Building a budget isn’t hard, but it does require time and effort. And once it’s completed, it’s something you should be proud of. Yet, many people have trouble sticking to a budget. They wind up essentially throwing all their work out the window as a result of impulse buys, unrealistic expectations, or a lack of discipline.
Don’t let that happen to you: Here’s a look at some of the reasons budgets can fail and tips for making a budget you can stick to.
Key Points
• A budget helps organize money according to priorities and achieve financial goals.
• Assess income and expenses to create a realistic budget.
• Set SMART financial goals for better budget adherence.
• Automate bill payments and savings and use apps to help stay on track.
• Revisit a budget regularly to reassess, and update it when major life changes occur.
Understanding the Importance of Budgeting
A budget allows you to organize your money according to your priorities and plays a key role in achieving financial goals. Those goals can be anything from taking a vacation and buying a new car to funding future education and retirement. With a well-crafted budget, you can work on multiple goals at the same time.
A budget is also one of the top tools to help you stay out of debt or rein in any outstanding debt you may already have. In addition, having a budget can help simplify your spending decisions, making it easier to determine which purchases are worth making and which you don’t actually need.
The Role of Budgeting in Financial Planning
Budgeting can play a critical role in financial planning. It can allow you to balance your income into such buckets as paying for necessities, enjoying discretionary spending, and saving for your future as well as managing debt responsibly.
With a budget in place, you can earmark dollars toward short-term goals, such as redecorating your bedroom, and longer-term goals, such as having enough cash to retire early. You can divide your income and funnel it toward different financial goals.
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Overcoming Common Budgeting Challenges
Budgeting usually begins with the best of intentions. However, it’s all too easy to get sidetracked. Temptations and unexpected expenses can cause a budget to go off the rails, leading to overspending, missed bill payments, and debt. Here’s a look at some of the most common reasons why budgets fail.
Lack of Discipline
Even if you’ve created a budget, it can be easy to slip into a free-spending lifestyle in the moment (say, when out with friends who have deeper pockets than you do). If you generally live within your means, that might be okay. But if you’re a habitual overspender, it’s important to recognize that those behaviors have to change to keep your budget on track. A budget can’t help your financial situation if you don’t follow it.
Unrealistic Expectations
Many people think budgeting requires drastic measures. For example, if you’ve been living beyond your means and want to rein in your spending, you may decide you must go from spending more than you make to living off half your income. But that stringent plan may not be a viable option. When you fail, you might give up on budgeting altogether. It’s important to set achievable expectations.
Discounting Irregular Expenses
While building your budget, you probably remember to factor in regular expenses like your monthly electricity bill and grocery shopping. But it can be easy to forget to include budgeting categories and expenses that occur on a more infrequent schedule, such as quarterly or annually.
Annual membership fees, homeowners’ association fees, insurance premiums, holiday spending, and kids’ camp tuition may come up only once a year, and that can make them easy to forget. Failing to account for these costs can throw your budget off once they come due and you may have to scramble to find the cash to pay them. You can try to account for these expenses by saving a little each month to help cover them.
Recommended: Money Management Guide
Getting Lost in the Weeds
While it’s important to take a thorough accounting of your expenses when making a budget, it is possible to go overboard with so many line items that can make your head spin. How do you stick to a budget when it’s several pages long? With difficulty, if at all.
A budget with too many line items can be tedious to update and track. It can be more productive to have broad line items that encompass a wider array of expenses, so if you spend a bit too much on one small item, it won’t make much difference.
Your Social Circle
The people you surround yourself with, including your friends, family, and partner, can have a huge impact on your spending. If these people tend to be big spenders, you might be tempted to spend when you’re around them. That’s sometimes known as FOMO spending or “fear of missing out” spending. It would be a shame if one big night on the town threw off a whole month’s worth of budgeting plans.
If you’re saving for a specific goal, like putting a down payment on a home, you might let your friends know that you’re trying to stick to a budget, so maybe they won’t tempt you with expensive sushi dinners or weekends in Vegas. In their excitement to help you achieve your goal, they may be willing to trade nights at the bar for cheaper activities like game nights in.
