Have you ever tried to go on a weight loss diet only to fall back to your old habits? Have you ever tried to join a gym membership, only to drop off the bandwagon a month later?
If yes, don’t be hard on yourself. We have all been there, at one point or another in our lives. We have tried and failed miserably at it. I want you to know that it’s OK to fail.
When I started looking into my personal finances, one of the most important technique every personal finance guru recommended to follow, was the need for a written budget. So I started learning different budgeting techniques before I found one that worked.
How To Write A Budget That Actually Works
When it comes to budgeting, there are some common mistakes you might commit, which can ultimately dissuade you from ever being successful.
1. Avoid Excessive Categorization
When I first began budgeting, I thought I needed to track where my money was going. It meant I needed to categorize each line item in my spending. I used to go over each item spent during purchase and try to fit into one of the categories. I was obsessed with tracking categorization. It turned out that I enjoyed this feeling of “being in control” of my finances and knowing where every single dollar went.
But it didn’t take me long to realize that this excessive categorization was counterproductive. At one point I had close to 20 odd categories which used to be in my budget. E.g. When I tracking groceries, I didn’t just stop at it, I was trying to classify them based on where I bought it too. Was it Costco or Wholefood or Trader’s Joe? It was quickly turning out to be a nightmare.
I can tell you from experience that it would really serve you better if you could stick with some high level categories and don’t sweat about the details. If there is a specific item in a category that you’d like to cut back on, track it closely. I have found that it usually takes at least 2-3 months to get a good handle on the categories you need in the budget. So don’t beat yourself up if your categories look overwhelming in the beginning. Try to cut back as you gained more
2. Don’t Ignore Real Costs
Have you ever been on a weight loss diet? If you have tried it before, you might have noticed that in trying to appear too focussed, you might be tempted to go over board and get ahead of yourself. You might take your dieting to borderline deprival if you don’t curb your enthusiasm. It’s really common for people to do this and that’s one of the main reasons why people often fall out of the band wagon and don’t even make any progress.
When you begin budgeting the first time around, your intention is to track where your money is going and in doing so you might get very optimistic about some of your expenses. The most common categories I’ve found people underestimate include groceries and dining out. These can be some of the most tricky categories to tackle someone who is new to budgeting. Since people often keep these categories close their heart, any overspending in these categories bring the same level of guilt as cheating on your diet. I want you to be conscious of this phenomenon and be aware that it can trip you off.
The more pragmatic approach to this would be allow yourself some grace. When dealing with categories which don’t have predictable numbers, give yourself some room to over spend. It’s absolutely fine. You’ll get a handle on these categories as time goes by and you’ll learn to juggle the different competing priorities in your budget.
3. Watch Out For Irregular Expenses
Have you ever bought a car within your budget and still noticed that your actual cost of ownership is much more than just the money you had thought about. We’ve all been there. Some of us might have even bought a fairly new car and felt we struck a good deal, only to realize that we’ve not taken on new expenses like insurance, registration fees, annual maintenance etc.
This applies to budgeting too. When you look at your budget, you might notice that it’s fairly simple to accommodate the monthly expenses like utility, gas, groceries, internet, etc. However what trips most people is the irregular expenses. The ones that are due for payment on a monthly basis. Some of them might include your insurance premiums, property taxes, car registration. They occur once in a while and they can really catch you off guard.
From my experience, people typically track these expenses and save for it in 2 ways:
a. Sinking Fund
This technique involves diving the actual expense in to equal monthly amounts and saving the amount every month. It could be in a single account and your budget could ear mark the money as a fund dedicated to cover an irregular expense.
This is preferred if you are staring at quite a substantial amount of money, which could easily throw your budget off the track if this were to come up suddenly. You can go with this approach if you think it would be easier to save small amounts of money towards this goal rather than paying it in one shot.
b. Pay Lump Sum
This approach can be adopted if you don’t wish to save money for the goal each month and would rather use that money to meet some other goals. I personally believe this approach works very well for most expenses. In all the cases, I often try to avoid irregular expenses as much as possible and try to convert them to a monthly payment plan, to keep things simple.
One thing to notice is that, if your budget has no buffer, this can throw your off the track if anything else “urgent” comes up and you can’t cover the expense with your income. You’ll be forced to tap into your emergency fund or cut back on other categories, which might be desirable.
4. Have Some Wiggle Room
When you are in debt and you’ve got payments to make, you need to plan your budget around the payments. This leaves you with little wiggle room in your budget. This can be very frustrating and discouraging since it means you are always going off budget whenever an unexpected (non-emergency) expense comes up. If you are new to budgeting, this can be one of the most important things to do with your budget, add some buffer.
I often have a category in my budget called “Misc” which literally means anything I didn’t plan for this month to spend. It could be a night out with friends or a movie you watched over the weekend. This can truly save your day. Having some cushion in your budget also means, if you didn’t utilize the money by the end of that month, it can be diverted to some other things like extra payment on your debt or a savings goal.
Always have some wiggle room in your budget!
5. Use A Budgeting Tool
If you really look at what budgeting is all about, it’s not rocket science. It’s just listing your income, all of your expenses and then tracking them as you spend your money. That’s all there is to budgeting.
Given the simplicity of this idea, one may be tempted to go with just a pen and paper (not that it’s bad) to tackle their budgeting needs. In fact, it’s how most people start. But in this day and age of mobile and online apps, you’d do yourself a huge favor to choose a budgeting tool.
I might have given you a very simplistic picture of budgeting earlier but you’ll soon realize that budgeting also means often adjusting the budget categories, moving money from one budget category to another. Having to track spending in various formats like cash, debit cards, and credit cards. It can quickly get out of control and you might be overwhelmed with all of these transactions.
I started off my own budgeting with a simple spreadsheet and there tons of templates available for you to get started. They have nice macros built into them to help you get quick summaries both monthly and annually. Once you’ve mastered this approach, I would encourage you to try apps like Tiller, which is basically spreadsheet on steroids. It helps you to connect your bank accounts and the transactions are automatically pulled into the spreadsheets. I found them to be very good if you want to use spreadsheet-based budgeting.
If you are looking for a full-fledged budgeting tool, there are quite a few tools available for you to check out. I personally have tried working with EveryDollar and YNAB. I have written my experience working with EveryDollar before and have since then moved on to YNAB. I find YNAB to be more sophisticated than EveryDollar. I would definitely encourage you to try them.
How do you maintain your budget? Do you use any app or a spreadsheet template for this purpose? Share your experience in the comments.