Call it what you will: a spending plan, cash flow management, or just a plain old budget, but whatever name you give it, figuring out how to cover your expenses while also saving for the future and also having enough to enjoy today is an essential piece of financial security.
The thing about budgeting is that there are many different ways to achieve the goal, none of them perfect, and none of them right or wrong. The key to successful budgeting is finding a way that fits your personality, habits and goals – if you're trying one method of budgeting that doesn't work, try another.
Here are some common issues that get in the way of successful budgeting along with a suggestion to overcome it.
Common issue: Overspending in a specific category such as dining out or entertainment – the trouble here is that we usually view our "wants" as something we can or should do without if we are focused on a big savings goal, but it's not realistic to plan on little to no dining out or fun time until a goal is achieved. Even when we do give ourselves a budget to spend in this area, we often have trouble tracking what we've spent against our limit.
Possible solution: Rather than relying on an app or saving receipts to view spending as or after it happens, find a simpler way to stick to your planned amount in these categories that is very obvious. For example, the popular envelope method works well here – if you wish to limit dining out to $100 per pay period, just get in the habit of taking $100 cash on pay day and putting it in an envelope to spend from whenever you go out to eat. When the money's gone, you'll know it's time to start cooking at home.
If carrying cash is not your thing, you can create a similar limit by using a pre-paid cash card or even just a gift card if your spending "weakness" is with one or two particular outlets such as your favorite take-out spot.
Common issue: One-off life events like weddings and funerals – most people start their spending plans by looking at where their money has gone over the past year or so, then categorizing accordingly. When we encounter things that are unlikely to repeat such as a wedding or other event that may require travel or other unusual expenses, we often just pass over those in our budget because they won't happen again. The problem is that something like that will likely happen again And again.
Possible solution: The good news is that many of these events give us some warning, so one way to make sure you've got the funds set aside is to get out your calendar every 6 months or so and see what's coming. Did a slew of friends become engaged over the holidays? Better start saving now. By estimating your expense ahead of time, you can break down what you need to save in the months leading up.
If planning ahead isn't your thing, then just go back over those expenses that you passed over and add up what they cost. If you reviewed a year's worth of expenses, simply divide that total by 12, and you have the amount you should set aside each month to at least have something for the next "one-time" event that comes up.
Common issue: Non-monthly expenses – it's pretty easy to make a budget of the bills we have that have a consistent due date and relatively consistent amount such as housing, utilities and even groceries. It's all the other expenses of daily life that seem small that add up that are the challenge to plan for. Examples include pet expenses, replenishing personal care items such as shampoo and shaving supplies, and other household goods. For the most part, spending like this can't wait, so if you have a budget line item and find that you've exhausted your limit for the month, you may find that you're "borrowing" from your savings or using credit cards.
Possible solution: This is a tough one because it does tend to be small expenses that add up into big amounts when you look at the total spend throughout a month or year. One idea is to use separate accounts or envelopes to save up for purchases in certain categories that are tough to plan the exact date or amount. For example, if you have pets, consider a savings account that you fund each paycheck for things like vet visits and pet-sitting while on vacation.
If the issue more just household goods and personal care supplies, consider that most of these purchases tend to come from one or two merchants. If you go to a big box store to buy shaving cream and shampoo, there's a strong chance you'll also wander around and look at other merchandise before checking out – these stores know that and take advantage, so be prepared before you walk in. You might even consider giving yourself a little splurge budget so you don't have to be 100% steeled against buying yourself something more exciting, but you'll have a limit to ensure you don't blow your other savings goals.
Common issue: Trying to account for each dollar – most budgets fail because people start by trying to categorize where every dollar goes, which leaves no room for error or spontaneity. Then once something comes up that isn't in the budget, it can break the whole plan, leading many people to give up.
Possible solution: There's a better way, which is what some people call a "zero sum budget." Rather that giving each dollar a category, just remove all the money from your spending account that is allocated toward other purposes – you might have one account for all your monthly bills, then a savings account (or several) for various savings goals that are funded the same way you pay a bill. Whatever is leftover stays in your spending account for your discretion to spend on things like food, entertainment, gas and other daily expenses. Because you know that you're already saving for your goals and your bills are being paid, you can spend whatever's in your account, knowing that when the money is gone, you're done spending until your next payday.
Common issue: There's just not enough coming in – if you find that no matter how you look at it, there just isn't enough money coming in to support what's going out, it might not be your budgeting method that's broken.
Possible solution: Obviously you could look to cut expenses, but if you can't trim another dollar, an alternative is to look for ways to earn additional income. Even just working a second job for 4 hours a week on one evening or weekend day can make a huge difference in balancing your budget.
The key to success here is giving any extra income you earn a job. For example, if you find a way to bring in an additional $200 per month and your family phone plan is about $200, assign that bill to that income. That way you won't find that the extra money is absorbed into spending.
Remember, budgeting is a skill, much like playing a sport or musical instrument – most of us don't innately know how to do it, so give yourself some grace if it takes some time to figure it out. Pay attention to what works for you and tweak what doesn't. Then give it time – just like any new skill, it does take practice before you can master the game. Don't give up!