5 Reasons Budgets Don’t Work
Posted by Gail | Filed under Budgets
People are always willing to volunteer their wisdom about budgets to me. I’m a Budget-Discussion-Magnet it seems. And nine times out of ten, people want to tell me why budgets don’t work. I agree. Most people’s budgets don’t work for a few basic reasons. Here’s my Top 5 List:
Inaccurate Income Projections: I can’t believe the number of people who don’t know how much money they make. People, whazzup with that? How can you have a hope in hell of having a budget that works if you don’t know how much money you bring home. I know there are a variety of pay periods: monthly, semi-monthly, bi-weekly and weekly. But all you have to do is look at how much is coming into your accounts to know how much you actually make. If it varies from one month to the next, then you use the lowest income you have as your basic income, and use whatever extra you earn to fund stuff like home maintenance, vacations, gifts, and the like.
Not Enough Categories: Most people generalize their budgets too much to get an accurate picture of where their money is going. I swear if I see one more budget with “spending money” I’ll spit. It’s all spending money. What are you spending it on?! You have to have enough categories in your budget to give you a real sense of where the money goes and where you may be able to cut costs. Careful now; too many categories and you’ll make your budget such a chore that you’ll toss it in no time at all. Another problem that goes hand in hand with this one is…
Failure to Include Expenses: Not all expenses come in every month. Insurance bills can come annually. Property taxes can come quarterly. Service contracts, dental bills, health-club renewals… there are lots of things that pop up only once or four times a year. If you don’t include them in your budget, you won’t have the money at the ready when the bill comes in.
Cash: People spend cash without keeping track of where it’s going and that throws their budgets out of whack. Some people use bank machines like a wallet, pulling $20 here and $40 there, as needed. The problem with this approach is that money flows away without any record of where it’s gone. And if you know you have a bill coming due in a couple of days, but your partner doesn’t, and (s)he goes into the account for cash, then you won’t have the money available to pay the bill
No Plan to Save: People seldom put a “savings” line on their budget. Despite how well known the “Pay Yourself First” idea is, people still don’t do it. They wait to see how much they have left to save. And it’s usually ZERO, Zip, zilch! If you’re serious about savings it has to be a line item on your budget, you have to identify a specific amount you’re going to save (both for long-term savings and for emergencies), and you need an auto-deduction to a savings account to MAKE IT HAPPEN.
Budgets are a great tool providing you use them the right way. You need to have spending categories that fit your personal situation, your spending habits, and your income. Don’t look to anyone else’s completed budget as a guide, except perhaps for a list of categories you may not have thought of. Make sure you review your spending patterns to see if there are areas where you’re overspending. There may even be things you’re spending money on of which you weren’t even aware.
Budgeting isn’t just about tracking your costs, it’s about making sure you’re spending your hard-earned money the way you WANT to. Maybe you want to get out of debt. Maybe saving for a downpayment is a priority. Perhaps traveling is your big Wanna. It doesn’t matter what your goals are, if you don’t identify them, you won’t achieve them. And with no goals and no budget you can be sure that another year down the road, you won’t be one iota better off.
BTW: I’ve been getting a lot of questions about how I decide what money goes into the Magic Jars. The Budget Worksheet is the place to go to figure this out.
August 14, 2008 at 11:43 am
Every time I revise my budget I add more categories to it since I always seem to miss something. I actually have a savings account and all I use it for is to move money into and out of for the once a year expenses. If you do this it will keep you from spending the money. I include things like my hair cut which isn’t quite once a month. I also include things like my weekly 9-ball game which leads to things like eating out and drinks. It isn’t usually the big things that throw you off it is all of the little things you miss. I think alot of people view the budget as fixed but you should adjust it as often as your expenses and life situation changes. I also like to round up my costs a bit. It gives a little wiggle room in the budget and it also gives you a head start if the cost for something goes up.
August 14, 2008 at 12:03 pm
Great post. One thing I can’t stress enough is to be able to compare actual expenditures with those budgeted. In other words be able to answer questions such as if the budget says we should have $200 left in our bank account… why do we only have $7?
August 14, 2008 at 2:45 pm
The reality of what you can afford to spend can be difficult to accept.
Something I did when setting up my budget after schooling was done was to be true to things I knew I would spend money on (my dogs). I knew that I would not lower these expenses, so I used what was left for the rest.
KNOW you weakness(es) and account for that!
The 10% away towards savings/emergency is worth it!
August 14, 2008 at 3:20 pm
Marie is right in that if you know your weeknesses you can either work on them or work them into your budget. I think a big problem when people build thier budget is they don’t want to sit down and go through all of the paperwork in order to find out what they spend. I also think there is a big fear of finding out how much you are actually spending on any given thing.
