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“Why Can’t I stay On My Budget?

We don’t know of a single financial expert that wouldn’t advise people to make a budget and stay on it – assuming you’re not one of that fortunate 1%. In that case you’re probably not reading this article anyway so it doesn’t matter.

Why is it important to have a personal budget?

It’s basically for the same reason that every successful business has a budget in the form of a business plan. It’s because without a budget, it’s practically impossible to know where you stand financially and what will happen to you and your family in the future.

How did you arrive at your budget?

One of the principle reasons why people fail to stay on their budgets is because they didn’t budget correctly. Maybe they tried to make a budget too hastily and without doing the homework first. The first rule of budgeting is that you must know where your money’s going so that you will know how to allocate it in the future. The only real way to do this is to track your spending for at least a month and by this we mean all of your spending – right down to that candy bar you bought at work. After those 30 days you will need to divide your spending into categories. There are a zillion online sites where you can find a list of these categories but the major ones all tend to be the same – food, clothing, utilities, transportation, medical expenses, debt payments, entertainment and so forth.

If you need help making a budget, watch this video from Bank of America …

Your budget is too inflexible

If you’re having a really hard time staying on your budget the reason may be that it’s too inflexible. The best way to think of a budget is like a football team’s game plan. While the team’s coach might have a complete game plan in mind, he will watch the game as it unfolds and then make changes accordingly. If you’ve become discouraged because you’ve “busted” your budget in several categories, don’t give up. Review the amount of money you’ve allocated to each category and then make adjustments. You’ll probably find a category or two where you didn’t spend as much money as you had anticipated. Take the money out of those categories and assign it to the ones where you were unable to stay within your budget. The important thing is to review your budget regularly and then make corrections just as a ship’s captain will tack and jibe as the winds change.

You failed to set goals

Your budget doesn’t exist in a vacuum. If you’re unable to stay on your budget the reason might be that it’s not linked to your goals. What are your goals? Is your goal to retire early, buy a second home, sail around the world or pay for your kids’ education? Since the real purpose of a budget is to save money you need to ask yourself why you’re saving it. When you have goals your budget will help you make progress towards achieving them, which can keep you motivated to stay on your budget. What’s best is to have both short- and long-term goals. You could then see you’re making progress towards realizing a short-term goal without becoming discouraged because you don’t see you’re making much progress towards achieving a long-term goal – especially when things get tough. As an example of this it can be discouraging if your only goal is early retirement and you suffer a setback in your career and feel you’re not saving enough money to achieve it. But if you also had a short-term goal of taking a nice two-week vacation next year and you see you have almost enough money saved to pay for it, you might feel less discouraged and more motivated.

Your partner isn’t onboard

There’s an old saying that it takes two to tango. It also takes two for a budget to work. If your spouse or partner isn’t interested in budgeting or consistently fails to stay within your budget for whatever reason, the two of you need to have a serious talk. You should sit down with your spouse or partner and try to determine what can be done to get them to buy in. You will need to discuss your financial philosophies and have all your numbers available. You might be able to show him or her that your budget isn’t terribly restrictive and that there is room to make changes. Try to get him or her to understand that your budget is a roadmap designed to get you to your important goals. If your spouse sees he or she won’t have to make drastic changes in their lifestyle you may get more cooperation. If you can stay calm during this discussion – without getting upset – you may find your spouse will be more willing to work with you.

There was no emergency fund

Every budget needs to include an emergency fund. This is so that when you run into an emergency and, trust us, you will eventually run into an emergency, you will have the money to pay for it without having to run up debt. Most financial experts say that you should have the equivalent of six months of living expenses in your emergency fund. If the idea of saving this much money seems too awful, try for at least three months worth. If you don’t already have an emergency fund, make it a line item in your budget so that you’re saving money for it every month. One easy way to do this is to have the money automatically withdrawn from your checking account and deposited into your savings account each month. You might think of your emergency fund as a personal life insurance policy but that the “premiums” are yours to keep.

You didn’t give it a sufficient amount of time

If you made your budget just a few months ago and feel it’s just not working then maybe it’s because you didn’t give it enough time. One way to overcome this is to consider those first few months to be a sort of beta test and now you’ve learned enough to make a real budget. It can take time to smooth out a budget and for you to make changes in your spending habits. Don’t beat up on yourself if you haven’t been able you stay on your budget for those first few months. Professional athletes didn’t get to be the way they are overnight so don’t get discouraged if you haven’t become a professional budgeter in just a few months.

You just hate budgeting

If you find you just hate budgeting what with all that software, columns and rows of numbers, you need to look at other ways to manage your money that would eliminate this. For example, you might withdraw the cash you need for a week or two weeks at a time with the idea that when it’s gone, it’s gone. Or you might try the program Mvelopes, which is based on the old envelopes strategy for budgeting. This is where you divide your paycheck into envelopes based on your categories. Then when that envelope is empty, that’s it. You can’t spend any more money in that category. Of course, with Mvelopes this all happens digitally on your computer and not in actual paper envelopes.

If neither of these options appeal to you and you just hate budgeting, what can you do? You will need to do some research to see if you can find a money management plan that would help you achieve your goals without that terrible demon called budgeting.