Steps to Creating a Realistic Budget
One of the most important tips for how to stick to a budget is to start with a realistic budget — or, in other words, a budget that is easy to stick with. These three steps are key to starting off on the right foot.
Assessing Income and Expenses
To create a realistic budget, you need to first assess where you currently stand. That means calculating how much, on average, is coming in each month and how much, on average, is going out each month.
You can do this by reviewing bank statements from the past several months, then adding up all of your (after-tax) monthly income. This is how much you have to spend each month. Next, add up what you are spending each month to come up with a monthly average. If your average monthly spending exceeds your average monthly income (meaning you’re going backwards) or is about the same (meaning you’re not saving), you’ll need to find places to cut back.
Setting SMART Financial Goals
Whether your goal is to build an emergency fund or go on a great vacation, setting clear, achievable financial goals will help you create — and stick to — your budget. Strong goals serve as reminders for why you’re choosing to spend less in some areas, which can make sticking to your budget feel more rewarding.
Consider using the SMART framework when setting goals. You’ll want your goals to be:
Specific: Rather than saying, “I’d like to save more,” try to be more specific, such as “I’d like to save enough for a down payment on a car in four months.”
Measurable: You want your goals to have a measurable outcome, such as a set amount of money you’d like to save by a certain date.
Attainable: If a goal is too hard to achieve, you might give up before you get very far. Strive to set goals that are attainable given your current income, expenses, and time frame.
Relevant: It’s key that your goals address your top needs and concerns. Consider what will give you the most security and value to your life right now.
Time-based: Having a set timeline can help you stay on track and reach your financial goals.
Recommended: Savings Calculator
Allocating Funds to Financial Goals
You may wonder how to best allocate money toward your financial goals. One method that can work well is to have separate savings accounts for each short-term goal, such as one for your emergency fund, one for your beachhouse rental next summer, and one for the down payment you are saving for a new car. It can be wise to keep these accounts at an online bank, where interest rates are typically higher and fees lower (or non-existent), helping your money to grow faster.
You may find that if your paycheck goes to your bank by direct deposit, you can determine how much goes into different accounts. In other words, you could direct most of it into your checking account and some into a savings account or two.
Prioritizing Essential and Non-Essential Expenses
A budget is an opportunity to align your spending with what’s most important to you. You’ll want to have three main categories for spending:
• Essential expenses (“needs”) These are your necessities, such as groceries, housing, healthcare, and transportation. Minimum debt payments fall into this category as well.
• Nonessentials (“wants”) These are the expenses that aren’t necessary for survival but enhance your quality of life. Examples include dining out, gym memberships, and travel expenses.
• Savings This is the money you separate from spending each month that will allow you to reach the financial goals you established earlier.
A very basic approach to budgeting is the 50/30/20 budget rule, which divides your net income into the above categories, spending 50% on needs, 30% on wants, and 20% on savings. Those percentages may not be realistic for everyone, however, If you live in an area with a steep cost of living, for example, you may need to spend more than 50% on needs and take some away from the wants and/or savings categories.
Recommended: 50/30/20 Budget Calculator
Practical Tips to Stick to Your Budget
Once you have a basic budget in place, you’ll need to stick to it — or you won’t see any progress toward your goals. Here are six ways to keep spending and saving on track.
1. Sleep on Big Purchases
Impulse buys can quickly throw your budget off course. To avoid the problem, try the 30-day rule: If you see something nonessential you want to buy either online or in person, put the purchase on a one-month pause. Tell yourself that if, after 30 days, you still want the item and you can afford it, you’ll buy it. This gives you time to reflect. You may well decide that you don’t need or want the item that badly and forgo the purchase.
2. Aim to Never Spend More Than You Have
minimum on your credit card balance, for example, means you’re never getting ahead of your debt. Running a balance also means you’re going to end up paying far more for your purchases than the original price tag.
If you want something you can’t afford right now, plan for it, and start setting money aside for it each month. When you have enough, you can splurge without guilt — or throwing off your budget.
3. Set up Autopayments for Bills and Automatic Transfer for Savings
To make sure you never miss a payment (and avoid late fees), consider setting up autopay (aka automatic bill payments) for all of your regular bills. You can apply the same principle for paying yourself, which means saving.
