A realistic budget can be a lifesaver, but one that doesn’t work for you can lead to serious financial stress. Learning how to identify problems with your budget is the first step in making positive financial changes.
According to The Money Charity, the average UK citizen has £4,264 in unsecured debt. Over 12.8 million households in the UK also have either no savings at all or less than £1,500 put away for emergencies. While there are no statistics on how many of those households keep a budget, it’s a fair to guess that a large number don’t.
If you’re the kind of person who cringes at the idea of setting up a personal budget, there’s good news. An effective budget doesn’t have to be complicated. In fact, a realistic budget can be very basic and still work very well as long as you keep track of your money properly.
Here are some potential budget problems you should address right away:
Your budget is not realistic
Maybe you’re a bit of an optimist and think you’ll only spend £100 a month on food. Or perhaps you only allocate £50 for entertainment each month when you really spend three times that. While reducing your expenses is a great goal, you need a clear plan to do that. Otherwise, you’ll overspend in each category and bust your budget by the end of the month.
If your current budget isn’t working, consider starting again from scratch. Decide how much to allocate to each category but then keep track of all your expenses for a month. This can give you a realistic view of your money and allow you to adjust your targets, if necessary. If your actual expenses are much higher than you want (or can afford), start by reducing your total – but keep it reasonable. Cut your food category by 10-20% in the first month rather than trying to spend 50% less. Then, revise your budget again to see if you can realistically cut down even further.
You don’t know what to do with irregular bills
Once you’ve acknowledged the problems with your budget and redone it based on your actual income and expenses, there’s one thing left to account for: those pesky irregular bills.
Chances are you have at least some bills that are only paid once or twice a year. This includes things like your car tax, car servicing and holidays. If you do pay for these expenses annually but don’t make them part of your budget, they can wreck your financial blueprint.
The answer? All irregular expenses should be part of your monthly budget. The easiest way to do this is to add up all of your yearly expenses and divide the total by 12 to get a monthly figure Every month, factor that amount into your budget and move it into a savings account until it’s time to actually pay that bill.
You don’t regularly evaluate your budget
Simply put, spending changes over time. Problems with your budget start as soon as you assume your expenses will stay the same forever. Some change because prices go up, others because your circumstances change. If you move house, have a baby or adopt a dog, your budget will have to adapt to those changes.
A budget is only good if it’s re-evaluated on a regular basis. Monthly might be necessary at first, while you’re still trying to figure out your expenses. After that, you might assess it every three months or every time you change your circumstances, goals or lifestyle.
You’re not ready for emergencies
When people think of emergencies, they usually thing big, such as a job loss or a flooded bathroom. But small emergencies such as car trouble or an unplanned trip to visit a sick relative can result in unexpected expenses that will throw your budget off track. It can even be as simple as relatives visiting and increasing your food budget or your pet suddenly developing tummy trouble that requires a vet visit.
These month-to-month “surprises” can completely destroy your budget if you don’t have some breathing room.
You can solve this problem with your budget in two ways. The best option is to have an emergency fund saved up for these challenges. You can start by putting aside £500-£1000 as the start of an emergency fund, and then add to it over time.
If you don’t have such a lump sum available, the other option is to add a buffer into your budget. For example, if you have a household category where you estimate expenses of £100 every month, you could budget £120 for it and put the extra £20 aside. After a few months, you’ll have some money saved up that can help if something comes up.
