We all know that one of the best personal finance strategies is to have a budget and you’ve probably tried to create one at some time. Maybe you’re like me and could never get the budget to balance; I always had more expenditure than income and couldn’t see how I was going to be able to cut expenses. I even managed a reasonably balanced budget once but then some things in my life changed and it all went out the window. Along the way, I’ve learned some things, so here are a few tips on how to get your budget to balance.
I found it hard to know how much I should be spending in certain categories and this meant I couldn’t recognize where I was over-spending. I found some figures on expenditure percentages from a survey conducted by the Department of Labor, which gave me an idea of what the average person spent in different categories. It’s important to remember that these figures are just guidelines and that every person, family and household is different, with different priorities and needs.
Housing, whether it is rent or a mortgage, accounts for the biggest piece of the pie at 31.8%. Next comes transportation at 17.6%, but this is one area that could vary widely between households. Food accounts for 15.6% of expenditure with clothing and services at 7.1%, entertainment at 5.6% and health care expenses at 4.6%. The remaining 17.6% is for ‘other’ expenses and this category includes things like education, gifts, vacations, personal care, tobacco and alcohol, contributions, personal insurances, pensions and miscellaneous expenses.
Calculating Your Percentages
To calculate the percentages, simply take the amount you spend in a category, divide it by the amount of take-home pay you get and then multiply that by one hundred, to get a figure expressed as a percentage of your pay. Obviously, when you add up all your percentages, they should come to one hundred; if they don’t, you need to cut spending somewhere.
Using these percentages as a guideline helped me to finally draw up a personal budget that balanced. I found that my transport costs were considerably less than 17% because I work close to where I live but entertainment was higher because I was young and single at the time. Obviously, when I married, I had to reassess my family’s situation and create a new version of my budget.
Earlier, I referred to housing being the biggest piece of the pie; when I got hold of the concept that dividing my income into different areas of expenditure was much like slicing up a pie, I found the process easier to understand. When you have a pie to share between a certain number of people, you need to cut the slices a certain size to make sure everyone gets a piece. If you cut them too big, someone will miss out. Your income is your pie; your expenses are the slices. Cut one piece too big and something else will miss out. This is a recipe for financial disaster and it is how so many people get themselves into financial difficulties.
Identify The Common Pitfalls
It’s really important to understand some of the common pitfalls that can affect how well your budget works. Advance knowledge is power so look out for these potential problems that could crop up and throw your budget out of balance.
Credit cards are probably the greatest danger to all your best intentions of sticking to your budget. They lead to thoughtless and irresponsible spending which then has to be paid for, but has not been allowed for in the budget. The chances are you already have a hefty credit card debt you are trying to pay off, so adding to it is only going to make things harder. Leave the credit cards at home and work at getting them paid off, keeping just one for emergencies.
Not Making Adjustments
Another common pitfall is failing to make adjustments to your budget when your circumstances change. If there is a change to your income or any expenses, you need to adjust your budget to make sure it stays in balance; otherwise you could end up with insufficient pie to go around.
Losing Focus and Ignoring The Budget
Losing focus, ignoring the budget or being impatient are all common pitfalls to making a budget work. Stick to the plan, don’t give in to the temptation to buy that great car you saw before you had planned to do so. Learn the joys of delayed gratification, even if it hurts in the short-term.
An effective personal budget is a proven method for bringing excessive spending under control, controlling and managing debt levels and getting onto a firm financial track that will lead to a secure financial future. Be aware of the potential problems and pitfalls and use these tips to get your budget to balance and keep it balanced.
So, how do you do with your budget? Is it balancing?