Posted by When it’s come to personal budget more often than not, people start with a lot of enthusiasm but very soon it fades away. Most of the time there are some fundamental mistakes people make when they do the budgeting that makes it extremely hard for them to stick to the budget. There are five simple rules you can follow to avoid that trap.
Have a goal in mind
If you are putting a budget together it must be for a reason. It could vary widely person-person and their personal circumstances. For example, you could be saving for a new house, saving for investment, low-income and trying to fit within the paycheck, want to be a millionaire and have the freedom from paycheck to paycheck run – whatever be it there need to be a reason. Without having a goal you can do all the budgeting you can but your motivation will only last for couple week (maximum months) and you will go back your original spending habit.
Even more important – you would need to know what is your goal and how you track towards your goal. It will give you the motivation to stick to it. Be realistic with your goal, you cannot have a goal to be a millionaire in one year while you earn 60K per year, there is no magic wand with the money & finance and there is no miracle, it all your planning and long team hard work.
Know the future expenses
Most people budget for their payment cycle i.e. monthly, fortnightly or weekly and this is the biggest trap why most of the budget fails. Regardless of income cycle, our expenses have their own cycle. For example, most utility bills come either monthly or quarterly, car related expenses like rego, insurance comes yearly, your holiday expenses comes yearly, child’s back to school fees comes yearly, council bills for house & land comes quarterly or yearly. That’s why when I do the budget I would do for a year rather than payment cycle. Otherwise, it gives you a false impression that after the payment cycle you might see a lot of surplus in your account and you go for a spending sphere without realizing that you are leaving no fund for the upcoming bills you will get next month and you will dip into your savings.
Do not get too harsh on entertainment & personal expenses
The first thing people do when they are doing budgeting is to cut all the expenses related to their daily life and entertainment expenses. For example, I won’t want any movie do take off that, I won’t drink any coffee and save $4 each day, no shopping for clothes, will not lunch with friends. In reality, it doesn’t work, these are also required for your lifestyle. Do not just randomly cut-off budget for things you may need. First review them carefully and understand you really need or not and then cut-off the budget. Best to do this is to accumulate your couple of month’s expenditure and then see which one of them is really unnecessary expenses that you keep doing. Sometimes it doesn’t even make sense to cut some of the budgets. For example, you might only spend $50 a month on coffee and you really enjoy that. On the other hand, you spend $350 on lunch each month. You will more likely to stick to the budget if you instead of cutting off the coffee just bring in lunch from home once a week, it will save you the same amount of money.
Plan for the unexpected
Plan for the unexpected, no matter how careful you are there will some issues with things. For example one fine morning your washing machine will stop working Ca-Ching $1000 bill, or you will hit another car and Ca-Ching $500 for insurance. Have an unexpected fund budget. Set aside a little amount every month that will come in handy with those unexpected situations and you won’t have to dip into your monthly budget for that. For example, if you set aside $200 each month in a year you will have a fund of $2400 already, make it till $4000-$5000 and leave it like that. If something happens then you have a safety net, if nothing happened then you got yourself a cash-stash.
Track the spend & review them regularly
You will be surprised how much money we spend on things we do not need and how much annually it cost us in small bills. You would never know that unless you have a spending tracker and review that annually. For example, $5 a day doesn’t seem much but in a year time that’s like $2000. Think about your choices, $2000 can buy a nice luxury item you wanted, could be a weekend away or your car rego and insurance bills for the whole year. It doesn’t take the whole heap of time to track these in today’s digital world. It is a whole lot of mobile app and software available nowadays, or even an Excel spreadsheet will do the job. I normally prefer to spend all my money from Bankcard (small or big) instead of cash and then after a month, I download the monthly statement from the bank and just categorize them. Take around 15-30 min for me to sort out one month’s expenses but time well spent. The insight I have from that is invaluable.
Constantly review & update
Every month review your budget and spend and update it. You will not get it right in day one for sure. You will miss a whole heap of the expenses that you do the first time you do that for sure and will only remember once you get a bill or as that expense occurs. But as soon as you have visibility of that update your budget for the year accordingly. Over the time you will have a refined expected list of your expenses and income that you can much better control on.
About the author: My name is Shahnewaz Khan (tamal_khan@hotmail.com) I am a Project manager on my day-job and have done fair bit study from post-grad Business school. I find there are a lot of principles from my day jobs and the things I learned at B-School can be applied to our daily life. In my blog I write about those – please subscribe if you like for regular updates.
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