- One of the most crucial things to achieving your financial goals is simple: sticking to a budget.
- Budgets often get shattered due to impulse buying, excessive unnecessary spending and âlifestyle driftâ.
- Reviewing your finances every couple of years, taking a break from splurging, and paying yourself first can help.
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In the age of social media, there’s no shortage of industry experts and influencers promising financial freedom with a few quick tips. But one of the most important aspects of maintaining financial well-being is also one of the simplest – controlling your budget.
While it may seem simple, maintaining a budget is no easy task – physically or psychologically. However, technology has dramatically improved this labor-intensive process over the years with software like Mint or You Need A Budget.
Successfully tracking your budget is just the first step – you need to stick with it, too. As a financial planner, I often see three common pitfalls that can sideline an effective and efficient budget before you even know it.
1. Not controlling impulse spending
When most people start to budget, they usually first separate their spending into two broad categories: discretionary and non-discretionary. Or in other words, wants versus needs. Each of these categories can take their fair share of your budget. and then some, especially if you’re like most Americans, who can’t afford a $ 1,000 emergency.
Ignoring your budget or simply not making enough money to make ends meet is often the catalyst that drives us towards the silent budget killer: impulse spending.
Impulse spending is when someone makes the spontaneous or emotional decision to buy a product or service. This is an issue that can affect many people living from paycheck to paycheck to paycheck, as impulse spending offers a sweet dose of dopamine, which could ease the stress of under-budget. Plus, research has often shown how buying things can often reduce feelings of sadness.
However, no one is entirely immune from the desire for impulse spending. For example, MassMutual recently conducted a survey showing that Americans spent $ 765 more per month in the summer of 2021 than in the summer of 2020. Of course, some would argue that is because America is more. open for business after the pandemic. Still, it’s fair to suspect that some of the spending was an impulse response to pandemic-induced cabin fever.
Implementing strategies like a mandatory wait period before shopping, reminding you of your short and long term financial goals, and avoiding shopping online can help if you succumb to impulse spending.
2. Not controlling daily discretionary spending
Discretionary spending includes non-core budget items that vary from month to month: dining, hobbies, entertainment, vacations, and gifts. When I sit down and review a budget with a client, they’re often bewildered by how much they’re spending in that category.
Since these expenses vary, the first step in understanding the impact of your discretionary spending is to review your last three months of bank statements. This exercise will allow you to compare what you actually spend with what you originally planned. Although the numbers may shock you, it is a worthwhile exercise.
As a rule of thumb, most experts will recommend that you follow the 50-30-20 rule. This rule states that 50% of your net income is spent on fixed and essential costs like utilities, housing, groceries, 30% on discretionary spending and the remaining 20% ââon financial goals or savings like funds. emergency, 401 (k) contributions and 529 plans.
While I think this is a good rule of thumb, I think most Americans need more detailed advice and guidance when developing a budget. This is because no one is spending the same or has exactly the same wants and needs as the next person.
I think building a budget should start with your spending first on savings, then on housing, then on transportation. By using this top-down approach, you make sure you pay yourself first, and then tackle two of the most important budget categories for most people, before you even jump into discretionary spending. It’s an almost guaranteed way to keep it under control.
3. Fall into “lifestyle creep” and not review your finances
While I firmly believe in enjoying the fruits of your labor, I advise you to do so in moderation. When you intentionally increase your standard of living every time your income increases, it is called lifestyle drift.
A great way to avoid this is to conduct budget reviews at least twice a year. This way, you can ensure that you are paying optimum prices for services and products, monitor inflation, and temper any temptation to let the lifestyle creep in.
Taking these reviews and avoiding lifestyle drift are typical habits of some of my business’ most successful clients.