No one can ever be perfect with their personal budget; there will always be moments when you choose to overspend in a certain area, because something holds a higher priority for you than sticking to your budget. This can be either a conscious or unconscious decision. But getting back on track doesn't have to be difficult if you keep in mind 6 simple steps.
For employed people, I advocate the Zero-Based Personal Budget method, which means money in equals money out, every month. Since you can reasonably predict what you’ll be receiving, there are rarely surprises with this method.
For self-employed business owners, like myself, I try to apply the Zero-Base Personal Budget using an average income from the prior 6 months; if income goes down, you have to adjust your personal budget down as well. If income goes up, you hold the excess until you have another 6 months of evidence that your income has stabilized upwards. It can get more complicated, but you get the gist.
Some of you know that I use Mint to track if I am going over in one of the areas of my personal budget. I have alerts for my overspending “danger zones” which are eating out, coffee, coffee and coffee. I think I have finally conquered books as an overspending item! But because some months I have extra cash above my personal budget, I know that I have a little breathing room if I want to spend extra on something.
So, this last month I did. I had WAY too many meals out, in addition to special holiday grocery purchases. And somehow, I was so hypnotized by Starbucks pretty red holiday cups that I had a Peppermint Mocha in my hand more times than not.
And, you know what? I didn’t care. I am now aware enough of my spending that I CONSCIOUSLY went over budget—plus, the Mint alerts kept reminding me! I didn’t care because I have come so far from that crazy, clueless financial planner of my twenties that for her, my spending wouldn’t even register. Yes, my overspending may have prevented several hundred dollars from making it to my cash reserve this month, but there will always be setbacks. As J.D. Roth of Get Rich Slowly says, “Perfect is the enemy of good.” I know exactly what I need to do to get back on track.
Sometimes people let the personal budget abandonment go on for more than a month. Maybe they aren’t as conscious, or maybe they hate the tracking system they have set up (for budgeting software options, you can find alternatives to Mint here). Whatever the reason, recovering your personal budget and recommitting to following it is an easy first step for the new year.
Think of it like getting back on track with your health after a month or more of overindulgence. If you can commit to this next month of performing some basic routines and engaging in healthier behavior, you’ll not only set yourself up for a healthy 2012, you’ll replace the regret of the past month of overeating with pride over your new accomplishment.
Here are 6 steps to get your personal budget back on track:
Confirm average income. The quickest way for people to become ineffective with their personal budgets (as I can well attest) is letting raises and excess cash merge and mingle with existing fundswithout accounting for them. Know exactly what is coming into your household from month to month.
Confirm your expenses. Knowing the amount of your fixed expenses is easy; it’s the lifestyle expenses that tend to creep up without you noticing. If you’re using budgeting software, go back and get an average of the past 6 months for different categories. If you’re NOT using budgeting software, this is a perfect time to start. But you might want to review bank statements and credit card statements to get an average to start with—the good news about budgeting software is that you’ll never be in this situation again!
Identify the excess income. Hopefully, you have found that Income – Expenses = Excess Cash. At some level. Then you get to decide where the excess cash should be allocated—toward cash reserves, goals, etc. This will be the new normal for you, so you can have it auto-pull out of your account every month or every paycheck. If there is NO excess income, or you’re at a deficit, there are really only two solutions to correct this: Spend Less or Earn More. I really encourage people to understand and tweak the expense side of things first, because clearing up the ambiguity with spending often frees people emotionally to have the energy to earn more.
Create your new “normal.” You’ll find that you’ll alter your behavior to spend less, and I can tell you, the next month for me is all about meal planning for efficient grocery shopping. Inviting friends to my home to eat together more cost effectively. Those steps, and going back to my regular drip coffee (which I am actually glad to get back to!). In your budgeting software system, set up alerts to notify you when you go over budget in a category.
Review weekly. As you get into this new personal budget implementation, I recommend you review your budgeting software weekly, so you remain on top of all of your spending. Eventually, you’ll be able to look at it less frequently, but for now, you respect what you inspect. Reviewing often will reinforce new behaviors.
Find a buddy. Find someone you trust to review your spending and give you a reality check. This buddy can also make a spending pact with you, so you’re both cutting back on certain expenses and together finding new interests to fill that gap in your life. Just like having a workout partner, having a “budget buddy” will make the personal budget easier to follow. There are many parallels between reaching your financial goals and reaching your health and fitness goals. Both are a marathon, versus a sprint. You’ll never be able to stay 100% on track. However, if you are able to remain consistent, forgive yourself for mistakes and take a long term view, you’ll be surprised at the improvements you’ll make over the next year!