Creating a well-designed budget can help guide you to financial stability. However, more often than we would like, budgets fail. If we can understand the ‘why’ behind budget fails, we can learn how to make them work. Want to get your budget on the right track? Let’s look at the 7 reasons why budgets fail and how we can fix them.
The first step: What’s your plan?
For most, a budget is one of the first steps in creating the blueprint by which financial planning takes place. We have heard it said, ‘If you fail to plan, you plan to fail.’ So, planning and thinking through what your financial situation really is, can help you avoid the pitfalls discussed here. With your plan in place, you can save, invest, use credit and build a stable financial future. Without a plan, though, it’s easy to become frustrated if/when your budget doesn’t work as expected.
Great. You have a plan. Now it’s time to evaluate it and see if you can avoid making these common mistakes. Let’s look at several reasons why budgets fail.
1. You don’t have a financial goal.
Why do you want to create a budget? If you don’t have an end goal then you won’t necessarily see the benefit of sticking to your budget. Fulfilling financial goals is one of the main reasons individuals create a budget. Financial goals can vary based on the individuals and their needs. However, a budget more or less follows the same pattern of income minus expenses.
Without a financial goal there is no reason to stick to a budget. Without a financial goal, your funds can drift away from you, like a ship in the sea. And without a plan, money can be unintentionally spent on frivolous items that don’t make sense.
Over time, that can’t be good for your account. It should be noted that not sticking to your budget and spending unnecessarily can cause you to end up in debt. If you keep some clear financial goals in mind, though, it will help keep your budget from failing.
2. Your budget is non-realistic.
One of the most common reasons why budgets fail is because they are unrealistic. How realistic are you with your budget, in relation to your earnings? Being realistic with your budget means not putting restrictions on yourself that will be too difficult to keep. It also means, having habits or setting goals that will be out of your reasonable reach.
If, perhaps, you have an average-paying job and no other sources of income, you have to at least be realistic. In this scenario, eating out multiple times per week, or buying groceries with your credit card may not be the best choices you can make. Keep this up long enough and the chances are likely that your budget can fail.
If your main goal is to save but you are taking regular actions contrary to that goal, then it’s likely your budget can fail. When creating your budget, always ensure that the numbers you have budgeted for your total expenses are well under your total income.
Many individuals make the mistake of adding unnecessary expenses to their budget. This increases their expenses and brings that figure too close to, or over, their total income. Be aware of all unnecessary spending, when analyzing your spending.
A simple way to make your budget realistic is by calculating and tallying your total cumulated income. After this step, add your total expenses such as, bills, groceries, travel expenses and loan or mortgage repayments. When your total expenses have been added, subtract that number from your total cumulated income figure. This will give you an idea of how much money will be left after expenses.
Your final step will be to decide what percentage of your remaining income will go towards savings or investments. When you put a percentage of your total income towards your savings or investment, you begin to build barriers for yourself against failing finances. You can learn a lot about getting started with savings, here, in our previous blog.
3. You don’t stick to your budget.
It would be great if we did not have to address this point, but we do. A key reason why budgets fail is simply because people don’t stick to them. Like New Year’s resolutions, they start off strong and then fizzle off into not-getting-done land. But what good is a solid financial budget if you don’t stick to it?
In order to keep track of your spending, you need to follow your budget. Making arbitrary purchases that don’t align with your budget is a sure way to have your budget fail. For most individuals, one of the hardest tasks is sticking to their budget.
A simple way to ensure that you stick to your budget is by questioning yourself on if you need or want the item that you are about to purchase. If this added expense, that is not on your budget, is not a necessity then you should consider leaving off the purchase for another time.
Always remind yourself about your financial goals, before taking on unnecessary expenses. This will remind you of the reason for your budget and why you have to stay on track with it to reach these goals. There’s noting like the joy and satisfaction of sticking to your budget and seeing how it rewards you. The more disciplined you are with your finances, the more they will reward you.
4. Your budget only has expenses.
The fourth reason why budgets fail is because they only focus on expenses. If you are new to budgeting, a major mistake you can make when creating your budget is only listing your expenses. That’s only half of the equation.
In actuality, a (good) budget is made up of both income and expenses. Neglecting to put either one of them in is a recipe for failure. If your expenses alone are in your budget then your budget is incomplete. For you to properly assess your expenses you have to look at your income, as well.
No matter how small, an expense is an expense. Is it the cup of coffee, the online membership, the subscription to an app or services you hardly use? Whatever they may be, be sure to include them in your budget. By including all your expenses, you are certain to avoid any blindspots that can derail your finances.
5. You didn’t track your spending.
Keeping track of your spending is another key part of your budget. Not tracking your spending is a major reason why budgets fail.
Imagine thinking that you have a certain amount of money on your credit card to cover an expense. Yet, when you go to make the transaction, the card is declined. Your credit is good. You are pretty sure you have the money on the card. But what happened?
If you don’t keep track of your spending, it’s very possible to spend parts of your money you did not intend to use. Or, even worse, spending money that you had intended to set aside for something important.
Small oversights on your spending can lead to big financial missteps. But by simply maintaining accurate and up-to-date spending records, you can avoid these errors. Tracking your spending is not too difficult to do. In fact, there are number of free apps that can make the process simpler. Here is a quick reference of 10 free expense tracker apps that can help you.
Another way you can keep track of your spending is by creating a money diary that you keep on your person to write down all of your daily spending. Whether going the tech route, or using a traditional note pad, it’s not difficult to track your expenses.
6. You are making lifestyle changes but not tracking them.
Another reason why budgets fail is due to lifestyle changes. Lifestyle changes can have positive effects on your life, but being aware of their financial impacts is important.
Pay attention to how your spending habits may increase as a result of this lifestyle change. Are you making a radical diet shift and eating a high-quality diet? Or perhaps you have decided to go vegan? Have you taken on a commitment to exercise and join a gym? Maybe you want to join some clubs or organizations that will improve your life.
These changes are not absent of some financial commitment. The point is worth repeating—track all your expenses and pay attention to where your money is being spent.
7. Your budget is too tight.
It’s difficult for budgets to account for income loss from pay cuts, a lower salary, retirement or retrenchment. While these changes can temporarily put you in a tight spot, they can also offer opportunities for you to reduce spending, gain a new income or start a new business.
Having too tight of a budget does not leave room for unexpected or new expenses. This is often most noticeable when you have new bills such as a vehicle payment. Adjusting your budget to be less restrictive can ease your stress when new or unexpected expenses come along. But it’s always important to leave a little wiggle room in your budget. When you do this, it takes off the strain and psychological pressure of not being able to enjoy a few modest spends. Yes, you should have goals. But you should also allow those goals to be flexible enough that you do not put unrealistic strain and frustration upon yourself.
By now, you should have a better understanding of why budgets fail. Now that you do, it’s important to apply what you know so that your budget would be strong, realistic, focused, balanced, and carefully measured. By avoiding these common budget mistakes, you’re more likely to reap the rewards of your heightened financial focus.
If you realize that your budget is failing, be sure to look at the reasons listed, make the necessary adjustments, and correct what you can. The good news is, you don’t have to do this alone. Do you need help? We don’t just write financial blogs for you, we also provide financial counseling services and would love to help. Feel free to contact us if you would like to learn more. Or reach out to Empowering the Possibilities on Facebook with any questions you may have.
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