For families living paycheck to paycheck, a tight budget is a necessity. Creating a budget requires families to sit down and analyze fixed payments, buying habits, and wants versus needs to figure out how to allocate the cash flow without overspending.
Some bills like mortgage and car loans never change, and these ‘fixed payments’ help simplify a portion of the budget. There are many expenses however, like utility bills, clothing expenses, groceries and gasoline that might vary widely from month-to-month. These evolving expenses are where families can bust their budgets easily if they are not careful.
But how do you know if you’ve broken your budget? And if you redline your budget one month, are you beyond repair? Here are some ways you can potentially alleviate a bad budget.
There are many issues that lead to exceeding the monthly budget, and sometimes families have emergency expenses beyond their control that can lead to overspending. Life happens; sometimes a tire pops or the HVAC needs to be repaired. These are expenses that can’t be predicted or controlled; however, if a family doesn’t have emergency funds stashed away in savings to cover these extra expenses, then the budget can take a serious hit. While one month of soaring expenses isn’t always indicative of a broken budget, if a family notices that expenses are consistently exceeding income then this might be indicative of a bigger problem: poor money management.
If you think your family’s budget is broken, then it’s time for a financial check-up to diagnose and cure the underlying issues.
Broken Budget Symptom #1: What Budget?
Families who live paycheck-to-paycheck might look at their bank balance and wonder where all the money has gone. The biggest symptom of a broken budget is that the family hasn’t created a budget. If you live from one pay period to the next, then you must figure your expenses down to the dollar. There cannot be guesswork; you cannot decide randomly to splurge on a new pair of $100 shoes. You must sit down and compare your income and your fixed and evolving expenses. You may discover that your expenses exceed your income; this means you may either need to find additional revenue (like a part-time job on the weekends) or you need to cut unnecessary expenses.
Create a spreadsheet that details every single bill that the family must pay. Set a standard—and reasonable—budget for how much you can spend on groceries and commuting. Add if possible miscellaneous expenses like one or two meals out, a new item of clothing or anything else that the family might need each month.
Financial Rx: Your budget should detail every single expense. Compile old bank statements to break down your spending by category.
Broken Budget Symptom #2: The End of the Month Means Financial Armageddon
One of the tell-tale signs of a broken budget is a lack of money to cover basic expenses near the end of the month after all the bills have been paid. Many families secure their paychecks around the 15th and 30th of each month. If you have a broken budget, you may start to have issues around the end of the month, right after the major bills for the next month have been paid. So after that last paycheck clears and the bills are scheduled the amount that is left may be minimal.
If you can’t pay for necessities like food and gas without using a credit card, then the budget needs mending. You need to go back and review the expenses of the last month to see why and how you have overspent. Did you spend too much money on dining out? Did the kids need new clothes or shoes? It isn’t enough to realize that the expenses have stripped your income; you need to look at the reasons why.
Financial Rx: Dig deep into spending habits and analyze where you can cut down to help support your bills.
Broken Budget Symptom #3: Your Credit Card is Maxed
Families who fail to budget properly may make up the difference by charging expenses to their credit cards. This leads to increasing credit card payments and possibly even a maxed out card. Credit is not cashflow. Credit must be repaid eventually.
When a family resorts to charging expenses that they cannot afford out of their monthly income, they are perpetuating indebtedness. Instead of digging out of financial troubles, additional charges to a credit card help dig a family deeper into debt.
There will be times when a family has no choice but to ‘charge it.’ Maybe there isn’t enough savings to pay for a new tire. Emergencies can’t be predicted or controlled, but other expenses—those that are chosen—can be controlled. Use a credit card responsibly, and remember that it isn’t a means to extra income. Those charges must be paid back. Otherwise, you might find yourself in so much debt that you can’t climb out without filing for bankruptcy.
Financial Rx: Your credit card is in your wallet, but it should not be easily accessible. Keep it out of eye sight. Don’t keep it next to a debit card or you may find yourself grabbing it too often.
Broken Budget Symptom #4: You Neglect to Amend Your Budget Monthly
Budgets typically focus on fixed and evolving monthly expenses. One of the ways that families can break this budget, though, is to neglect important expenses that only hit once or twice each year. Expenses like personal property taxes, fees for new license registrations, and insurance payments also must be allocated within the month they are due.
While a fixed budget is a great start to become more fiscally responsible, a successful budget needs to be tweaked each month to include new expenses or even delete expenses that have been paid in full (like a car loan or hospital bill).
Financial Rx: Review your budget each month to add in rotating expenses or delete debt that has been paid in full. And be realistic!
Broken Budget Symptom #5: The Big Spending Spouse
An article by Money Crashers notes that for a budget to work, everyone must abide by the rules. You might have created a line by line spreadsheet detailing how every dime will be allocated, and you may follow the plan diligently. However, if your spouse doesn’t care and cannot put the brakes on his/her spending, your budget is going to take a huge hit.
A successful budget means that everyone in the family must be willing to follow the parameters. Maybe this means that each family member has a set allowance for clothes or other wants. You cannot successfully meet your financial goals and expectations unless everyone can agree to the established budget.
Financial Rx: Grab the family and create the budget together. Everyone should know the monthly income and expenses. Kids can learn a great deal about money management from their parents, too.
Broken Budget Symptom #6: The Diet Budget Dilemma
A diet budget is a budget so restrictive that it makes everyone feel like they just want to cheat. A diet budget has no give, and the strings are so tight that even buying a gas station cup of coffee feels like you have just bought a new car.
Money Crashers notes that restrictive budgets can be destined for failure. Why? Because too many tight belts around the purse strings leave you feeling like you can’t do anything or buy anything. Restrictions feel too constrictive, and you may end up just breaking the budget anyway out of frustration.
Financial Rx: Pad the budget a little. Add extra to the clothing allowance or allocate a few more dollars for a night of fast food or a movie rental.
Broken Budget Symptom #7: Nothing Saved for a Rainy Day
A good budget should include a line that projects for monthly savings. However, for many families saving for a rainy day might feel impossible. If it’s possible, factor in a small amount to store away for emergency expenses. If you can only save $5 a month, this is better than nothing. The goal with any budget is to become more financially responsible; families might need to cut out ‘wants’ to make room for a line-item for savings. Don’t deprive the budget; don’t cut food expenses. However you can cut $5 from dining out or maybe even downgrade a cell phone plan.
The goal is to save…even if it’s just a little each month. When you do this, you pave the way for a cushion that can help protect your budget from those unexpected expenses. They might still hurt, but the financial hit won’t be nearly as difficult if you have even a little saved up.
Financial Rx: Set a monthly and yearly savings goal. Every family has different financial means; don’t be upset if you can only save a little each month. A little is better than nothing, so don’t be discouraged!
Many families live paycheck-to-paycheck, and this means that a monthly budget is necessary to avoid overspending and digging deeper into debt. While many families will be hit with unexpected expenses that can seriously damage the budget, a broken budget isn’t defined by just one month of debts exceeding income. A broken budget is the result of poor money management, and there are many symptoms that help diagnose a broken budget. While symptoms need to be addressed, every single issue can be fixed to ensure that your financial health remains strong.