There are a lot of good guides on the internet on how to make a budget and what to think about and account for. However, there are still people who struggle to meet their financial goals in life even though they stick to a firm budget. A typical story sounds something like “My husband and I have agreed on a budget, and I take an envelope of cash with me to the grocery store and I only spend that much, and we pay ahead $20 extra every month on the student loans we have, and we’ve done this for two years and we don’t seem to be getting ahead.”
Many of the people in this situation are sitting down, having a family budget meeting, making sacrifices, and putting effort into planning, but not getting anywhere. So here are some extra tips to think about:
1) Working a bad plan, or just setting the bar too low
Some people work under a budget, but they have assumptions such as “I always budget $500 a month per car loan payments because I need a nice new car”. Another is “I budget to make the minimum payments on my credit card balance, my credit score is awesome”. Or another classic is “I have a budget, and then I put the emergencies and unexpected things on a credit card, and then when I get my tax refund, I pay off all my credit cards”. The first change for someone whose budget is not making progress is to look for the most obvious fixes. Getting rid of high-interest debt like credit cards by making a temporary cut elsewhere in the budget will free up more future cash in future months. Getting rid of paying interest means you can maintain the same lifestyle using less income, which is a win-win. Another is to consider what spending in your budget is optional, or indulgent. Make a separate budget line item for something like cigarettes whether or not you are trying to kick the habit so you have to see how much it is costing you. Finally, making sure there is savings and flexibility to handle the unexpected expenses is crucial. Nobody knows in advance whether their financial emergencies are going to be a broken car, broken arm, or broken air conditioner, but something will break.
2) Not adjusting your budget over time
Just because you put it in your budget when you started the budget 2 years ago doesn’t mean it is the best use of funds today. A classic problem is when a two-income household becomes a one-income household through a lay-off. If there was room in the budget for both spouses to have dry-cleaning, new suites, commuting expenses, eating out at lunch, and so forth, then the budget needs to be adjusted until that spouse finds work again if those expenses aren’t needed at that time. Another is not going through and re-evaluating and re-prioritizing items over time. If two spouses each had a “fun money” allowance of $100 a month before a child was born, and then a new baby brings new expenses, then maybe the fun money should be revisited. Also, the lifestyle changes of a new baby might make the $100 that was needed for each spouse to entertain themselves each month might not be needed as the new parents might want to sleep more instead of go out.
3) Short-term vs. Long-term planning
Most people’s budgets are setup for monthly expenses. Many people have budgets that set aside money for big months, like the family vacation, holidays, or whatever month it seems the most birthday falls into. However, most people have goals in life beyond the next month or the next year. Taking a blank sheet, and writing down goals such as retirement, college expense for kids, wedding expenses for that daughter, buying a new house, boat, car, or whatever your financial goals might be. Then take your monthly budget and look at how much of your money in a month is going towards those goals. If it turns out that the 6% contribution to your company 401k are the only dollars that are being saved beyond this next year, then your budget might be too short-term focused. Sometimes people say they want to plan for retirement, but their budget says they want smart phones, cable TV, car payments, new clothes, and a nice vacation. A successful budget doesn’t just keep you from going bankrupt this year or being late on a bill payment, it helps you prepare for you goals in life. If your budget improves your financial situation, it is much easier to stick to it.
For help on how much of your budget needs to go towards building long-term net worth, the linked article I wrote has tables that show for a given age, and net worth, how much of your income from your budget needs to be going towards net worth (by saving, investing, or paying off debt).
Retirement plan needs and budgetted contributions to net worth
4) There is just not enough money
What about when there simply is not enough money to make ends meet, much less make progress towards long-term financial goals? Not to belittle this problem, but one of problems that developed in American culture in particular is a culture short-term vision. What situation a person is in today, it is bound to change, in terms of income, employment, or family size. The key for someone who is not able to make ends meet today is to find more income as soon as possible. More often than not, that means looking hard for a first, second, or third job. In the long-term, it might mean looking for opportunities to expand via education and opportunities. However, don’t get caught in the heavily marketed idea that just having a degree will magically make anyone want to throw money at you.
Remember that the situation you are in is temporary, and that you are just trying to find a light at the end of the tunnel. Don’t become desperate and panic. Desperate people sign up and take out loans to get an education from a fly-by-night school in a strip mall. People who panic end up taking a job making $10 an hour, and spending $11 an hour on childcare, when they could be offering to watch someone else’s kid for $8 an hour. If you have some income, but tiny kids at home to take care of, taking time to cut coupons and make sure that every dollar spent goes as far as it can might be worth more than a second job in the long-run. Survival is important, so if you need help from friends, family, your church, or the government, ask for it. Use that help as a hand-up to get track to improve your situation.
5) And if none of the above apply to you…
Then you probably have just had bad few months. Maybe the car broke down, and there was that roof leak, and maybe your 401k just fell 15% with the stock market while the neighbor’s foreclosure just sold at auction for 1/3rd of what you paid for your home. Those things are temporary. Looking at where you net worth was when you started working from a budget. Maybe today you have an emergency savings account and you sleep better at night. Sometimes your finances will make you take three steps back and pay luxury tax, but like in monopoly, you have to expect that at some point you will pass go or land on free-parking to offset that.