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- For many people, budgeting feels too restrictive or impossible to keep up with.
- But in my years as a financial planner, I’ve learned that solving these problems is simply a matter of tweaking how your budget is designed.
- Adding line items for fun, budgeting for annual expenses, and using a two-checking-account strategy are three of the ways I’ve helped clients get their budgets to work for their real lives.
- Lower your monthly bills and stay on top of your financial life with TrueBill »
Have you ever felt like your budget would work in a normal month, but that you haven’t had a normal month in a really long time? Or that you create a budget with the best of intentions, but then can’t keep up with tracking it every month? Does budgeting feel too restrictive to stick to — like every splurge will throw you off track?
If these statements ring true, you’re not alone. After 15 years in the financial planning business, I’ve seen hundreds of clients struggle with budgeting and feel like they’re failing. But what I’ve discovered is that it’s usually not that the client failed, it’s that their budget was set up to fail in the first place.
Here are the three biggest budgeting pitfalls I see, and how to avoid them.
Budgeting for a ‘normal’ month
Random expenses can be so frustrating, especially when you’re trying to stay on budget. They can make you feel like budgeting is hopeless. But you can change that. And it starts with a bit of detective work. Where are these “surprise” expenses coming from?
Most random or surprise expenses aren’t actually as random as you might think — it’s just that they don’t occur monthly so we forget about them when we set up a budget. It could be property tax bills, annual insurance premiums, summer camp fees, or holiday gifts.
So what can you do? First, identify the random non-monthly expenses that come up in your life. Make a list and assign a dollar amount to each one. Next, add up all of the amounts for the expenses you identified for one year. Maybe it’s $2,500 per year, maybe it’s $25,000 per year. Take that number and divide by 12. Then, set aside that amount into a separate savings account on a monthly basis. Now, you’ll have cash stashed away to cover those surprise expenses when they pop up.
Forgetting to budget for fun
You know what drives me crazy? Listening to financial experts tell us that we should feel guilty for buying a latte or taking a vacation. A good budget includes money to cover your expenses, money to make progress on your goals, and money dedicated to enjoying life. Fun is an important part of life, so it should be in your budget!
And to make sure those fun dollars are really dedicated to guilt-free spending, consider putting a set amount of your paycheck into a separate savings account that’s just for fun — a “fun account” if you will. My husband and I have used a fun account for 12 years and it’s by far his favorite.
If you don’t have enough room to save towards fun on a monthly basis, consider setting aside a percentage of bonuses, commissions, or side gig income to fund your fun account. It’s a similar idea to having a non-monthly savings account, but it’s just for fun.
When you feel like splurging, use the money in your fun account. This not only gives you guilt-free money for fun and flexibility on when to spend it, it also provides you with a boundary so that you don’t overdo it.
Trying to track every penny
Maybe you’ve heard that you should use envelopes of cash to budget, or cut out all discretionary spending. Maybe you’ve heard that tracking every penny is the only way to go. These approaches can work, but what if you don’t have time for (or interest in) tracking every penny?
Here’s what I recommend: Instead of thinking about detailed budget categories and daily tracking, think about your spending in two main categories: fixed and flex.
Fixed expenses are those that are the same amount each month — you’re not making an active spending decision. Your mortgage, Hulu, utility bills, your gym membership — these are all fixed expenses. It doesn’t matter whether they’re mandatory or not, just that they are about the same each month and can be put on autopay.
Open a fixed checking account just for your fixed expenses. Put them on autopay, and set up a fixed amount of your paycheck to go to your fixed checking account. You’ll probably also want to keep a base amount in this account to handle small fluctuations and make sure you don’t incur any low-balance fees. Then, let it take care of itself and remove all of that noise from your monthly tracking.
The second category of expenses is flex expenses. These are expenses where you’re making an active spending decision in the moment. Do you go to Whole Foods or Trader Joe’s? Happy hour or a sit-down dinner? Full price or 40% off?
Set up a flex checking account that you use for all flex expenses — food, clothing, copays, Target, Amazon — all the stuff that comes up daily. As long as your spending stays within the amount in this account, you’re on budget. No need to track whether money went to coffee or clothes.
Keep your eye on your flex checking balance at least weekly so that you know how you’re doing, and keep a base amount in this account, too, so that you don’t incur any low-balance fees.
I’ve seen these strategies work for hundreds of clients, and for me personally, and I hope they work for you, too!