Why budgets fail (and what to do about it)
Making a budget that works really isn’t that hard, once you get down to actually doing the budget. I could write tons of content on how important it is to get over the mental hurdle of just talking about it, and get to actually doing something about it. But in this post I wanted to talk about the mechanics of actually making it work. Part of making it work is balancing the budget, which is a concept not too many people truly understand.
We hear a lot of people talking about balancing the budget. We hear this term tossed around a lot by politicians who really don’t know the first thing about budgeting. We hear people in the streets or in our social circles use the term but if you dig deep enough, you’ll find they really don’t know how to put that term into practice either. “Balancing the budget” has become a watered down term in a society where living beyond your means is the norm. People use the term so loosely now that it’s lost its true meaning.
Why most budgets fail
A lot of people make up a wish list of things they want to buy, write down the prices for each, total them up and voila! They call it a budget. But a budget is more than just writing down the things you want to spend money on.
Some people figure out how much money they make in a year or month, and then simply state, “that’s my budget.” But a budget is more than just knowing how much money you make.
Some people track how much money they spend on a monthly basis for certain categories and declare that spending amount to be their budget. But a budget is more than simply knowing where your money is being spent.
In truth, a good budget is a combination of all three of these. To make a good, working budget, start with your monthly income and write a plan to give every dollar of your income a name before the month begins. This is the simple part. If you literally follow this one step, you will by default have a balanced budget.
So what does balancing your budget truly mean?
Here’s where the balancing part comes in. You can’t just decide how much money you want to spend or how much “stuff” you want to buy. Each month you have to spend less than you make. Isn’t that one of the fundamental principles of personal finance? If you don’t want to go into debt (or deeper into debt), you need to spend only what you make (or less). So when you write your spending plan before the month begins, you need to make your plan based on the income that will be hitting your paycheck that month. No more, no less.
If you write your plan and you see there’s money left after paying your necessities, plan to put the extra into savings or debt reduction. But make sure you write that savings or debt reduction into the plan. Your total income minus your total expenses for the month must equal zero. This is called a zero-based budget, or balanced budget. Simply put, your income and expenses balance out. When your budget is balanced, this means you’ve accounted for every dollar coming in. So when you see something on sale or that you “needed” (translation: you wanted it but it wasn’t important enough to work into your plan), you don’t buy it because you know the money won’t be there to accomplish your other goals.
I balanced the budget. Now what?
The next trick is actually sticking to the plan, but that’s the subject for another article. The main point to take away from this is that you have to be proactive with your money, or you will always be reacting to the lack of money. Write a proactive spending plan (budget) and make sure it balances by accounting for where every dollar will be spent. Just by writing out your plan for the month, you’re 90% more likely to accomplish your goal. Hold yourself accountable to the plan and you’ll be amazed at how balancing the budget before the month began helps you save so much more than you’ve been able to do before.