Why budgets don’t work!

But herein lies the reason why budgets don’t work.  At the point of this discretionary spending, your budget is nowhere to be seen.  It’s hidden away from view in a perfectly formatted spreadsheet filed somewhere on your computer or on a piece of paper folded nicely in your notebook.  It’s not until the end of the month when we check in and wonder why our perfectly considered surplus is ‘missing’ and we quickly come to the realisation that – no matter if you’re a teacher, a doctor, electrician or a volunteer worker – there just seems to be “too much month left at the end of the money!”

In fact, according to ME Bank Household Financial Comfort Report more than half (53%) of Australian households have no income left at the end of the month once they have paid their mortgage and other bills.  The report found that 43% breakeven and 10% spend more than they earn by drawing on savings, loans, credit or equity in their homes.

Therefore my conclusion is clear – budgets just don’t work!

They measure history but unless referred to often, have little opportunity to help you make smarter decisions with your money because they don’t address the main area of concern for most – how to control overspending on discretionary items.

Sadly, most people measure their success with budgeting by whether they have any money left in the bank account at the end of the week and if they run out, they use their credit card as a backup falsely thinking that this is their money.  Sadly the credit card generally doesn’t get repaid in full and before they know it they are on the debt trap paying high interest rates with an unhealthy addiction to spending more money than what they earn.

So what’s the solution?

Well, I draw on the secret of running a successful business… “Systems run businesses and People run systems”.

The family budget is essentially a small business.  Therefore, in the budgeting context, you need an efficient and effective system to run.    It’s simply managing money coming in and money going out and (hopefully) making wise decisions with whatever is left over.

So, what system should you have?

I recommend you split your budget into the following expenses categories:

• BILLS – e.g. electricity
• FIXED – e.g. mortgage payments
• PROVISIONING – e.g. holiday or birthday presents
• LIVING – e.g.  groceries
• DISCRETIONARY – e.g.  your lifestyle

Creating a system like this is crucial.  People are generally good at honouring their fixed commitments like the mortgage and the household bills but the area of slippage for most families is discretionary spending.

The solution lies in generations past.

Think back to your grandparent’s era when they were paid in cash and had separate jars in the kitchen for rent/mortgage, groceries, bills and discretionary spending.  If they didn’t have the money they simply didn’t spend it.  The same principle applies here.  Once you know how much your living and discretionary (lifestyle) spending will be each week then you pay yourself this amount weekly (set up an automatic payment) into a SEPARATE account and then only spend this amount.

Make no mistake, this separate account is CRUCIAL for monitoring and avoiding overspending.

As a tip, I’d suggest you make this payment to yourself on a Thursday.  It means that you have your money available to be social over the weekend with your friends and family but come Monday, if you’re balance is low, then you’ll need to make the money stretch for the remainder of the week. Food wastage is a huge are of concern for making budgets work so this system makes you more likely to look in the cupboard or the freezer to make a meal instead of ordering a pizza or getting a DVD instead of heading out to the movies during the week.  With this simple system in place, you are less likely to spend what you don’t have as it requires you to manually override it and therefore consciously overspend rather than unconsciously overspend.

There is plenty of upside in being committed to making your budget work as you are more likely to have a surplus each month and therefore likely to be able to invest for your families future.  Remember, that good money management is the cornerstone to you building a wealthier tomorrow.  It doesn’t matter how good your investment process is if your money management skills are poor.

Finally, always remember your grandparents’ wise advice… “If you look after the pennies, the pounds will take care of themselves”.

If you’d like to learn more about Empower Wealth’s cutting edge financial management systems, please contact us for a FREE complimentary consultation.