A budget is such a vital thing for healthy personal finances. There’s no doubt it takes a lot of time to construct one, but when you have it in place, you can feel in control no matter what. There’s a lot of freedom to that. Even if it means constraining your spending in personal areas, at least that feeling of control gives back what the constrictions take away. Most people feel better when they have a budget…
… and therein lies the problem.
Let’s say you make the decision to take control of your family finances once and for all. You’ve read a little on personal finance, so you know the most effective way of going about doing this is by budgeting.
So you create a budget. You separate your outgoings into different categories, figure out how they’re going to be paid, and then you have the rest of your income left. It should be simple, right? After all, if everyone says that having a budget is the key to financial management, and you’ve got one… you’re done, aren’t you?
This just isn’t the case. Creating a budget is just the beginning of the process. As you continue, there are multiple ways in which this feeling (which borders on being arrogant) can trip you up. Even for families that have got a budget in place, there are plenty of ways in which it can make life difficult. So where is everyone going wrong, when they are meant to have ticked the most sound financial tenet that there is?
1) Only Budgeting The Essentials
By far the biggest issue with budgeting is when people only set aside the money for the essentials. So they carefully budget and plan for their rent/mortgage payment, the essential bills, and then any debt payments they may need to make. And then… they’re done. Job finished.
This then has a tendency to spiral. Everything that doesn’t have to be set aside for those specific budget categories becomes “free game”. They might known on pay day that the money you have got left from the budget is going to have to last them the rest of the month, but that doesn’t mean they do anything but know it.
The end result? A few weeks of living more-than comfortably and then a final week, limping towards payday, without two cents to rub together.
A proper budget should include categories for food expenses, travel expenses, and - yes - a luxuries section as well. You don’t have to deny yourself just because you’re budgeting! You just have to make sure it’s controlled, so that your income can see you through to the next month without having to rely on credit cards to do it.
2) Only Paying Minimum Payments
If you have any debt or credit card repayments as part of your budget, this is just papering over a fissure in your finances. Of course, you should make debt repayments, but how much is enough?
One thing that’s for sure is that the minimum payment amount is definitely not enough. In most cases, this will only cover your interest - so you’re not actually making any difference to the amount of money you owe. This means the debt becomes a permanent fixture in your personal budget, rather than being paid down so you can enjoy more financial freedom.
You should always try and pay down more than the monthly payment onto each debt that you have. Overpay the most on the debt that costs you the most, so you save money on the interest you might otherwise have been charged. If you can’t really find room in your budget for higher payments, it might be worth considering consolidation - taking out a new loan to pay everything off. This can save you a lot of money in interest, as well as making it easier to manage a single payment than lots of different ones to various creditors.
Just make sure that when you’re finding a personal loan that the interest rate is lower than you otherwise would be paying on credit or store card debts. It almost always would be, but read the small print!
3) Not Budgeting For Nothing
That might sound like a bizarre statement, but it’s true: you should have a section in your budget for nothing. It’s not the amount that you save every month, it’s not an amount that you intend to spend on birthday gifts - it’s just for nothing.
If you don’t have some leeway in your calculations, the smallest of upsets can throw your entire budgeting system off for the month. Your child could need a new pair of glasses or the washer unexpectedly breaks down; nothing major, but nothing you can ignore either. Your ‘nothing’ fund doesn’t need to be a lot, but it’s there in case you need to ease the burden caused by circumstances beyond your control.
It’s good practice if you get to the end of the month and realize that you haven’t needed to use the money. You can then turn your nothing into something and treat yourself or the family. Or you can practice good financial management, and put the money into savings. Or you can be a real superstar and use it to pay off debt.
The key point is that not having an area of your budget that you keep reserved - but for no intended purpose - could lead to the entire picture unraveling. If you plan your budget down to the last dollar (as you realistically should be) then you need a bit of give.
So Is It Worth Budgeting?
Given the fact that budgets can be insufficient or unravel at a small unexpected occurrence, is there any point in having one? Maybe they are more hassle than they’re worth?
That’s not the case. The most important thing is that your budget works for you, rather than feeling like a nice idea that you will inevitably always exceed. Be realistic, set money aside for the right things, focus on reducing your outgoings - and the rest will, in time, take care of itself.