August 14, 2008 at 4:27 pm
Hi Gail,
I’ve just used the interactive budget worksheet and I’m SO EXCITED!!! I start my new budget on September 5th. Wish me luck, we need it! I think if you reviewed our statements you’d have a heart attack. When I reviewed the past 6 mths like you do on your show, I saw over $800/mth in takeout, not to mention what we probably ate on cash. I wish you’d do a show in Ottawa, but for now, I actually feel confident about this budget, and it’s all thanks to you!
August 14, 2008 at 5:23 pm
I’ve been reading your blog for a couple of weeks now, I don’t see your show since I live in the US and am cable TV-free. What are the Magic Jars? Are they explained in an older post that I haven’t seen yet?
I like your perspective on savings and money, keep up the good work! Thanks.
August 14, 2008 at 6:05 pm
Setting up an auto-savings plan, along with buying my own home and learning to make my own investment choices, are the 3 “pillars” for me. There’s nothing quite like knowing you have a little nest egg building up, and are saving for things like holidays, to give an inner sense of confidence, even when unexpected stuff hits you.
I’m one of those $25/month starters. Fairly quickly, it increased, and increased again. Savings is addictive!
August 14, 2008 at 6:53 pm
Rachel:
Gail’s “Magic Jars” are just a means of helping people understand (and see!) where the money is going from, and helps people get a visual of a their budget.
In my experience, I don’t bother with them, as my only debt is my student loan, and I’ve got a budget that works.
However, I noticed that once I got a raise, I started spending money a little more freely, and it quickly adds up! I thought “oh, great, now I can go out with friends more often!” and although I can, I still need to be aware of how much I’m spending and where.
Rather than jars, I use an excel spreadsheet, and just have a running tally of where my “fun” money can go to, divided up into categories that make sense to me. I also don’t carry cash and instead use my credit card for the points (which can sometimes become a problem when stores require cash). If you’re in debt though, and a credit card is an enabler to the problem, it might not be best suited for your needs, hence the magic jars, where you physically place the money that you can have access to.
August 15, 2008 at 7:40 am
Rachel:
You can search on this site for articles on the “Magic Jars”. The interactive budget worksheet is where you do your budget and it calculates how much goes into each jar. We have been using the jars for 2.5 months and it has turned our finances around. I suggest giving it a look if you don’t have a budget, or if you would like to improve your finances and feel you are spending too much on the wrong things. Good luck!
August 15, 2008 at 12:00 pm
Rachel: Slice has the episodes for seasons 2-4 http://www.slice.ca/Slice/Watch/Default.aspx (look for FULL EPISODES and Till Debt Do Us Part is more than halfway down the list) It’s worth watching every single episode if you can!
August 15, 2008 at 12:01 pm
Rachel: Slice has the episodes for seasons 2-4 on www (dot) slice (dot)ca/Slice/Watch/Default.aspx (look for FULL EPISODES and Till Debt Do Us Part is more than halfway down the list) It’s worth watching every single episode if you can!
August 15, 2008 at 3:58 pm
I’m still earning to budget for the little things. I ensure I have funds for all of my bills, and I regularly save for retirement. I’ve recently set up a bi-weekly savings; one amount for small renos I want to do, and one for a future car purchase. I’ve also started an emergency fund. I feel really good about that! It’s small right now, but it’s nice to watch it grow.
Now I need to figure out how to factor in gifts for others and little expenses for my son.
I’m determined not to go into debt for Christmas this year. I have shopping for my son almost done, and I’ve started a list for the other people I want to give to.
Gail, thanks for helping me stay focused and figure it all out. It’s taking time but I’m getting there.
On a side note, it amazes me how many people have no clue what they earn. I work for a bank and deal with credit. I would say at least 60% of my customers can’t tell me what they earn per hour or what their annual salary is. Most don’t know their mortgage payments either.
August 15, 2008 at 8:01 pm
Melanie, Christmas is my Achilles’ heel too, which is why I have a separate item in my budget for Christmas savings
I put away a fixed amount every month so that I’ll have enough to splurge in December.
August 18, 2008 at 8:22 am
Hi,
I have been doing so well, but I have discovered my achillies heel. I have been saving well, working towards a debt free life, and my daughter has just had a growth spurt. Annoyed at needing to replace basically her entire wardrobe all at one, I decided to sell some of her better clothes on ebay. Shoes and other stuff as well. As I have lost about 20kgs, I listed some of my clothes that were just plain to big.
Most of this stuff is selling well, but my secret is I cannot go on ebay without buying something. I replaced my daughters wardrobe, bought a new plaque (not even sure where it will go) and bought some beautiful tea cups, which I adore. I have just realised I have spent over a $1000 in 9 days. My listings haven’t even finished as yet.
