Budgeting. It's a word we're all familiar with. Everyone knows what a budget is, right? Yet how many of us actually make and stick to a solid monthly budget? The truth is that most of us start out with the best of intentions, but an unexpected expense comes up and busts our budget. Then we give up and go back to juggling our finances and worrying about having too much month left at the end of the money. However, if you are striving to create a budget for the purpose of systematically paying off your debts, or to start a savings and investment program, then it's critical to develop a workable and realistic budget.
So what's the problem? Why do most of us fail at the simple task of creating a budget so we can live within our means? The simple truth is that most budgets don't work because they fail to account for irregular or variable expenses. Everyone knows how much their rent or mortgage payment is. It's the same amount month after month. If your rent is $1,000 per month, that's a "no-brainer." The same is true of many other fixed expenses, such as auto loan payments, cable TV subscriptions, insurance premiums, and so on. It's easy to budget for these expenses because the amounts don't change from one month to the next.
Besides expenses that are the exact same figure each month, there are numerous types of expenses that vary a little from one month to the next, yet we still have a pretty good idea what we spend each month. A good example is our grocery bill. Most of us have a fairly clear picture of how much we spend each week at the supermarket. So we can insert a realistic figure into our budget-in-progress and not be too far off the mark. Sure, the amounts may go up or down slightly each month, but we usually know the range we're dealing with. Other examples of this category include telephone bills, utility bills, and gasoline (although this one certainly seems to be going nowhere but up these days!).
The real culprit in busted budgets, however, is the variable or irregular expense. How much will you spend on car repairs over the next 12 months? What about medical bills? Home maintenance costs? It seems that bills for these types of expenses hit us out of left field, and there goes our budget. Before long, we're using food money to cover a new set of tires for our car, and the whole budget comes crashing down.
So what's the solution? There is no perfect answer to this problem. But we can come to a close approximation by using the simple technique of monthly averaging. Start by gathering 12 months' worth of checkbook registers, bank statements, and credit card statements. Write down (or enter into a spreadsheet) how much you spent each and every time your money went toward something that was not a fixed expense. Group these expenditures into categories, such as auto, home maintenance, clothes, etc. Don't try to break it down too far. What you want is a handful of useful categories. Then keep listing each of these expenses under their relevant categories for the full 12-month period.
When you are done with this exercise, you should have an excellent idea of your total annual expenditure for these variable expenses. For example, if you add up all the automobile repair or maintenance expenses for the year, and the figure comes to $1,200, then divide by 12 to get the result of $100 per month average. That's how much you need to allow in your monthly budget in order to build up enough reserves to handle an auto repair when it comes up. Again, this method isn't perfect, because an expense may come up that exceeds your estimated outlay, but at least it takes into account a closer approximation to reality than simply guessing, or worse, ignoring auto maintenance in your budgeting.
The trick here is to set up a separate savings account in which to set aside these "extra" funds. Let's say the "extra" $100 goes into the savings account for six months, and then you get hit with an auto repair for $400. You pull the money from your $600 savings that was purposely built up for this type of expense. This way, you're automatically setting aside amounts intended to cover each type of irregular expense that you encountered over the previous year.
Most people are shocked when they perform this 12-month analysis of irregular expenses, and it immediately becomes clear why their budget is always breaking down. This technique leads to the discipline necessary to recognize that "extra" money is seldom really extra. If we think we have our bills covered, and there is some cash burning a hole in our pocket, our tendency is to spend it on something fun. But if we know that there really is no cash left over, because we haven't yet set aside the extra $100 needed to keep our car on the road, then we'll be less inclined to spend it on pizza, beer, and movies.
Budgeting can be successfully accomplished by this technique of monthly averaging, especially if we consistently apply it year after year. As we move forward, our understanding of our true expenses becomes clearer and clearer, and we are no longer surprised by the occasional unexpected expense. The best way to implement this approach is to set up a regular savings program, where the amount you're setting aside to cover irregular expenses gets automatically deducted from your paycheck and forwarded to your savings account. If the money is deducted from your paycheck before you even see it, then you will be less tempted to skip this critical part of the budgeting process, and you will greatly increase the chances of making a budget work over the long term.
