if both spouses are not on the same page with their budget, their financial situation will not improve. It takes everyone in the family to work together to stay on budget. It just takes one unbudgeted purchase to blow the whole budget.
I refuse to go through my program with only one spouse, even if the other spouse isn’t interested. They must both be willing to work on their finances together.
Not making cuts immediately
Your budget must balance. This means that all the categories must be included in the budget, and the total expenses must be less than your income. If you find expenses are greater than income, the exact reason you decided to make a budget, make the needed cuts immediately. Do not continue down the path of overspending.
I remember working with a couple who was spending $5,000 a month more than they made. Before we began making the budget it was obvious it currently was in the red, as their savings was dropping precipitously.
After pointing out their $5,000 deficit, I told them the only way they would solve this issue was to sell their “dream” home and buy one they could afford. And they needed to do it immediately!
After refusing to make the needed changes, they continued their current spending for another six months, losing an additional $30,000, before deciding to put their house up for sale. It sold in less than 30 days, and they used the money from the sale to buy a house without a mortgage. Now that they had a house their income could support, their budget balanced, and they lived happily ever after. (I’m not sure if that is true, but they were no longer bleeding money every month.)
Not Taking advantage of the envelope system for problem areas
If you begin to use a budget and find you are going over budget in the same areas every month, it is time to switch to the envelope system in those problem areas.
Let’s say you have a budget of $300 a month for clothing. If you find that you spend more than that every month, then in this one category, you should now only spend cash. To set up an envelope system, start by writing ‘clothing’ on the outside of an envelope and at the beginning of every month put $300 in the envelope. Keep the envelope in a safe place in your home and take it shopping when you plan to shop for clothes.
Since you can only spend the money that is in the envelope, when the envelope is empty, you are done buying clothes until next month, when you replenish the $300. This method ensures that you will never go over budget in this category. If you anticipate a need to spend more than the allotted amount in a given month, save up for it. You never have to spend all the money in the envelope. Some of it can carry over to next month if needed.
If things are not going financially the way you think they should, make a budget and stick to it. For those who find this task difficult, get help. You might even consider doing my one-on-one financial makeover. Those of us who earn more than the national average have no excuse for not doing well financially. Make a budget. Find the areas you are overspending and take action.
