Wednesday, October 21, 2015

Budgeting: Where People Go Wrong

Lately my husband and I have had a hard look at our budget.  Since switching countries, our budgeting expenses are different.  In Canada we didn't have a hefty "health" category because our only expense was the dentist or medicine.  But our rent and utilities were higher.  I've also had to include a "school expenses" category because we've had to pay for trips, school supplies, and lunch which I (for whatever nonsensical reason) did not budget as a separate item while in Canada.  Well you get the idea.  Our budget has changed and so I'm working out the kinks.  Hence the budget post.

When most people budget they put up two main categories: expenses and income.  But creating a budget requires a lot of tweaking.  So here are some of the things that people forget about when creating a budget.

1) Not breaking down expenses enough- I just mentioned that in Canada I didn't have a working "school expenses" category.  I just absorbed things like school trips into entertainment and food into our house grocery budget.  They don't have a cafeteria set-up in most Canadian schools.  It was fine then even if it was silly.  But since school expenses in the United States (even for the allegedly also free public school system) are higher.  Add into that the expenses of schoolish projects for Knee and well, I need a separate line item.  For you it may mean separating out entertainment (such as family outings or date nights) from out-to-eat expenses.  The larger the expense the better to put that as a separate line item.  Why?  Because if you put it as one giant chunk you will find yourself not allocating enough for a particular thing.  Spending more money on say date-nights versus making sure there's some cash for a school field trip.  This may not be a problem if you homeschool (as you can reschedule for another month), but it is if you don't.  So making those two separate categories helps to make room for both expenses. 

2) Breaking things down too much- Some people like to put in their income selection every little detail of their income such as gross versus net.  Using a net income is just fine.  The gross is only good to know if your adjusting for tax forms.  It won't help you create a basic operating budget.  For that you just need the net.  It's the same with entertainment.  Unless you've got some long standing weekly trek to the movies, you really don't need to line item what every little entertainment plan you have is.

3) Including fluctuating income- While it's good to include a line item for fluctuating expenditures, it's not true of income.  You know you are going to spend groceries each month.  How much will vary but overall you can give yourself a cap.  With income, you should pretend that you won't make any interest in your investments or your yearly bonus or tips.  Use the base as an operating budget.  Otherwise you may find yourself in the hole if you discover that you didn't get that anticipated bonus.
4) Not budgeting for emergencies- This one is a bad one to skip.  Unforeseen things do and will happen.  If you set aside a little each month, eventually you will have a good cushion to absorb any potential upset.  Depending on your life-style, you may want to invest your emergency fund in a nest egg like a money-market account or you may want to keep it in a more liquid form like a low-interest savings account or a combo of the two.  As you can imagine, because we have small children "emergencies" happen frequently.  Fixing a broken glass door.  Stitches.  Or if you have an old car.  Those will help you decide how much to sock away in investments versus having easier access.

5) Not saving for retirement- If you can, have it automatically deducted so that you don't even include it as part of your operating budget.  Less line items that way.  But if not, make sure there is a line item for retirement savings.

6) Not having a financial goal- Your money is not going to heaven with you.  You are merely the steward of money here on earth.  It is to serve you and your family and those in your community.  Why do you save money?  Is it for retirement?  Is it to help your children in the future?  Are you trying to pay of debts faster? Once you have a long-term reason for saving money, it's easier to put back something you don't really need or conversely plan for a getaway or something fun like that.  There's a time for practicing mortification and a time for feasting.  Plan what category is what.

7) Not having Categories for Tithing and charitable contributions-  They are not the same thing.  Tithing goes to the parish operations.  Charitable contributions are like buying boxes of pasta for the St. Vincent de Paul Society.  Make sure you set aside money for both.  Those two items should be squished between necessary categories (groceries, utilities, housing, etc) and those that you have more flexibility with (entertainment, clothing, out-to-eat money) since that is where they should fall in terms of importance.

8) Not having a "splurge" category- As I said mortification is great, but you need a splurge category.  Don't kid yourself.  That cute figurine would look lovely in your house.  A bright new rug really will help you out of the doldrums of winter.  And this is fine.  If God wanted us to see life as dull, boring, and colorless, he wouldn't have painted the world the way it is and given us the eyes to see it's beauty.  It's fine to include that in your life.  We're to maintain a balance: wonder and awe in what God has created but not gorge ourselves selfishly.

9) Not setting aside money for the holidays or traveling- We should be reasonably setting aside for large yearly expenses a little each month and this includes for any traveling or holiday expenses.  However you celebrate holidays, you need to budget for it.  This doesn't mean you give extravagant gifts.  It could mean visiting or hosting family and friends.  You decide how you want to honor Christ's birth, resurrection, etc and plan for it.

10) Not discussing what you are budgeting for with your spouse- You spouse may be a bit more spend thrifty than you are.  Or they may enjoy the occasional shopping with friends.  It's important to discuss long term goals, and baby step into any mortifying (yet edifying) budgeting constraints.  Doing it all at once can lend itself to someone spending over budget and past your means.

11) Not making monthly adjustments- Incomes change.  Expenses change.  Goals change.  You need to come up with a budget and then adjust each month.  Are you planning on a trip?  Perhaps you can cut out a flexible spending category or half it one month.  Perhaps you can work an extra temp job (especially in this season).  You need to account for all of it and know what your plan for it is.

Well that's all I can think of.  If you are looking for a good basic budgeting template- here's one.  Do you have any tips for creating a budget?  Let me know below.

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I love to read your thoughts. Thanks for sharing!