WHat do I do now?
August 18, 2008 at 8:40 am
Ooops! Sell it. And when you go on ebay, have no forms of payment readily available. Talk about the mountain — or in your case the Mall — coming to you!
August 26, 2008 at 4:56 pm
Gail, I have been reading your blog for some time now and you know I finally really looked at your interactive budget sheet and filled in the figures. It took me some time to juggle the budget so that my revenue/expenses come out to ‘0′. I have the budget sheet, complete with the jar system ready to go for September! I am really excited about it. Finally, when you talk about the jars on your show, I understand more about the jar system and what you are actually explaining to people. Pray for me that I will make it to the end of the month! I know if I can do one month, then I can do two months!
October 18, 2010 at 10:05 pm
I just seen “Til Debt Do Us Part” this past Saturday. I decided to look into the program Gail was using on the show because I thought nothing would hurt me at this point in my life. My husband and I have been struggling so much to try to figure out where our money was going. I also knew that I had student loans that were coming due. I thought I was good at budgets and figuring our finances but since we got married, my budgeting skills went to the birds. We had no money to pay bills and we had no money to put into savings. We had nothing. We started cutting back, looking for ways to save money. We even went down to one vehicle, which is really hard! It wasn’t until I started reading and did the budget worksheet that Gail provided me online that I found out where our money was actually going. I knew that we made enough money to pay our monthly bills but we never made it. After I did the work sheet and seen it all layed out and actually knew how much money to put into the “magic jars” it seemed like a light bulb came on. I have to wait until we get our bank account back in the black to start but I am ready and excited to begin a budgeted and organized life. I have many hopes that this works for us because this is actually our last hope.
October 19, 2010 at 12:47 am
Kim M.
Congratulations on starting this journey. All the best and hang in there.
November 30, 2010 at 10:49 pm
Hi Gail,
I am hooked on your show, and have now committed to living by my new-found way of managing my money and my life. I am excited to budget for the first time in my life; I love checking and watching my (10%) savings grow via internet banking. So a big thanks to you and your show for the insight and inspiration to get this gal going.
Tamara
January 30, 2011 at 7:01 pm
Hi Gail,
I was channel surfing last night and came across your program on CNBC. I was amazed at how well you came across to the people you were trying to help. I just received my paycheck and the first thing I did was put 10% of it into my Roth IRA. The rest of my check has been divided out according to the monthly bills I have. This will be a work in progress, but I am looking forward to getting completely debt-free. Once this happens I do not plan to go back. Thanks.
February 24, 2011 at 2:19 pm
Hi All:
Like a lot of you Im new to Gails budgeting ideas and the show and it all finally sank in a while ago that this was something that a) Worked!!!! and b) I could live with because basically Gails budgeting ideas dont tell you what you dont have they tell you how to handle what you do have so that eventually you have more to play with.
For me once I had figured out the categories for the budget and the numbers and got the jar amounts ( I dont actually use the jars. That amount is all that I’ve allowed myself access to via my debit card)
I broke my budget down to daily amounts ie budgets for restaurants (previously my biggest expense) I allowed a reasonable amount in the budget for restaurants and I can spend it all on the first day and once it’s gone I get to brown bag lunches till then next pay period and the allowed amount resets or I can brown bag it and wait to go out for lunch or buy pizza for dinner.
My main goal was first to get to the next paycheck still having some money instead of having to borrow a few bucks from wherever to get to the next pay.
It was definately a thrill the first time pay day rolled came and there was still money in the bank – was only about 3 dollars that first pay but the amount thats left over is slowly growing and the debts are lowering at the same time. My next goal is to get the last big debt paid off and that should be done in about 8 months then onto power saving for retirement.
Good Luck and happy debt free futures to everyone!
April 20, 2011 at 9:50 pm
Hi Gail,
I am a fateful viewer, I live in Maine in the US, I have just gotten my husband to watch it as well, I am just setting up my budget, the jars etc, I plan to start on starting on May 1st. I did the new worth statement and we are positive I think I am going to have to get a part time job to make our budget balance but thats ok. I just love your show and your website it has helped me alot. How do I plan for savings plus money for house repairs, we are in need of a new roof and some other repairs. If I put 5 percent into savings I won’t have enough to do my repairs. Thats with me getting a part time job. Not sure what to do.
July 27, 2011 at 2:51 pm
Last payday when I told my husband we didn’t have any money for our “other” catagory which includes clothes, entertainment, etc. He said we had probably had to many catagories.
February 26, 2012 at 1:47 am
Hi Gail and to all of the faithful followers. My husband and I are both poor money handlers. I have tried repeatedly to get on this new budget program, but it always seems that another bill comes in that needs paying. Any ideas on how to get things moving?