Saturday, November 2, 2013

Erase Debt - 5 Ways to Wreck Your Budget

It has been said by many financial experts that the best way to erase debt and stay out of debt is to create a budget. Many people have created budgets. Not all work. Here are 5 Ways to Wreck Your Budget if you don't do things right.

1. You Don't Have a Budget

This may seem overly simplistic but not having a budget is the number one way to wreck your budget. You may ask, "how can I wreck a budget I don't have?" A budget is basically an accounting of your income (your money coming in) versus your spending (your money going out). The truth is even if you do not have a formalized budget written down every month, your spending habits have created an "unwritten" budget that is probably ruining your personal finances. Spending without giving it much thought will lead to over-spending and effectively living beyond your means. Every one of us has a set number of dollars coming in and money they spend going out. That is your budget. Whether it is written down or not, it exists. So if you do not have a formalized budget now is the time to create one. Sit down, write it down, and account for every penny coming in and going out.

2. You Don't Have a Realistic Budget

So what is a realistic budget? A realistic budget is one that accounts for the real income you make and the real purchases you make. Let's start with income. Your income may be $5000 per month gross. But that is not the dollar amount you put down in the income box on your spreadsheet. You need to take into account things like taxes and insurance that come out of that gross income. What your want to write down in the income box of your budget sheet is your net income. Income after taxes, insurance, liens, etc. are taken out. Someone making $5000 gross per month is probably netting around $3600 per month. Use real take home numbers. If you use the gross number your budget will be way off and you will grossly over-spend.

A realistic budget accounts for realistic spending habits. The best example is when it comes to budgeting for food. So many people vastly underestimate how much they spend on food. I have seen budgets that have taken into account a $420 monthly car payment but only allocated $50 per week for grocery shopping for a family of four. This is not going to work. Unless you are one of these SUPER coupon savers, that $50 per week is not going to get you far. And let's face it, most of us are not super coupon clippers. So be realistic about your recurring expenses.

3. You Don't Account for Unplanned Purchases

No matter how good you are at budgeting there will always be an unplanned expense. A gift you bought for an unexpected birthday, a dinner out with a friend you just reconnected with, that Christmas Snoopy that dances to Linus' piano song (okay, I just bought this for $19.95). These are items that at the beginning of the month were not accounted for or were not anticipated. But just because your budget did not initially include those items does not mean you can overlook them and not add them to your budget. As the month progresses you need to account for every expense and make sure every dollar gets a name. If you do not you will quickly find yourself over-spending and over-budget.

4. Your Budget Is Not a Living Document

What I mean by this is that your budget changes month-to-month and year-to-year. It must account for lifestyle changes where necessary. Your budget needs to be a living document and be able to adapt to fluctuations in lifestyle, circumstance and income. For example, your April budget will not be exactly the same as your September budget. April you may need to budget for Easter pictures or Spring Break activities. Whereas in September you may need to budget for new clothes for the kids' new school year. Therefore you cannot just copy April's budget for each and every month thereafter and think the budget will remain the same month-after-month.

Even year-to-year it will change. Using the example above of buying school clothes in September, the following September the same child may have graduated and you are no longer responsible for clothing purchases. Therefore last September's budget would not be a perfect fit or match for this September.

5. You Give Up at the First Sign of Trouble

If you are just getting started with budgeting the first few months will be the toughest. You will forget to include debts or you will not budget enough money for food or an emergency will pop up and just throw your budget out of whack. Our first instinct in such situations is to throw up our hands and say budgeting does not work.

Don't give up. Allow enough time to get into some sort of rhythm with your budget until it becomes second nature. This may take a couple of months. For others much longer. Allow yourself at least four to six months time of repeatedly creating monthly budgets to see it work. It will work if you allow it to. But do not quit. The old adage of if you fall off a horse get right back on is very pertinent to your first budgeting experiences. You will make mistakes. Guaranteed. But never give up.


So to avoid wrecking your budget, first actually create a budget. Make sure you are dealing with realistic numbers. Be able to account for unplanned and unintended purchases. Continue to come back to the budget and review it regularly so that you can make changes as needed and treat It as a living document. And do not give up at the first sign of trouble with your budget. Then you too will be able to budget and erase debt forever.

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