Charles J. Phelan has been helping consumers become debt-free without bankruptcy since 1997. A former senior executive with one of the nation's largest debt settlement firms, he is the author of the Debt Elimination Success Seminar?, a five-hour audio-CD course that teaches consumers how to choose between debt program options based on their financial situation. The course focuses on comprehensive instruction in do-it-yourself debt negotiation & settlement designed to save $1,000s. Personal coaching and follow-up support is included. Achieves the same results as professional firms for a tiny fraction of the cost.
Debt levels are at an all time high in the... Read More
If you want money you need to learn how to... Read More
If You Have an Existing Account and 5 Minutes, You... Read More
Does it feel like you have to be Sherlock Holmes... Read More
Commonly referred to as the first of the three major... Read More
Here are some tips that can help you save money... Read More
If you've been to a shopping mall lately, you've probably... Read More
Sticking to a budget can be difficult, but with so... Read More
Developing and living by a household budget is by far... Read More
Well, dang! From what I've heard and read, it looks... Read More
Are you interested in saving money off your grocery bills?... Read More
During the last twenty years, banks have offered a number... Read More
Women are charged more for dry cleaning services. Don't fume,... Read More
With the A-level results coming out, the long wait for... Read More
We have heard a lot about consumers' personal information getting... Read More
As the saying goes: "Buyer Beware". If you see ads... Read More
Budgeting. It's a word we're all familiar with. Everyone knows... Read More
Has anyone been to the gas pumps lately? Soon $3... Read More
Reducing the clothing budget was a serious challenge for me.... Read More
I have to admit, I do it too. I complain.... Read More
Vacations Made Easy: Buying a Florida Investment PropertyA relaxing beach... Read More
Gas prices have soared to unimaginable heights of late. Since... Read More
If you, like most people, have not seriously considered what... Read More
If you have a 401(k) account, it can be very... Read More
Your boss has just informed you that your department is... Read More
You should thoroughly consider your business needs when selecting a... Read More
My personal opinion is that in today's new economy, it... Read More
Most consumers are aware of the importance of their credit... Read More
We all know that money doesn't grow on trees, but... Read More
Here are ten steps you can follow to help improve... Read More
Ever wonder where address labels come from? AveryŽ is perhaps... Read More
As a parent you are bound to face a few... Read More
Six Scholarship judges were sitting around an oval table. Forms... Read More
Sorting out your personal finances can be a tricky and... Read More
Most of us, especially those of us who have debtor's... Read More
Single Mother's in need of Financial GuidanceBudgeting is key to... Read More
Has anyone been to the gas pumps lately? Soon $3... Read More
When you received an energy (heating) bill last winter, were... Read More
During the last twenty years, banks have offered a number... Read More
Have you ever wondered what it would be like to... Read More
As a parent you are bound to face a few... Read More
It is widely written that you need 75% of your... Read More
With interest rates being at an all-time low, I can... Read More
Each of us knows how to spend money, but do... Read More
Christians are called to be good stewards of God's resources.... Read More
I thought I was through with exams when I finished... Read More
Are you a check fanatic? Don't worry, you aren't alone.... Read More
The Prudential has dubbed those who refuse to leave home... Read More
Everyone needs to maintain their lives. What I mean by... Read More
If you die without making a Will in the UK,... Read More
Are your financial muscles well toned and healthy or flabby... Read More
While 40% to 50% of us make New Year's resolutions... Read More
I've been going through and interesting growth period lately that... Read More
What is finance and what do you need to know?... Read More
Your food budget is the most flexible area of your... Read More
ID theft is a major consumer concern, though there is... Read More
So, you've made the decision to apply for a credit... Read More
Many people spend their little income haphazardly without any planning... Read More
Debt levels are at an all time high in the... Read More
Do you have a 401(k) retirement account? Are you vested... Read More
Super-mumsIt seems that the proof of maternal efforts is no... Read More
Those who keep a watchful eye on where their money... Read More
I've been sharing the following idea with people for a... Read More
One of the biggest challenges facing black RELATIONSHIPS today are... Read More
Car donations and used car donations are the way many... Read More
If you were to ask 100 women "What would you... Read More
Personal Finance |