You’ve probably created a budget at some point in your life (if you haven’t, no worries, there’s still time!). Maybe you hit a point where you feel like enough is enough and you have to be an adult and finally start paying attention to your finances. Maybe someone told you about mint.com and you were like, “Oh that’s cool, I should check it out.” Maybe you heard it was just a thing people do.
Whatever reason you had for doing one in the first place, you also most likely tried to stick to it for about a week and then it got hard and you just went back to what you were doing before (it’s okay, this happens to us financial planners too!).
There are lots of reason why a budget doesn’t end up working for you and based on my experience seeing over 100 clients’ budgets, here are 4 common mistakes I’ve seen people tend to make when they put together their budgets:
1. Guessing what you spend without confirming in an account aggregation site like mint.com. The very first time I put my accounts into mint.com, I was shocked. I had been in NYC for about a year, plugging along and feeling like I was doing this whole personal finance thing right. mint.com just seemed like a cool thing that would confirm what I already suspected – I was a pro at budgeting. And then I checked out their handy pie chart and gasped. $500 on restaurants?? How was that possible? I was already spending $200 on groceries! I looked through the transactions and had to face the truth – I did eat at all those places and I didn’t even remember most of them.
How to fix it: Before meeting with a client, I have them put together an estimate of their budget. Their eyes widen when we put their accounts into their personal financial portal. Usually, they’re spending about 1.5-3x as much as they thought they were on discretionary expenses. The very first step to coming up with a truly working budget is to know how much you’re spending today. Once we know where the money is actually going, we can start planning for how to redirect it.
2. Setting a budget that is too extreme. Most of my clients react the same way I did when I saw the real numbers for the first time. That’s it, no more eating out! I told myself I would only spend $150/month on restaurants. Three guesses as to how that worked out the next month. Often, the shock of seeing the numbers for the first time makes you react against it. Feeling of guilt and embarrassment can crop up too. But in the end, restricting yourself too much just ends up making you retaliate against yourself. Numbers are just numbers and money is just money. It’s easy to sit in front of a screen and declare that you’re going to “be better” or “not spend so much,” but when you go back out into the real world, the things that money can buy you, whether it’s convenience, a little slice of happiness, or a break from the day, are going to feel more important, no matter what your bank account says.
How to fix it: Before changing a habit, we need to figure out what feeling or need it’s satisfying and then address it from there. The reality is, I LOVE going to restaurants, trying new food, and luxuriating with a friend I haven’t seen in a while for a few hours while someone else brings us food and takes care of the dishes. When I took a closer look at where my money was going, I also noticed multiple transactions per week for about $7-$12 that were just me buying lunch at work. I decided to break out the restaurants budget from the random lunches budget. By doing this, I could pinpoint which habit I wanted to change and which one I wanted to keep. Eating out with friends was a treat I wanted to spend money on, but buying lunch at work was more of a convenience than anything. Instead of just trying to reduce the number, take a little bit more time to figure out where it’s coming from and then decide what you want to target.
3. Not choosing a budget tracking system you will stick to. 3 out of 4 clients I see actually hate mint.com (the other 1 out of 4 are weirdos like me (looking at my Savers and Worriers out there!) who check this stuff every day). Just because you used mint.com as a tool for figuring out what you’re currently spending your money on doesn’t mean you have to keep using it to maintain your budget. If it doesn’t make sense to you or it’s too much trouble for you to maintain, don’t use it. It doesn’t mean that you failed at budgeting, it just means that you haven’t found the right tool to help you budget yet.
How to fix it: It’s all about experimenting with finding a tracking system that you can see yourself using day to day. Some people live by mint.com, others feel more comfortable with a simple spreadsheet or simple app that they can manually log things into. You do have to track your money, but you can take some time to experiment with different ways to do it. Check out this piece I wrote on how to find a budgeting tool based on your money personality for some ideas on where to start. Also, keep in mind you don’t have to track everything – why put in a line item for rent or car payment when you already know those numbers? Adding them to a budget tracker just creates noise. Choose the one or two categories you really want to monitor and just watch those numbers for a few months.
4. Not leaving wiggle room for all the “unexpected” things that come up every month. Even if you don’t know what unexpected thing is going to pop up, you can always expect an unexpected thing to pop up pretty much every month because, well, life. This is one of the biggest budget killers for people. Everything is set up in these perfect little categories with their perfect amounts and then something derails it (an unexpected gift you needed to buy, a small appliance needing to be replaced, a sample sale). On top of that, sometimes you have to dip into your savings account to cover the extra expense. Then, usually what I see is clients end up throwing their hands up, saying to hell with it, and dropping this whole budgeting business all together.
How to fix it: First things first – expected the unexpected. It may sound simple and almost downright corny, but first acknowledge that more likely than not, things will come up that you’ll have to spend money on that you didn’t plan for. So now that you’re expecting it, you can plan for it. What I usually recommend is that my clients have two savings accounts – one called a “Now Fund” and the other called a “Future Fund.” Your future fund is your long term savings that will take care of all those big, beautiful goals you have floating around in your head (or, hopefully on a piece of paper somewhere). Your Future Fund is something you don’t dip into unless it’s for one of those big goals. Your Now Fund is an account where you set aside a small sum of money and you can tap into it every month in case you go over your budget. This gives you the freedom to dip into a savings account without touching your (big “S”) Savings account.
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