The 3rd step in properly learning how to budget is figuring out how to overcome budgeting pitfalls. Through personally implementing this type of budget, and being trained to coach others how to do the same, there are some consistent failures and roadblocks that people run into when first starting and attempting to execute a budget.
I’m convinced that the primary reason people DO NOT have money left at the end of the month is because they don’t limit their spending. Period. Sure, some people don’t have enough income to pay all of their necessities, but that isn’t the norm.
Most Americans (1) get their paycheck, (2) pay all of their bills for the month, and (3) spend whatever is leftover. Then wonder where all of their money went and are shocked they don’t have any left. Do you fit into that category? Yeah…I’ve been there too.
It isn’t intentional, but that’s what happens when you don’t plan and you don’t set limits.
When I traveled for business, and prior to getting on a real budget, I stopped at gas stations 2-3 times a day. I’d typically spend $1-$4 each time; it wasn’t much, and I certainly didn’t think it would kill my budget…but it did.
Furthermore, I’d go to the grocery store and buy whatever I wanted. I had no plan, no grocery list, and certainly didn’t have a dollar amount that I couldn’t exceed. So, I’d spend and then later question where all my money had gone.
So, to get around this problem you MUST learn to use CASH for all categories where you have a decision on the amount that gets spent. I’m not talking about a debit card, I’m talking about GOING GREEN!.
Typical categories are: Groceries, Hygiene, Eating Out, Entertainment, Clothing, Hair Care, Pet Products, Cleaning products/housing supplies, and Gas for your Car.
Just like Dave Ramsey preaches, we have a specific envelope for every category I just listed above. At the beginning of each month’s budget, we withdrawal cash from the bank and fully-fund every envelope with its pre-determined monthly limit.
Depending on how often you get paid and how your bills fall each month, will really determine when (and what amount) you should withdrawal cash. It’s very common to have to split the cash up between paychecks, and if you get paid weekly you may even have to split the monthly total into 4 withdrawals.
You may think this is a great idea, or you may be like most people and start hemming-and-hawwing (had to say that for my wife) at the idea of GOING GREEN. However, there are a few very important reasons that you MUST use cash in order to successfully implement a budget:
1. In terms of setting a budget, it helps to have a specific dollar amount for each category to include in your budget. There is no guessing: ‘well, I think we’ll spend around $500 for groceries and $150 on eating out…so that’s just what I’ll write in our budget.’ By setting definitive limits, the number you get at the end of your budget (How To Budget Step #5 from last week’s post) is extremely accurate. The only fluctuation in the budget should be seen in utility bills.
2. If you know your budget is positive, even including all of this cash, then you can freely spend it without having to worry about bouncing a check, overdrafting your checking account, or worrying about whether or not you have enough money to cover the remaining bills for the month. I can’t speak enough on the peace that this will bring to your life.
3. It also gives you the ability to say “NO.” Once you’ve spent the money in the particular category for the month – I think you know what happens – it’s gone! There is no going back and getting more cash. You’ve set your budget according to these limits, and in order for everything to work, you have to stick to it!
4. It forces you to be intentional. When you start to use cash you’ll physically see the money in the envelope dwindle down which will cause you to be more thoughtful about where you spend those final dollars.
There is an emotional connection and concious realization when you spend cash that using a debit/credit card doesn’t provide. Swiping a card is completely emotionless and it enables you to spend money that you don’t have. You don’t have to believe me, the facts speak for themselves: people that pay with Credit spend 16-18% more and people paying with debit spend 8-10% more.
*Important Note: it gernally takes 2-4 months to get the amounts in the cash envelopes correct. It takes time to test and see if you need to make any tweaks. You will mess up when you first start and that’s okay. The important part is getting started and finding what adjustments you need to make.
I’ve coached and talked with hundreds of people about this topic, and I promise that you will have a very difficult time succeeding with a budget if you don’t use CASH. Failing to limit spending is the reason budgets fail and the #1 reason why people don’t have money left at the end of the month.
Be cool. Be different. GO GREEN!
As a married couple, if you can fit it into your budget, you should have an envelope titled “Blow Money.”.
“Blow Money” is money that both spouses get each month to do whatever they want.
I am the spender of the family. I like to golf (when it fits in the budget), I like to go to lunch with friends, I love iced coffee at Starbucks, and I have to buy nice clothes for work (sometimes necessary, sometimes not).
