Ingredients of a useful budget
Budgeting is like baking a cake: Sometimes it’s what you forget that leaves a bad taste in your mouth.
If you’ve resolved to get a handle on your money, a budget is the first order of business.
Too many times, budgeters draft reasonable plans with the best of intentions. Then they run out of money before they run out of month and end up “borrowing” from the next month, pulling money from savings or reaching for the credit cards. They conclude that budgeting just doesn’t work.
Often, the big culprit isn’t the budget or the budget-maker: it’s the regular and semiregular expenses that they omit.
Want to build a successful spending plan that will give you power over your money? Here are some critical points to consider when you draft a spending plan.
The ideal: stockpile six months’ worth of living expenses (not gross income), to cover a job loss, says Peggy Cabaniss, CFP, president of HC Financial Advisors in Lafayette, Calif., and past national board chair of the National Association of Personal Financial Advisors.
Cabaniss’ advice is to make this one a priority, right along with your retirement contributions, until you amass your target amount. Then you can take it off your budget.
One way to avoid the temptation not to save: Have the money automatically transferred on the day your paycheck hits. Keep it where you can get to it on short notice, not tied up with a long-term investment. “This money is honestly meant as a cushion for a rainy day,” Cabaniss says. If you want to earn a little interest, consider a short-term bond fund, she says.
The most important thing is to get it out of that checking account. “For most people, what hits that checking account is what gets spent every month,” Cabaniss says.
Want to go on vacation? Buy a car? Make a down payment on a house? Put a new roof on the home you’ve got? Make it a budget item.
If you’ve got a big expense planned, get that money “off the table before it gets into your checking account,” Cabaniss says.
Be willing to rethink your budget and your plans. If you’re craving a $5,000 vacation and need another $10,000 for a list of large expenses, “that means you’ll have to take more than $1,200 a month from the paycheck for a year,” she says. But “you may say there’s no way we can cut $1,200 from our monthly spending,” she says. “So you go back and do the best you can.”
“It’s a back-and-forth process.” You may have to scale back your vacation or the list of “special” purchases you’re planning on making this year, she says.
The reason a lot of budgets fail? A bad memory.
“Someone will sit down and do a budget with pencil and paper, going through a mental list” of expenses, says Barry Picker, CPA and Certified Financial Planner with Picker & Auerbach, CPAs, in New York City. “And invariably something shows up that throws the budget into disarray.”
Even when people remember items, they might forget the true price. Dave Jones, president of the Association of Independent Consumer Credit Counseling Agencies, agrees. “I’ve never had a single person in history overestimate a budget,” Jones says.
Consumers typically underestimate by between $350 and $1,200 per month, he says. Culprits include variable expenses such as utilities, lunches, snacks, cell phone and texting plans, and even less-than-monthly expenses such as insurance and repairs. Don’t forget clothing. Apparel is especially a big issue for parents. “Children always outgrow clothes, especially shoes,” Jones says. But most families forget to put allowances for clothes and shoes into their budgets.
Christmas is the perfect example, says Gail Cunningham, vice president of public relations with the National Foundation for Credit Counseling. Everyone knows it’s coming, “yet we don’t plan for it,” she says. “And this is the perfect time of year to look back at your holiday spending.”
Cunningham’s advice: Calculate what you spent last year and divide by 10. Put away that amount every month and by October, you’ll be ready to start shopping.
The same goes for birthdays, anniversaries, prom, graduation and other major celebrations.
A little regular attention and TLC
A working budget isn’t something you set and forget. Your budget’s like your desk calendar: If it’s going to do you any good, it has to be current.
“Things change,” Jones says. “To be living with an antiquated budget and think you’re doing all right is sticking your head in the sand. It’s one of the worst things you can do.”
Can’t seem to draft a budget, or stick with the one that you’ve constructed? Get free help through an affiliate of the Association of Independent Consumer Credit Counseling Agencies. Or find assistance that is either free or low-cost ($20 or less), through the National Foundation for Credit Counseling.
And forget looking at it as a punishment or sign of failure. Jones says, “People need to be living to a budget regardless of their income.”