Q & A: Does Your Budget Have Breathing Room?
November 6th, 2007 | by rachel |
Just having a written budget does not guarantee that all financial issues will be easily controlled. Even with a well-built budget, stretching those last dollars until the next paycheck can be a struggle. These questions and answers highlight effective techniques for creating a little “breathing room” in any budget.
1. Is it possible to organize a budget so that it is not “fragmented” into too many spending areas? If so, how?
An effective budget is a “financial snapshot”. In other words, it is a picture of a given set of financial circumstances at a particular point in time. When creating a budget, list liabilities and spending categories in order of priority - food, shelter, clothing, transportation, utilities, medicine, debt payments, etc. Mark all the categories as either ESSENTIAL or OPTIONAL. Pay all the essential expenses first. Then, determine which of the optional expenses is most important and pour any and all money that can be squeezed from the budget into that priority. NO MATTER WHAT HAPPENS, keep focusing on that priority until it is achieved (i.e. debt paid, money saved, etc.). Then, move to the next most important “optional expense”. During this time, DO NOT allow any essential expenses to go unpaid and DO NOT accumulate any additional optional expenses (i.e. debt)!
2. Is there a “one size fits all” budget form that will clarify our finances and work for more than a few pay periods?
In order for a written budget to be effective, it has to “fit” the finances that make it up. Each financial situation is different. Consequently, each written budget will look and act differently. When using a written budget for the first time, make it as simple as possible! As you get used to using a written budget, you will see changes that you want to make that will make the budget fit your specific needs. Be prepared to try several formats before you find the one that works best. If you are interested in using a computer generated budget form, start with these links:
3. What is the best way to stay within our budgeted amounts when using debit and credit cards for financial transactions?
First, be realistic about the limits that you set for spending categories. You can get a good picture of what your expenses are in specific categories by tracking your spending BEFORE you create a budget.
Second, convert to “cash only” with some of the spending categories. Using cash will definitely make you more deliberate about your spending and it is a built in boundary to keep you from overspending certain categories. An “envelope system” is a great way to start using more cash and less plastic.
4. How can we maintain motivation to work through the rough spots in our pay period?
Usually, the budget will look great on paper at the beginning of the month. It keeps looking good until somewhere in day 10 - 14. That is when enthusiasm starts to wane and reality sets in. It’s still 15-20 days until the next paycheck and this isn’t fun! You will have to work through these “rough spots” so you need to develop some methods for doing so. Try these for starters:
- Set financial goals. If you are working toward specific financial goals, you are more likely to see the bigger picture and keep working toward the end. To begin with, make your goals something small and quickly attainable so you can have success early and often.
- Be accountable to someone for your budget. If you are married, create and execute the budget together. If not, find a trusted friend or co-worker that will help you be accountable.
- Monitor your finances regularly during the budget period. If you pay attention to your spending, debt reduction, etc. several times during the month instead of just when you are getting paid, you will see evidence of progress more often. Even small amounts of progress will motivate you to continue.
- Make a game of it. Think of ways to compete with yourself and achieve your goals faster. How many vending machine trips can you cut out during a week to save $5 or $10, etc? Put whatever money you shave off your weekly spending toward the next financial goal on your list.
5. What is the best way to increase cash flow to have more money funding the budget?
- Evaluate your tax withholding to make sure you are not loaning the government money interest free
- Spend less on your lifestyle.
- Sell stuff - eBay, garage sales, etc.
- Get additional jobs to make more money
6. What keeps an unexpected expense from throwing a budget completely off track?
Every budget needs a buffer! It may not be a large buffer but there needs to be some cash that is immediately available so that unexpected expenses are not stressful, traumatic events. Ultimately, you want your budget to be a flexible framework rather than a fragile “house of cards”. To budget a buffer, label a spending category as BUFFER and assign a limit to it. Don’t take the money out of your checking account, just know that, when the balance gets to that point, the buffer is in place. As you have a chance to increase the amount of your buffer, gradually start moving part of the buffer to a separate “emergency fund” account. Within a few months, you should have a comfortable cushion for unexpected expenses.
Finally, sit back and BREATHE. Your budget already is!