Last time we talked about the most common budget mistakes that cause our attempts at budgeting to land DOA. Believe it or not, most people have made one or all of those mistakes at some point. *Raises hand *Raises husband’s hand. But that doesn’t mean bad habits can’t be corrected. Today I’m going to dive into some best practices I use to avoid these mistakes. Let’s get started.
It wasn’t realistic in the first place
The most important lesson I took away from Steven Covey’s The 7 Habits of Highly Effective People, is to begin with the end in mind. I read this book like ten years ago, but that lesson still shapes my approach to many things in life, including budgeting. When it’s all said and done, I know I need to balance bills, savings, debt and a healthy amount of spending, without setting myself up for failure down the road. If you know you struggle with overspending, ease into cutting back a month at a time, versus going cold turkey. If you know you will neglect a spreadsheet after 3 months, use a mobile app instead.
You didn’t plan for month-to-month variances
Like I said in part 1, May is crazy expensive for me. I’m also paid semi-monthly at work, which means that during those longer months, I have to prepare ahead of time to make those dollars stretch. The major line items in your budget (rent, insurance, car notes) should be fixed from month-to-month, but make sure you consider smaller items that may vary. This is where you’ll have to adjust your “play money” for the month. I know no one wants to cut into their spending money. But doesn’t it make more sense to skip a happy our or two versus cutting into your savings?
TIP: Utility bills can vary significantly as seasons change. Contact your provider to find out if they offer budget-friendly billing plans that allow you to pay a consistent rate year-round.
You only consider the short-term
I start my budget planning around mid to late December, so we start the new year on a good note. I draft out a budget with all the major bills for each month. From there I determine amounts for savings, spending and student loans. Then I add in any major purchases or special savings that I’ll want to spread over several months, as “bills” that need to be paid.
For example, we’re planning a big trip in May, so I’ve added a line item to stash extra savings away each month leading up to the trip. Once I have this general template in place, I can use it to look ahead a couple months at a time, and to prepare for any changes that might arise. You may get that raise, or start planning a wedding, which will force things to change. But at least you’ll have a general idea of where your year will go.
You’re trying a method that doesn’t fit your lifestyle.
There are a ton of methods circulating nowadays. One beef I have with some of these techniques, is they can’t be easily adjusted for different circumstances. For example, The 50/20/30 formula allocates 50% of income to necessities, 30% to wants and 20% on savings and investments. This is only works for people who have the ability to cap their necessities at 50% of take home pay. For a securely middle, or upper middle-class household, this would work just fine. For some folks, this might be impossible.
You may be familiar with Dave Ramsey and his baby steps. Short summary: save $1000 for emergencies, then aggressively pay down debt (except the house). After debt is completely paid off, building up savings, start investing, pay off your mortgage. Dave Ramsey is my uncle-mentor-homeboy in my mind, but I disagree with his program for certain situations. What happens if you lose a job and have no cash flow for several months? What if that transmission goes out on you? That debt payoff is great, but $1000 won’t carry you through these issues.
Honestly, I choose to keep it simple. I calculate out what we need for bills each month (including groceries, incidentals, and car notes), then split the remainder into thirds. Spend a third, invest a third, and put a third towards student loans. Here’s an illustration with some sample amounts:
These amounts go in my budget as line items, and we stick to them pretty closely. This is what works for me, and the priorities that I’ve set. Sidenote: Aside from tiny credit cards and cars, student loans are our only debt, so I’m able to dictate how much I pay towards these more than I would a mortgage.
If you want to get out of debt as quickly as possible, you may want to allocate more to debt payoff. If you have kids, you might want to start building up their 529 plans as much as possible.
You spend or save “whatever’s left” every month
Spending and saving “whatever is left’ in varying amounts each month, typically leads to overspending and not saving at all. I avoid this by treating spending and savings just like bills that remain mostly consistent each month, as illustrated above. Including these as line items ensures that we prioritize them, and will force you to spend less money on things that don’t matter. You’ll be surprised how many Tarjay runs you cut out when you have a defined pot of money to play with each month. Also, I protect my savings by any means necessary, even if it means cutting myself off for a month at a time.
TIP: I suggest using a separate bank account just for spending money. If you determine that your monthly spending is $500, have that amount automatically deposited into a separate checking account than the one you use to pay bills.
You lack the discipline to use it consistently
I do the following every week
1. Look at our accounts daily via mobile banking apps. DAILY. This allows for more fluid conversations with the hubs, and prompt action if there’s an issue with an account.
2. Every Saturday, we review our budget tracker and compare actual income against expectations.
3. Check for any miscellaneous income like expense reimbursements or refunds.
4. Check that automated payments were processed as expected, and make any manual payments (because Comcast can’t be trusted on autopay).
5. Check for any surprise deductions (like the annual Amazon prime charge we always forget about)
In all this should only take 20 minutes if you’re consistent. There’s no magic formula, or complex process necessary. Just plain discipline and consistency!
Favorite Budget Tools
I know that was a lot of information to soak in. Here are some tried and true tools that I’ve personally used successfully.
In true accountant fashion, I use a cloud-based spreadsheet to budget and track our finances. It allows the hubs and I the flexibility to check in and update from anywhere, and has most of the same features as excel. Over the last few years I’ve built in a net worth calculator, estimated tax return, and personal financial statements. I can feel your eyes glazing over. Eventually I’ll build this into a tool that anyone can use and make it available to everyone, stay tuned. In the mean time, here’s a great Google Sheets template to get you started.
For folks who hate spreadsheets, there are a couple great online tools that I’ve used successfully.
Mint is a platform that allows you to pull all of your financial accounts into one place and tracks monthly spending activity against your budget. It has desktop an mobile app interfaces that sync nicely! I was an early adopter of Mint years ago, and abandoned the service because managing multiple accounts wasn’t as seamless as I’d hoped. Apparently they’ve improved their features, and added bill pay since then. The major con is having so much sensitive information in one platform.
Nerdwallet has a free budget calculator for those interested in the 50/30/20 method that I described above.
Dave Ramsey’s, EveryDollar is a very powerful tool for those who are interested in following his system. It available via desktop and mobile apps to keep you organized on the go.
Do you have any tried and true methods for managing your budget? Have you every tried any of the tips described above?
Let’s discuss in the comments!