Most personal finance advice tells you to start with creating a budget. With a great budget, you can save money even on a limited income. However, budgets do not always work for everyone. If yours is failing you, don’t abandon it—figure out the problem. That way, you can address it and move forward with a more solid plan.
There are several reasons people struggle with their budgets. Read on to learn about some of the most common.
- You missed some expenses.
Most people plan budgets monthly. This makes sense since it lines up well with most bills. However, not all expenses are monthly. If you have annual expenses, such as property tax or insurance premiums, then you may forget to include them in your budget. Always think about the expenses you have that do not fit nicely into the monthly organization. Then you can divide these expenses appropriately. For example, for an annual expense, divide it by 12 to fit it into your monthly budget. Once you do this, it is important to remember the annual expense and avoid spending the extra money that accumulates each month. Doing this ensures you always have adequate money to cover your bills.
- You didn’t account for fun.
We are not machines—we deserve some fun occasionally. That means you need to account for some entertainment and hobbies in your budget. If your budget is so strict that you don’t have room for fun, then you will likely end up breaking it to spend money on entertainment. Recreation is important, and budgeting an adequate amount of money for it is key to keeping yourself on track. If you find yourself resenting your budget, you should think about whether you have budgeted adequate money for fun.
Once you have the entertainment budget in place, you can go out and do fun things without feeling guilty, knowing that you still have enough money to cover your expenses and save for goals.
- You have not adjusted your budget.
An important thing to keep in mind about budgets is that they need to be revisited regularly. Think of your budget as a living document that changes as your expenses and income fluctuate. Naturally, you need to revisit your budget whenever a major life event happens, such as a new job, home, or marriage. However, it is important to build time into your schedule to adjust at other times as well. This especially applies when you are first creating your budget, as you may not fully understand where you spend your money. Over time, if you feel strained to stay under your budget, revisit it and think about how you make some changes to give you more slack. As you learn more about how you spend your money, you will naturally become better at setting a budget.
- You spend more than you make.
The first step in creating a budget is accounting for all your income and expenses. Then, you must find the difference between these two numbers. For a budget to work, you need to make more than your expenses. If your expenses outweigh your income, you will never be able to make a sustainable budget. In this case, you need to either reduce your expenses or increase your income. Typically, people find it easier to cut their expenses. Look at where you spend money and figure out where you can make reductions, whether that means cooking at home more often or canceling some of your subscription services. If you want to go the other way and increase your income, you may be able to find some gig jobs or even a second position to make ends meet.
- You don’t have an emergency fund.
Your budget needs to account for an emergency fund. The emergency fund should take precedence over just about any other savings activity. This is because the emergency fund is what keeps you out of debt and helps you stay on track with your budget. Unexpected expenses can arise at any time and you need to be prepared for them; otherwise, your budget will fail. The amount that you need to save in an emergency fund is different for everyone. One of the rules of thumb is to have about six months’ worth of expenses saved. Since this goal can often be daunting, start with something smaller and create room in your budget for expanding the emergency fund over time.
- Your income or expenses vary.
Much of a budget depends on consistency in the amount that you make or spend. Unfortunately, this is not always the case, especially with the modern gig economy. However, you should not forget about budgeting altogether when you have variables in your income. In this case, it often makes the most sense to prioritize an emergency fund. That way, if your income one month is surprisingly low or your expenses are surprisingly high, you still have the funds you need to make ends meet. You may end up needing to reconfigure your budget monthly as you figure out the exact amounts coming in and out of your accounts. Doing this ensures you are thinking critically about your spending and your saving.