Wondering why many people never have a budget, and most people who manage to have a budget seem to eventually fail to keep up with their budget? Read on to see how a simple shift of focus in your financial mentality is the key to creating a budget that works wonder.
The curious case of budgeting
Hands up if you can never follow through any of your budgets for more than few months. Budget is a simple concept. It’s no more than a spending plan, but there are countless ways we create then fail a budget.
I was no exception. But after a sequence of failed budgets, eventually I realized I had been focusing on the wrong things. Budget is there to help us stay within our means and not overspend. But what is the ultimate goal of not overspending? It is to SAVE.
It’s true! Folks try to control their SPENDING simply because they want to be able to SAVE more. Some of them may be thinking of paying down debts; some others may be dreaming of buying a house, taking a vacation, or buying a dream car; while more matured ones are thinking about their nest eggs for retirement.
Different folks surely have different goals, but the effort of trying to control spending is simply to be able to save more. We should think about the ultimate financial goal and shift the focus of budgeting on the right thing: saving instead of spending.
Thinking of creating a budget can be exciting. But sitting down to actually create a budget seems daunting and likely to be postponed times after times. Then comes the most challenging part: following a budget and not overspending.
Many people don’t even have a budget. Many dudes with a budget fail and give up on their budget shortly after creating it.
So, why is it so hard to follow a budget for most people?
Think about this: except for a few fixed monthly expenses like rent/mortgage, utility, phone/internet, transit pass, most other expenses vary from month to month. These include romantic dates with your significant other, impromptu gifts for your family, social outings with friends, occasional matcha latte breaks with colleagues, or catching up with a newly released tech gear, you get the point.
Those are the expenses you can’t really plan ahead. Putting a rigid budget on those expenses will freeze your personal and social life. Of course the human natural tendency is to enjoy life, spoil loved ones, and nurture social relationships.
That’s why it’s so easy to fail a budget that tries to strictly control spending.
Shifting the focus when creating a budget
Common budgets out there tell you to break your spending into categories, control each and every one of them, track every penny in and out of your pocket. It’s easy to say but nearly impossible to do and keep up. But even if you can manage to crack those numbers months after months, what’s the point of doing that?
A few weeks back, I shared my can’t-be-simpler 3-step budgeting technique. In a few words, here’s how it works:
- Know the take home income. Add up all sources of income and know very well the monthly take home number.
- Set aside enough money to cover the estimated expenses. Make a reasonable estimate of the total monthly expense based on the actual expense in the last three months.
- Automate to save the rest. Money not spent is money saved. Automation is key here.
More details are discussed here. With this budget, I focus on my saving instead of trying to control my spending. I set aside a reasonable lump sum expense allowance and set up automatic transfers to fulfil my saving goals before I get to see the money on each pay day.
So, if I already meet my saving goals for every paycheck, should I track every penny of my expenses and sweat the small stuffs? I prefer to track my savings rather than tracking the money I pay into someone else pocket.
Starbuck doesn’t pay me a cent to track how many cups of matcha latte I buy from them a month. Same thing, McDonald doesn’t care how many chicken nuggets and fries I put into my stomach. We should of course care about these things for our health sake. But tracking these expenses in a clueless way doesn’t help improve our finances.
Focusing on the wrong things is a sure way not to achieve the right thing. In this case, focusing on countless expenses is a sure way not to get to the saving goals, which is the ultimate goal.
I still look at my spending to ensure it makes sense and adjust it if needed. I just don’t track it down to the penny anymore. My estimate expense comes as a lump sum allowance that I’m free to spend on things I deem necessary.
“What if my actual expense is bigger than my income and there’s no savings left?”
You’re not alone. Many people actually live beyond their means and throw themselves into the piling debts without having a clue of how to get out.
But if you’re reading this post, I trust that you want to be serious with your finances. So look carefully at your bank and credit card statements, try to analyze and cut any unnecessary costs before putting the estimated expense in your budget.
“What if I’m self-employed or my income are not regular?”
I hear you. Self-employed folks or folks with irregular paychecks have a little bit more complications to deal with. But if you’re not earning the same amount every month, you’ll face the same challenge in any budgets anyways.
Still try your best to estimate your annual income and set your annual saving goals. From there you’ll know how much you’re free to spend a month without jeopardizing your savings. Then try to align this number with your actual expense to be realistic. After that you should have a reasonable expense allowance.
Leave a bit of expense buffer to cover the months with less income. Always remember to save the rest. If your income doesn’t vary substantially from month to month, you still can automate the savings.
If you can change your financial mentality, creating and following a budget should be dead simple. When making a budget, there’s only one thing you should focus on: your saving goal. Doesn’t matter if it’s 5%, 10%, 20% or 50% of your earning, just set the saving goal and automate it. Start small and increase it gradually.
When your saving goal is fulfilled every month, you’re free to spend the rest. Budget doesn’t have to be boring and tough as steel. Flexibility is what makes it last in changing financial situations.