Laura Cooley Retirement Plan Advisor View Bio

Money crisis

Has there ever been a concept that has been so overwhelmingly embraced but yet so minimally executed than the household budget?  Everyone who starts the process has good intentions; the problem is keeping it going past the first month.

The philosophy behind the budget is simple: control expenses to live within a spending limit.  The hard part is twofold, 1) figuring out what you’re spending now so you have a clear picture of what you need to control and then 2) controlling it.

I have attempted many budgets that have lived both online, in excel and on paper.  My most recent version has worked the best for me but what I have learned though all my failed attempts is WHY so many budgets don’t work and how to fix it.

  1. Spending cannot be micro-managed.

This is the single greatest reason why budgets fail.  It is extremely difficult to keep track of every transaction within a category.  Let me provide you with an example using a widely used category of ‘Clothing and Shoes”.

 

You calculate monthly expenses for your beautiful family of three and you determine you spend $250 per month on clothing and shoes.  You make a commitment to reduce spending in this category to $175 to free up $75.  Great- except it’s easier said than done.   Trying to keep track of each purchase and what you have left to spend as the month progresses will be close to impossible- especially if you have multiple people making purchasing decisions.

 

Most purchases in this category are impulsive.  So if you went over the budget that month you are likely to borrow from next month in order to avoid missing the deal, which perpetuates the difficulties in keeping track of each purchase.

 

Also, and most notably, if this seems like it’s a tough task, just imagine adding another 10 categories to the mix, such as groceries, entertainment, eating out, gifts, personal care and gas.  Hence the ineffectiveness of micro-managing spending; who can keep track of all that?

 

  1. You are not breaking out expenses.

One effective trick to my budgeting process was breaking out expenses by essential and discretionary.  My essential expenses are considered priorities in the budget hierarchy and typically cannot be paid late or even cut out of the budget.  This would include mortgage or rent payments, car payments, insurance premiums, gas, groceries and utilities.

 

Discretionary expenses are not necessities.  This includes: entertainment, eating out and clothing, just to name a few.  Having these separated gives me a clear picture of what expenses I can focus on first.

 

  1. Estimation is the enemy

I have worked with a lot of clients on their household budget and in almost all instances requested a copy of their budget for my review.  When I would see a lot of round numbers like $100 or $150 or $200, I would question how much time was spent preparing the numbers.

 

After a little embarrassment from the client, they would admit to how hard it was to complete it and just estimated what they were spending.  My advice is don’t bother doing the budget if you won’t commit to diving into the numbers.  It’s in our nature to want to overestimate income and underestimate expenses.

 

  1. You went too aggressive too fast

After categorizing your expenses and figuring out what your spending each month, my advice would be not to get too aggressive with your budget by slashing your expense by more than you think you are capable of achieving.

 

It’s important to have an overall goal for reducing expenses, but approach it conservatively so you don’t get too discouraged if you can’t meet your goal within the first couple of months.

 

  1. It’s a lifestyle commitment- find your discipline

Constantly remind yourself why you decided to budget in the first place.  Was it because you wanted to save more money into retirement, buy a new home or pay down debt faster?  Consider writing these important catalysts down and looking at them often.   This is a commitment by all those involved; regardless if you are single or married.

 

This will be a process and may take longer than you anticipated so it’s important to find out what strategy works best for you.   Do you prefer software or paper? Do you want to reconcile your expenses monthly or weekly?  In the end it’s your budget and you need to show it who’s boss.

 

 

Securities offered through Cadaret, Grant & Co., Inc., member FINRA/SIPC. Lawley is not a subsidiary or control affiliate of Cadaret, Grant & Co., Inc.

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