What budgeting money does is sends shivers down ones spine, but it’s a necessary evil. It sounds painful to do, much like extracting teeth without anesthetic. To save money for the future appears like an aggravating process. We grow up taking money for granted, as we despise saving for the future.
What’s the point of restraining oneself when it comes to spending as we please. Most will however eventually discipline themselves to create a budget. Then impulsiveness suddenly kicks in, or an unexpected expense comes up, then the budget vanishes into thin air. The savings plan then suddenly no longer exists.
Then they’re back to square one, back to juggling their finances, knowing that there’s too much month and not enough money to pay for it. So what needs to be developed is a systematic method for a better budgeting plan, a more feasible savings strategy.
Creating A Budget
Most fail at the attempts to create a simple budget that’s reasonable and within their means. The reason why most budgets fail, is because what’s not accounted for are all the unexpected or variable expenses.
What everyone knows is exactly how much their rent, mortgage, or car payments are. These are the fixed amounts month after month. If your rent is $1,000 per month, then that’s an established known.
The same goes for the other fixed expenses, such as the car payments, cable, smartphone, and Internet subscriptions, insurance premiums, and so on. It becomes easy to budget for these expenses since the amounts are set every month.
Known Floating Expenses
Besides the fixed monthly expenses which are already known, there are a number of expenses which will vary month to month, where we have a fairly good estimation on what they are.
The grocery bill, utility bill, gas expenses, etc. Most have a fairly good idea how much is spent on these expenses every week, and won’t fluctuation that much.
The real culprit which can break budgets are the unforeseen variable or irregular expenses. How much you’re suddenly hit with on car repairs, medical bills, home maintenance costs, aren’t known.
These are the expenses which can strike at any time and will hit you from left field, and there goes the money which was planned for that well deserved vacation. Or worse, you begin to skimp on groceries to pay for that dental bill.
To Budget Better
The great unknown is that there’s no obvious way of predicting sudden expenses. There is a solution however which involves guesstimating, this by using a technique known as “monthly averaging.”
Begin by gathering all the checks you wrote the past 12 months, all the bank and credit card statements, add them up and record that figure on a spreadsheet. What you need is to find out how much money you spent on things which weren’t a fixed expense.
Group these expenditures into categories, such as auto, medical, home maintenance, etc. Sort them broadly, as all you need are generalized categories. List each of the expenses under their appropriate categories for the entire 12-month period.
Project Future Expenses
Once all of the expense dollars are accounted for, what you’ll then know is the total annual expenditure for all the variable expenses that was spent.
For instance, once you add up all of the automobile repair and maintenance costs for the year, say it comes to $1,200. Divide that $1,200 by 12, for an average of $100 per month.
So that’s the amount you should expect and allow for your monthly budget the upcoming year, as it’s a close projected amount for your upcoming car expenses.
This isn’t a perfect model, since expenses will suddenly arise, which can exceed the previously estimated outlay. What it accounts for however, is a closer approximation then taking a guess, or worse, having no automobile maintenance budget at all.
Setting Up Separate Accounts
The key step is setting up separate savings accounts for these expense funds. Then begin depositing $100 per month into the auto expense account, and if you get hit with an auto repair for $400, you can cover it, as you’ve established a fund for this type of expense.
What you’re automatically doing is setting aside the amounts which are intended to cover each type of unknown expense that you’ve encountered in the previous year. Set up direct deposits for each of them.
Once you begin doing this 12-month analysis of unexpected expenses, what becomes instantly clear is why and where your money is going to, and easier to track down. Using this method leads to the discipline that’s necessary to recognize where the money deposits.
What usually happens once someone has all their monthly expenses paid for, and if there’s extra money left in their wallet, the tendency is to spend it on something impulsive.
But what’s quickly realized is that there’s really no surplus of cash, as it’s just not properly set aside, such as that extra $100 to keep the car on the road. Once knowing this, then the frivolous spending suddenly stops.
Budgeting can then become successful and easy once monthly averaging is used, this especially once applied consistently year after year.
Then in the future, understanding what your expected expenses are will become crystal clear, while no longer being surprised by them.
The best way of implementing this is by setting up a regular savings account for each category, and the monthly “averaging” amount for that category gets automatically withdrawn from your paycheck, into that savings account.
Since this money is automatically withdrawn from your paycheck before you even seeing it, then the temptation to stop this budgeting process is forgotten, all while you’re saving the money to pay for all of the unexpected annual expenses.