Sometimes despite our best efforts to maintain a budget and properly handle our money, things can still get off track. Perhaps the credit card bill may be higher than we expected, or there isn’t as much money leftover for our savings goals as we wanted.
It’s more common than you might think. According to a survey from NerdWallet, 84 percent of respondents say they’ve exceeded their budgets often. Turns out it’s harder to do than most people anticipated.
Of course, that’s not an excuse to give. When your budget isn’t working, it’s time to dive in and find the root cause of the situation. Here are six possible reasons why your budget might be getting detailed and some tips for bringing it back in line.
1) Is Your Budget Based on Data?
A lot of people think they know how much money they spend in a given month. But in reality, they’re just guessing, and that can be dangerous according to something called the planning fallacy. The planning fallacy is a phenomenon that says humans will often underestimate how much resources (like money) are needed due to optimism bias.
The problem with estimating your budget is that even the best of us cannot possibly account for every dollar spent. No matter how hard you may try, there will naturally be dozens of smaller purchases that would go unaccounted for. Though they may seem insignificant, you’d be surprised at how quickly those extra transactions add up to an extra thousand dollars or more.
That’s why when it comes to budgeting it’s best to rely on cold, hard data. The good news is that you can easily automate its collection using a helpful budgeting app like Buxfer. Buxfer will connect with each of your bank and credit card accounts, and consolidate the transactions into one real-time report. This will help you better recognize where you stand and whether your budget is on track.
2) Could Your Expectations Be Unrealistic?
Setting targets for each of your budget’s spending categories is a regular part of the process. But you could be setting yourself up for failure if those limits are too restrictive.
For example, a person might declare that they won’t charge any more than $2,000 per month to their credit card. This could be based on the assumption that the majority of their credit card bill is just “fat” that can be cut. However, what if that person has more than $2,000 in non-discretionary purchases such as home energy, auto insurance, internet service, etc?
Again, your budget should be based on real-world data. Targets are good, but they must also be achievable if you want your budget to be successful.
3) Is Your Budget Too Air Tight?
Perhaps you’ve already done a good job of going through your most recent transactions and detailing your budget to reflect them. However, at the end of the month, you still have more expenses than you anticipated.
The problem could be that it may not have enough safety margin. Safety margin is the buffer you put between your income and expenses. This would be desirable because prices don’t always stay the same. Especially throughout 2022, we all got a big lesson in how inflation can show up unannounced and increase the price of everything.
On top of that, everyone encounters unplanned expenses every now and again. These aren’t necessarily purchases that would count as “emergencies”, so you wouldn’t want to deplete your emergency fund to cover them. Instead, add a line item in your budget labeled “Misc.” to create a small safety net.
4) Is There a Hole?
Is your budget based on your average monthly expenses? If so, you may be at risk of “holes” that you didn’t originally anticipate.
Usually, these are expenses that show up periodically once or twice throughout the year. A few examples include:
- Taxes
- Holiday gifts
- Spring or summer vacation
- Insurance premiums (if paid all at once to capture a discount)
- Planned home renovations
- Etc.
It’s for this reason that preparing an annual budget will be more comprehensive. By thinking about your finances for the whole year, you’ll be able to identify these one-time costs better and wrap them up into your plan.
If you’d prefer to stick with a monthly budget, then you can do that. However, it will need to include a portion of these one-time expenses. For example, if you plan on spending $4,000 on a summer vacation, then you’d want to factor in $333 to your monthly budget to account for this. It may look like a surplus at the end of each month. However, when the time comes to spend it, that extra cash will come in handy.
5) Is Your Income Fluctuating?
Sometimes the problem isn’t necessarily your expenses but rather the way you receive your income. People who don’t get paid a traditional steady paycheck every two weeks may be dealing with irregular earnings. This is often true of those who work on commission, receive periodic bonuses, or are self-employed.
In these situations, what’s needed is a layer or pool of money between your earnings and expenses. For example, let’s say in a given year you earn approximately $60,000. That’s an average of $5,000 per month. For simplicity, we’ll also assume your expenses are $5,000.
Now imagine your bank account is at $0. This would put you in a difficult spot because if your income fluctuates to the low end and you’ve only earned $2,500 this month, then you’d have trouble covering your $5,000 of expenses. You may even go into debt by putting it on a credit card or taking out a loan.
Instead, a better strategy would be to build up a buffer of $5,000 or more in your bank account. That way you could comfortably pay for your expenses while your income flows in at whatever pace it does.
6) Are You Being Disciplined?
As the old saying goes: When you point your finger, there are four other ones pointing back at you.
We’d all love to think there’s some external force that’s preventing us from being able to balance our budget every month. But sometimes the problem is with ourselves.
Be honest with yourself: Did you spend a little more this month than you normally do? Could a few more boxes from Amazon have shown up at your door? Did you splurge on eating out more than usual?
It’s okay if you did. There’s no judgment. But the point here is that you have to take responsibility. After all, if you’re not going to change your spending habits, then no one else can do it for you.
The good news is that when you’re the problem, you can also resolve to be the solution. You can put boundaries in place and restrain yourself from exceeding them. Just because you’ve slipped up doesn’t mean you can’t still be successful. If you can commit to truly being disciplined and want your budget to work, then you’ll do what’s necessary to make it happen.
Featured image credit: Pexels
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