12 Keys To Making Better Decisions About Your Personal Finances

man fanning money near his earDid your parents teach you to be a smart money manager? If so, consider yourself lucky. Most parents will talk to their kids about the birds and the bees but not about budgets and CDs. They must assume we’ll pick it up on our own, which is how most of us learn about personal finance. The Irish writer and poet Oscar Wilde once said, “Experience is simply the name we give our mistakes.” Unfortunately this is how many of us learn to be better money managers. We make mistakes like maxing out our credit cards, learn the consequences and become smarter about money.
Keys to making better decisions

If you’d rather not learn how to make good financial decisions by making bad ones and learning from them, there are some keys to making better financial
decisions …

Be brutally honest with yourself

If you’re not careful you can fool yourself into making some really bad financial decisions. For example, you could decide to borrow from your 401(k) because, heck, you would be paying interest to yourself. Or you might buy furniture you don’t really need because of the lure of zero interest financing. These are the kind of decisions where you could be deceiving yourself into financial problems. Be brutally honest with yourself about all of your decisions and the motivations behind them. Do you really need to borrow from your 401(k) to buy that new car or could you just save money for a year or 18 months and then pay cash? And while 0% interest can be a good deal in some cases you shouldn’t use it as an excuse to buy something you don’t really need. A good rule of thumb is that when in doubt, get a second opinion from a family member or friend that you know is good with his or her money. As George S. Clason once wrote, “It costs nothing to ask wise advice from a good friend.”

Watch out for fees

There are almost always fees attached to things that have to do with finances – credit cards, banking, investments and other financial products. It’s absolutely critical to keep fees low especially when it comes to investing. Making money in the stockmarket is tough enough by itself without paying fees that wipe out your gains.

Use cash not credit

Whatever you do, don’t finance your lifestyle on credit. Credit card debt can just ruin your life. Pay cash for everything from groceries to vacations to cars. If you need to make sacrifices to pay cash, do it. Using credit to buy things is the equivalent of stealing money from yourself in the future. Every cent you borrow must be paid back and often at very high interest rates. As the Persian poet Omar Khayyam wrote, “Take the cash and let the credit go. Nor heed the rumble of a distant drum.”

Save a dime out of every dollar

This is very simple but very powerful. Make a habit beginning right now to save at least 10% of your gross pay. Save 20% or even more if possible. If you don’t doubt what this can mean to your lifer, read the book The Richest Man In Babylon by George S. Clason.

Think long-term

Ours has turned into a “get rich quick” society. But if you really want to build lasting wealth, you need to think long term as you make your financial decisions. This puts everything into perspective from a $4 latte at Starbucks to how much you should invest in your 401(k). As an example of this, if you think long term you would realize that a daily $4 latte eventually adds up to $21,056 over 10 years. And investing $1000 a month beginning at age 25 (instead of age 35) generates $1.7 million more by age 65.

Learn to live with uncertainty

While you may think you should avoid uncertainty like the plague when making financial decisions, the problem is that it costs a lot to avoid it. For example, the insurance industry thrives on uncertainty when it comes to cash value life insurance and annuities. However, some protection against uncertainty is unavoidable such as term life insurance and auto insurance. Be sure to think twice before spending a lot of money in return for guarantees.

For example, this concept can be especially important if you are evaluating an annuity. Annuities can be part of some financial plans but there are always fees associated with these products and they tend to limit the upside. An annuity will generate a constant stream of payments but at a high cost. The key here is to think carefully before spending a lot of money to avoid uncertainty. There are rewards to learning to live with it.

Keep things simple

There is an old rule of thumb that the more complex is a “solution,” the less likely it is to be your best option. For example, in most cases term life insurance is a better investment than complicated permanent life insurance products. And index funds are generally better than more complicated actively managed funds. One simple way to invest is in funds or ETF’s as this is usually better than complicated insurance products that have an investment component. In other words, all things being equal, simple is most often better.

stack of moneyHarness the power of compounding

It’s important to harness the power of compounding. Once you understand it, you can better evaluate your financial decisions to make sure they take advantage of it and not ignore it. If you’re not familiar with compounding this is where you earn interest on your investment and then interest on that interest. For example, if you started with $100 and added $100 a month at 2% interest, you would have $1,313.08 at the end of year one and then $2,550.64 at the end of year two and not just $2500.

Always consider the power of compounding whether it comes to paying off debt or how you need to be investing today.

Do the critical things first

Don’t put off the big financial decisions. Begin every day thinking about those things you need to accomplish and get to the important stuff first. Don’t put off actions such as preparing a will, investing for retirement or buying life insurance. When you do the critical things first, everything else will just be much easier.

Take responsibility for your actions

Despite what the politicians might want you to believe, you are not a victim. These people may tell you that the problem is corporate America or that the system is rigged but the result are the same – it makes us feel helpless. This is all nonsense that’s created to score political points rather than moving the country forward. Never play the victim.

Learn to think outside the box

Do you tend to view financial decisions in black and white? For example, do you believe that your emergency fund should always be in cash in a bank or that you should pay off all your non-mortgage debt before investing? These approaches to personal finance often turn out not to be in your best interest. Don’t make a financial decision without weighing the pros and cons and considering all alternate options.

Don’t be greedy

Your friend has a great stock tip that’s absolutely guaranteed to make you money. But you also worry that this might be too good to be true. When this is the case, it usually is. Whenever you’re faced with one of these deals you need to monitor your own emotions. You may be tempted by a get rich quick mentality. But think twice before acting as these deals often do turn out well.

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