When we first started budgeting, I paid for all of MY “fun” from our family’s “eating out/entertainment” envelope. Well, needless to say I learned very quickly that we didn’t have money when it came time for my wife and I to go out and do things together.
Talk about a ‘whoops’ moment.
To get around conflict, answering for every penny that’s allocated in the budget, and feeling that you have no freedom to do what you want, you must try to allow each spouse to have a specified amount of money each month to spend as they wish.
It’s also wise to allow each spouse to have the same amount – regardless of spending habits. It’s extremely typical to have a spouse that is a spender and one that’s a saver.
As I mentioned, I am the spender and my wife is the saver. I will plow through my blow money in the first 2-3 weeks of the month (leaving nothing left at the end), whereas my wife loves building up a ridiculous cushion that I become envious of. What does she save it for? I have no clue. Regardless, if a spouse spends their blow money or chooses to save it all, you’re both entitled to the same amount.
The #1 reason people go into debt, and have to use credit as a means to get by, is because they don’t save for expenses that are going to come down the road.
If the typical cycle is: get paid, pay monthly bills, and spend the rest, then where does the money to pay for car repairs, Christmas gifts, house repairs, etc. come from?
It comes from the trusty plastic that we carry in our wallets. ‘Thank God for Visa! It saved us again!’
When I talk about saving monthly for non-monthly expenses, I’m talking about planning for EVERYTHING that will happen sometime during the year. The event can be in the form of a bill, or it can simply be an expense that will have to come out of pocket. It’s not a matter of IF these expenses will come, it’s a matter of WHEN.
So, I’d recommend that you sit down and carefully think about all of the various expenses you have in a given year. Then take the amount you expect to pay for those expenses/bills, divide it by 12 (for a monthly amount you need to save), and start paying yourself that “bill” each and every month.
What I mean by that is simply set the money aside in a DIFFERENT checking account (see below) – someplace other than your normal account where your checks get deposited and where you pay your monthly bills. We all know what would happen if you just left it in your main checking account: it would get spent. Don’t even tempt yourself.
Here are some typical Non-Monthly Expenses that I see and some that I personally save for:
Every situation varies, and as you start working on a budget, you may not be able to fit everything you need in it (while also keeping your budget “in the black”). If that’s the case (which it often is), then that gives you an indication of why you’ve been relying on credit cards and/or home equity loans and lines of credit.
When including these non-monthly expenses in your budget, you’ve literally taken your problems you have on an annual basis and broken it down into a monthly (and more managable) problem. For instance, if you go into debt sometime throughout the year (for whatever reason) to the tune of $1200, your budget will likely reflect -$100/month.
Lastly, if your budget is extremely tight then you should only budget for “non-monthly” expenses that are absolutely necessary. As your disposable income increases over time, you can add more categories and increase amounts in existing categories. The same is true for the cash envelope expenses.
The important thing is that you start somewhere. If you’re nervous about starting all of the cash envelopes, pick 1 or 2 and test it for a couple of months (I’d really try eating out and groceries because everybody uses those – and they’re the easiest to limit). Once you get the hang of it, then try taking another step forward and move more items to cash.
It’s much more encouraging to succeed than to fall flat on your face.
I recommend that you have 3 bank accounts open at all times (there is really no need for more unless you own a business):
1. Primary Checking Account – this is where all of your paychecks will get deposited, where you’ll withdrawal your monthly CASH expenses, and where you’ll pay your normal monthly bills.
2. Non-Monthly Checking Account – this is the account where you’ll set aside that “non-monthly payment” each and every month. When an expense/bill comes due that you’ve included in the non-monthly category, then you’ll pay that bill from this account.
3. Emergency Fund Savings Account – we’ll get to how to allocate your disposable income here in a few weeks, but regardless you ABSOLUTELY must have some savings in the bank. When I say savings, I’m talking about money set aside for major rainy days: job losses, disability, major house repair (that you didn’t know what coming), medical bills, etc.
Frankly, if you start to budget as I’ve been describing (and save the non-monthly expense bill), you will rarely find a need to touch the Emergency Fund. Holly and I have been doing this for 5 years and we haven’t touched ours, ever.
The articles are written by personal finance enthusiasts (not certified professionals) based on their personal experience. What works for them may or may not work for you, and you should always consult a financial advisor before making important financial decisions.
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