Published: 8th November 2018
Budgets tend to have a bad reputation. They seem both restrictive and complicated, and at times the potential rewards are often too far in the future to make any of the sacrifices seem worthwhile.
In fact, most budgets fail. That’s why we’ve put together some tips on how to make yours foolproof so you can meet all of your financial goals. But first, let’s look at three key reasons why some budgets may not work, to begin with.
3 reasons why budgets fail
1. Unrealistic expectations
Sometimes we can be too enthusiastic when designing a budget. We volunteer to quit dining out altogether, going to the cinema or try to eliminate other activities that regularly make us happy. This is something that gets tedious very quickly. It’s better to cut back gradually on certain activities rather than cutting them out completely. The same problem occurs when allocating money for
expenses. If you regularly spend $400 a week on groceries, are you likely to suddenly spend $200 just because your budget says you should?
2. No written plans
Sometimes you have a budget loosely constructed in your mind, but nothing in writing. Having items on paper or on the screen – much like a shopping list – serves as an important reminder. It’s also a way to make notes and see what items of the budget are working and which are not. This will allow you to edit the budget and fine-tuned it to serve your needs.
3. Forgotten Items
Many budgets don’t account for unexpected costs: a gift for a cousin’s wedding, extensive dental work or children’s activities. Remedying this involves more planning. Look at a
calendar of events for the next year. Set budgets for presents, car insurance and known health costs divide the total of these costs by 12 to work out monthly allocations. These kinds of costs can be unpredictable. You may spend $20 on health costs for one month and $180 for another.
5 tips to help create a budget
Now that you know what to avoid, here’s our top five tips to help you create a budget that sticks!
1. Work out how much money you have
Look at your after-tax income and calculate exactly how much spending money you have. Try to be as exact as possible, so you know how much money you have to play with.
2. Look at where your money goes
Look at your bank statements for the last three months and categorise your costs. Examine how much you’re spending on food, entertainment, housing, health, education, transport etc. and see where you could make easy cuts. Perhaps it’s football tickets or takeaway coffee.
3. Discuss where your money should go
If you’re saving for something, calculate how much you need to save to make the purchase a reality. If it’s a long-term goal, like paying off your mortgage, or paying for your child’s private school education, be sure to write down the amount it will cost each month, to ensure that you achieve your goal.
A lot of financial analysts recommend a 50/20/30 approach where 50% of your income goes towards necessities: housing, transportation, food and utilities. 20% should be geared to your broader financial goals, like the money to start a business or putting down a deposit on an investment. The remainder of the money can be spent on your personal allowance for luxury items, gym memberships, personal grooming etc.
This is just a loose suggestion. You may want to allocate a percentage on an emergency fund in case health issues arise and you need time off work or extra money for childcare. Consider high-interest earning accounts or an offset against your mortgage so that your money is working for you when not in use.
4. Write It down
Once you have decided where your money will go, write it down in a document that’s accessible. Having a written reference for goal setting and motivation is essential.
After a few months of living with the budget, review your progress to see if the amount your spending matches your budget. If you are experiencing setbacks, look at the areas, which aren’t working and see if you need to make changes to accommodate your current situation. Don’t quit. If it’s not going to plan, just adjust the plan until it sticks.
If you can, leave a little room in the budget to celebrate achievements, whether it’s a nice bottle of wine or a night at the movies, budget success should come with a (small) reward.
And finally, don’t feel like you have to budget all alone – enlist the ideas of friends and family who you know are good with money. There are also some great online tools and apps to help you budget and track where your money is being spent.