Let’s get something straight right off the bat.
I’m not about to tell you off.
Making a budget takes time, effort and often involves asking yourself some difficult questions. It’s really risky because you might unearth something about your spending that you wish you didn’t know so I applaud you for having the balls to give it a go!
Even if you haven’t managed to stick to your Christmas budget, at least you made one!
I don’t keep a regular budget but I did make one about 6 months ago and it turned out that we were spending just over what we had coming in. Uh oh! Fortunately for us it wasn’t an emergency because we have a good amount of savings but we also have a wedding to pay for next year so we had to make some pretty drastic changes!
Wait a sec…
How did you know that you were overspending by making a budget? Isn’t a budget about deciding what you’re going to spend and then sticking to it?
If that’s your idea of a budget, this is what you’re doing:
Let’s look at two budgeting scenarios:
Scenario 1: Budgeting forwards (also known as forecasting)
Budgeting forwards or forecasting involves looking at what you have available to spend in an average month, quarter, year etc. and making decisions in advance to make sure you don’t go over that number.
Here’s an example of a forward looking budget:
This is what your Christmas budget looked like this year isn’t it? You dutifully went through all the bills, petrol costs and other known outgoings then allocated how you were going to spend the rest of the money. So, why didn’t it work?
Let’s look at budget scenario number 2 (the way I do it):
Scenario 2: The Financial Food Diary
When I know I have a big financial decision to make, take quitting my job to go full time on Wiser Wealthier for example, or when I feel like I don’t have a firm hold on my spending I start making what I like to call a Financial Food Diary.
Just like when you start working with a personal trainer and track your eating, your Financial Food Diary is a list of all of your spending over the previous month or two. It looks a bit like this except I do mine on an excel spreadsheet:
Making a Financial Food Diary gives you real-life data to base your budgeting decisions on whereas forecasting is pretty much guessing what you’re going to spend the following month.
Your financial food diary helps you to better understand your spending patters and then use next month’s budget to make some changes to your current spending and allocate your money with much more certainty.
This means that your next budget will look something like this:
Take another quick look at the Forecasted budget and it will be obvious what’s different.
As well as the numbers being much more specific, the second budget allows for the fact that some costs are known, others aren’t. The unknown costs are still a forecast of sorts but instead of a pure guess they are based on real data.
Here’s what the pros do:
During the coming month you still keep filling out your Financial Food Diary. This means that your next budget will include two month’s worth of real data. All you have to do now is rinse and repeat for a few more months (not forever because there will be trends) and I guarantee you’ll notice a difference.
Spending is uncertain and always will be but by using real data based on your actual spending rather than trying to forecast from scratch you will be making more informed, more realistic budgets in no time.
Who knows, you might even stick to them!