Simply set up recurring money transfers from your checking account to your savings account for the same day each month (ideally, right after you get paid). Even small amounts will grow into something larger, which can ultimately buy that vacation plane ticket or cover an unexpected car repair.
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4. Plan Your Meals to Curb Impulsive Spending
When you’re hungry and there’s no food in the house, it’s hard to resist the call of the drive-through or your fave local take-out spot. You can avoid this temptation by planning your meals (including breakfast, lunch, dinner, and snacks) each week, making a grocery list, and sticking to that list in the store.
Meal planning saves you from blowing your weekly food and restaurant budget. It can help you save on groceries if you use items up vs. letting them sit and go bad in the fridge. Bonus: You’ll probably eat healthier, too.
5. Utilize Technology for Tracking and Managing Your Budget
One of the best ways to stick to a budget is to harness technology. Putting a budgeting app on your phone, for example, can help you keep track of your spending and savings. These apps connect with your financial accounts (including bank accounts, credit cards, and investment accounts), so you don’t have to manually enter your purchases and transactions.
Leveraging Budgeting Apps for Financial Success
Apps can help you stay on a budget, too. They can monitor bank accounts, credit card spending, and even keep track of how much you spend in cash. Some apps allow you to split your spending into your own categories and can send you alerts when you start to max out your budget to help keep you from going over. Even better, many budgeting apps are provided by financial institutions, and third-party ones are also available and may be free (at least for the basic service).
With this kind of support, you may find it easier to stay on target with your budget and financial goals.
6. Revisit and Adjust Your Budget as Needed
A successful budget is rarely a one-and-done proposition. As your income, expenses, and/or financial goals change, it’s a good idea to revisit your budget and make adjustments.
You may want to check in on your budget every six to 12 months to reflect on your budgeting journey. How well is your budget working to advance your goals? Is it still relevant to your life? Maybe you’re spending more in certain categories and less in others. Perhaps you can siphon off a bit more in automatic savings each month and reach your goals faster. Picking up changes in your financial habits can help ensure that your budget reflects your current priorities.
Also, it can be wise to revisit your budget when you have a major life change: Did you get married, buy a house, or have a baby? Were you laid off and unemployed for a couple of months? Did you decide to go back to school? All of these events can trigger another look at your financial plans.
The Takeaway
Learning how to stay on a budget means starting with a realistic budgeting plan, setting SMART goals, picking the right tools, and keeping a watchful eye on your money as your income and expenses change. Remaining agile and staying disciplined with your budget will allow you to meet your expenses, enjoy extras like travel and entertainment, and achieve your future goals. There may be tech tools offered by your bank that can help as you manage your budget.
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FAQ
How often should I review and adjust my budget?
It can be wise to review and adjust your budget every six to 12 months, Some people may prefer a more frequent cadence. Also, if you have a major life experience or shift, from having a baby to deciding to go back to school, you will probably want to revisit your budget.
How do I adjust my budget when my income changes?
When your income changes, you could use a budgeting app to recalculate your spending and savings goals, or you could use a budget method such as the 50/30/20 rule. This says to dedicate 50% of your take-home income to needs, 30% to wants, and 20% to savings and additional debt payments.
How do I set financial goals while sticking to a budget?
You can incorporate financial goals into your budget. For instance, with a line item budget, you could have lines for saving for a new car and for retirement. Also, you can set up automatic transfers to help you effortlessly move money to accounts being held for those aspirations.
What should I do if I consistently overspend on my budget?
If you are consistently overspending, it can be wise to evaluate whether your budget is too stringent and unrealistic. In that case, you may need to re-allocate your funds and put more money toward where you are overspending and less elsewhere. Or you may need to exercise some self-discipline and look carefully at your budget, vow to change your behavior, and recognize that it’s important to work toward your long-term financial wellbeing.
How can I involve my family in sticking to a budget?
To involve your family in sticking to a budget, it can be wise to hold regular family meetings (but they should be fun and collaborative, not punitive) and talk about money goals and spending options together. Children can, once they reach a certain maturity level, be part of this process and contribute ideas and effort. Grocery lists and holiday gift lists can be created and discussed with an eye toward understanding how a budget works.
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