You tracked your income, you calculated your expenses, and your money still isn’t being managed in the way you hoped. Budgeting is a complex that requires accuracy, honesty and consistency; it mixes the technical skill of tracking income and expenditures with psychology and personal behavior. If you are brand-new to budgeting, it is incredibly likely that you have gotten one element wrong, if not several.
Fortunately, budgets are easy to change, so with a few small tweaks, you could be back on the path to financial success. Here are the most common reasons budgets don’t work as you might expect and some suggestions for how to fix yours:
Your Net Income Is Negative
You crunched the numbers, all your expenses and all your income, and you came up with a number that forms the foundation of your budget — there’s just one problem: Your number is negative. A negative number indicates that you have a negative cash flow; essentially, you are making less money than you are spending. This is not a sustainable situation, and it is not conducive to a successful budget. We strongly suggest you go back to the drawing board to calculate your income and expenses, and you might need to slash some expenses to get your net income back into the black.
You Are Underestimating (or Overestimating) Expenditures
When we say you need to calculate all your expenses, we mean all, and we mean accurately. You should print out a copy of all your account statements and go over every charge for the past few months to make sure you aren’t missing a major category, like “steaming services” or “gasoline.” If you have all the expenditures you need, you might consider double-checking how much money you are devoting to each category. It is possible that you don’t need as much cash each month for “gasoline,” — or that you actually need much, much more to maintain a functional budget. You can use a tool like a budget calculator to more accurately estimating the limits you need for your expenditures.
Budgets are long-term tools that slowly change your financial situation over time. If you are only a month or two into using your budget, you probably won’t see sweeping changes to your savings or lifestyle. You need to have more patience with your budget, perfecting it over the first few months and working it hard for a year or so, before you are likely to notice positive effects.
You Aren’t Committed
Having a budget isn’t the same thing as working a budget. You need to be committed to working your budget, adhering to the limits you set on certain types of spending and building your savings as planned. You can’t cheat; though it might feel liberating, cheating your budget is cheating yourself of financial stability and future wealth. You might take a copy of your budget everywhere, to remind you of rules and to help you track your spending through the week and month. Though studies on habit forming often conflict, the most extensive research indicates that it requires an average of 66 days to form a habit — so if you deeply commit to following your budget for three or four months, it might become second nature.
You Didn’t Make Budgeting Fun
You don’t have to get your thrills from money management to ensure that your budget is one that makes you feel happy and have fun. When building a budget, it is tempting to eliminate expenditures for categories that don’t contribute to essential survival or wealth-building, which usually means getting rid of things that make you happy, like going to the movies or buying new clothes. However, by prohibiting yourself from investing in fun things, you are dooming your budget to failure. You need to budget in fun activities and purchases, so you feel rewarded by your budget, not punished by it.
You Are Neglecting Your Emergency Fund
An essential component of any budget — any personal finance strategy — is the emergency fund. You can’t predict every obstacle on the road to wealth; certainly almost no one predicted the emergence of COVID-19 and the economic ramifications of the virus. However, those with healthy emergency funds are better able to weather financial storms. A portion of your budget needs to be devoted to building your emergency fund, which should comprise enough cash to meet between three and six months’ worth of your expenses.
It could be that your budget isn’t working, and it could be that you aren’t properly working your budget. In either case, you can address the issue quickly and get back on the road to financial success.