This is a guest post from James Griffiths, who is a freelance writer for Mint.com. Mint has created a number of tools to help you save, manage, and grow your money. On their website they offer a budget worksheet for users to stick to their budgets.
Anyone who has ever tried to make a budget has encountered similar types of mistakes. It’s not an easy process – for most of us, the transition from spontaneous spending to disciplined money management means a whole new way of life. That’s why it helps to be aware of the most common problems at the beginning, before stress and headaches set in. Being familiar with these obstacles will help you remain focused on overcoming them.
No specific budgeting goals
A major reason so many budgets fail to last, or deliver the results we hope for is a lack of specific financial goals. As noble as budgeting may be, very few people can stick with a budget for its own sake.
The only way you will voluntarily endure the sacrifices and inconveniences of a budget is if you know it adds up to a bigger payoff later on. For instance: having the down payment on your dream house in five years instead of ten, or sending your children to a better school without using loans.
Goals like these stick in your mind and motivate you to stay the course when tempted to overspend. Without them, “the budget” will come to be seen as little more than an annoying thorn in the side of your social life.
Across The Board Cuts
Others assume that budgeting has to include “across the board” cuts in every single spending category. In fact, this is not always the best way to budget. Instead of seeking to spend less on everything, start with the spending categories that you objectively don’t care about.
List each category on a piece of paper (things like entertainment, food, gas, clothing.) Then, decide which ones you can comfortably spend less on. Maybe you can buy store brand food, but keep buying designer clothes, for example.
The idea is to begin budgeting in areas that won’t immediately depress you, and only cut spending on cherished categories if truly necessary.
Unrealistic expectations
How many of us have sworn at the beginning of a new year to “start going to the gym seven days a week?” Chances are, you stuck with it for a week or two and then never went back. The problem wasn’t the goal of getting in shape – it was how unrealistically huge your expectations were.
In her book Debt-Proof Living, Mary Hunt says budgeting is similar. Vowing to cut spending by 75% is certainly admirable, but unless you have iron-clad willpower, you’re more likely to abandon budgeting entirely than stick to such a lofty standard.
If you’re serious about budgeting, start with a more modest and attainable goal – say, a 15% overall spending reduction. It might not sound like much now, but repeated a few times, it soon adds up to an impressive amount.
Lack of structure
A budget, if it is going to work, requires structure and accountability. Too many people keep their budgets mentally, never writing it down or recording progress as time goes by. This is a huge mistake.
In order to be successful, your budget needs to exist in the physical world, outside of your mind. One way to achieve this is by using envelopes to hold the amount of money you can spend in each category. Once an envelope is empty, no more spending in that category can happen until next month.
You can also use online budgeting tools like Mint to track spending. Simply connect your credit card or debit card to Mint and watch as your spending in each category is automatically and painlessly graphed for you every single day.
Tolerating exceptions
Of course, there is still no substitute for having a real mental commitment to your budget. Never forget that a budget reflects your own self-chosen financial priorities. It was created by and exists to benefit you. This means that no one is going to hold your feet to the fire or prod you to stick with it. Therefore, it is your responsibility to develop a zero-tolerance attitude toward exceptions.
Once your goals are established, never allow yourself to get away with overspending “just this once.” Exceptions will only eat away at your resolve, create weakness and demoralize you from sticking to the budget you created. Instead, solemnly accept that you will be uncomfortable in the beginning – and stay on track anyway.
I approach budgeting as an informational tool. When I am considering a purchase or a change in my expenses, I can immediately see what effect this change will have on my finances. I can’t predict all my expenses precisely, but I can get close enough to know where I stand and how it affects my financial goals. I maintain a nice surplus even with the occasional unplanned purchase.
Out of all the tips, the one that I found the most insightful was “don’t make across the board cuts”. One major change (like downsizing a car or house) could be 10x more effective than slashing everything else a little bit across the board.
While I appreciate the idea of having a budget, I’m still pretty casual with them. I’ve tried having a strict budget in the past and found it unpleasant, unworkable and not worth the hassle (for me).
Of course, I do closely monitor my spending, track rolling averages of spending in different categories and reduce as appropriate if a category is larger than I’d like, has been growing, etc.
Would I spend less with a strict budget? Probably. However, I doubt it would justify the loss in flexibility that I currently enjoy.
I like that James tied the idea of budgeting with having financial goals. With Mint.com, I have been able to set realistic goals and budgets. Though Mint.com is not without problems (miscategorized transactions is a big one), I use it to track my progress every week. And the colorful graphics really help!