Maybe you’ve listened to our podcast on Budgeting 101 and are worried about failing at your budget. Maybe you’ve tried to budget before, but always forget you even had one 6 months later. The good news is that we are covering the 5 reasons budgeting fails, so you can be sure to avoid those pitfalls.
1. Failure to Create a Realistic Budget
The first reason budgets often fail is the decision to be optimistic (aka, unrealistic) about your budget. If your electric bill costs $88 most months and up to $95 some months, don’t budget for $80. Budget for $100. Don’t round down, round up.
Another way people avoid a realistic budget is by NOT accounting for all costs. If you know it costs $1000 a year to keep your car running, budget for that. If you know you pay $20 a month for Netflix and Amazon Prime, budget for that. Pretending expenses don’t exist will ensure the budget’s swift failure.
You can be unrealistic in your budgeting by cutting too much too soon as well. If you have been spending $300 a month on Starbucks for the past 10 years, you probably won’t be able to quit cold turkey. You should reduce over time. Maybe just cut $50 off the first couple months, and then cut another $50 for the next couple months. Like dieting, being too ruthless right away can be discouraging and result in giving up.
2. Failure to Keep it Simple
You don’t like using a spreadsheet to track your every expenditure, I get it. I don’t either, and that’s why I don’t. You have to figure out the right way to budget for you.
Some people like or need to manually fill in each expense like you would with the spreadsheet method or YNAB. This can be great for people who need to feel the weight of every purchase by manually inputting them. But some of us want to have an effective budget that requires a lot less time and effort.
Mint will pull in all your spending from your bank accounts and even auto-categorize them. They might be wrong about a few categories at first, but you can manually change categories and teach Mint what category to put “Wal-Mart” in for future purchases. All you need to do is set your different categories, spend an hour or so a month checking on your budget and adjusting for some wrong categories and that’s it!
If you make budgeting a pain in the butt to do, you’ll probably give up on it. So solve that and choose the simple solution. Only choose as time-demanding a solution as you know you are willing to do.
3. Failure to Create Concrete Savings Goals
Wait, what do we have a budget for again? Can you remind me what the $5,000 in our savings account is for?
Not many people are happy forgoing that Nintendo Switch game to put more money in a generic savings account. It’s important to label your savings accounts specifically for something you care about. If you make your savings account a “Rental Property Fund”, “Kitchen Remodeling Fund”, or even “Emergency Fund”, you’ll be a lot more at peace with forgoing that game in favor of saving.
4. Failure to Automate
In the 21st Century, there is no reason to manually put money into your savings account or Roth IRA– unless you’re putting in extra that month. Automation is important, because it automatically puts your money where it should be. If you put all your money in your checking account and just say “Whatever is left over I’ll put in a savings account”, you won’t save a dime. Ok, maybe one dime. Two or three if you lay off that bubblegum machine.
The key is to have your company direct deposit into your different accounts. Whatever you want to put in your Roth IRA should go directly there. What you want to put in your “Emergency Fund” savings account should go directly there.
The first reason this is important is that it doesn’t rely on you manually moving money from your
spending checking account into a savings account. Instead, you have to do work to NOT save the money. If you were to totally forget to check on your accounts for a month, you would still be saving money and putting your money in the right places.
The second reason this is important is that it prevents you from missing the money that you’re saving. If you get $4,000 a month from work, and you manually put $500 in a Roth IRA from your checking account, you’re going to miss that money. You’ll cry little tears of sadness and feel that new guitar slipping from your fingers. If you just have $3,500 deposited in your checking account and the other $500 just happened to disappear into your Roth IRA, you probably won’t miss that $500. For more information of automating your budget, check out this great post by Ninja Budgeter.
5. Failure to Separate
This one is not often talked about, but is huge. If you use one bank for all your money, it is very easy to move money from one place to the other and end up using your savings account as a checking account buffer. Otherwise known as an oops-I-guess-I-shouldn’t-have-bought-another-TV-this-month savior account.
A super easy way to prevent yourself from falling into this trap is greater money separation. I do this by using Bank of America for my bills (mortgage, car payment, water, electric, security system, etc), Chase for my more variable expenses (fun money, groceries, gasoline, etc) and Ally for my savings accounts. This helps me totally forget about the thousands of dollars I have saved sometimes. Which is great, because it keeps me from spending it on an Oculus Rift. Because I, my wife, my friends, my sister-in-law, and probably even my cats want me to get one.
6. Failure to Focus on the Right Things
Lastly, budgets often fail because you aren’t focusing on the right things. It is important to know why you are budgeting, just as it is important to know why you are dieting. With either, if you don’t remember the end goal and motivation, you aren’t going to succeed.
Similar to the “Failure to Keep it Simple” step, you want to focus on the big wins, not all the little things. You also want to focus on the things you can change, not those you can’t. Don’t spend time sweating the fact that your gas bill was $5 higher than usual this month. Instead, focus on the big wins you can change.
Maybe you think your car insurance is really high, so you call around and realize you can lower it by $80 a month (I actually was able to do that, so that’s a real thing). There’s a big win. Or maybe budgeting has made you realize going out to eat every lunch costs you $200 a month, so you decide to bring a packed lunch more often.
Sometimes people have a budget and think “wow, I need to make more money”. If that’s your reaction, you’re doing it wrong. The point of a budget is to show you how much you truly spend on everything so you can figure out where you can and should cut.
You shouldn’t think “wow, I spend $300 on restaurants every month, I should change jobs to get a raise”. You should think “wow, I spend $300 on restaurants every month, I should cut that so I have more money for retirement”
Thinking that you need more money is like the person who thinks about how many brownies they eat and say “I should really exercise more”. So they start running 20 minutes a day and keep eating the brownie and say “why aren’t I losing weight?” Because they are trying to make up for their mistake- not solve it.
What are some other reasons you’ve had budgets fail? What are some reasons you’ve seen other’s budgets fail? Let us know in the comments below or tweet us @EscapeTheBoxLab. We love any feedback! Also, subscribe to our new email list! As always, thank you so much for reading and we hope to hear from you soon!