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If you've made a budget, you're on the right track to financial security. However, a budget is only helpful if it's tethered to reality. Use this guide to evaluate your spending plan.
Making a budget is one of the most critical steps not just in living without your means, but also in being able to save and invest for retirement. While you don’t necessarily have to maintain the strictest budget ever created, it’s still a good idea to have some general financial parameters you set and stick to. Having a solid structure in place is great for managing your current cash flow, expenses, and investments, but it can be even better as a tool to help you with long-term savings.
Even if you’re determined to make and adhere to a good budget, the tendency can be to drift away from hit. Here are four simple signs that your budget could use a little work.
New year, same as the old?
Last year’s budget can and often should be the basis for this year’s numbers, but copying and pasting all the fields from last year into this year is a recipe for a broken budget. Why? Because the only constant is change. Maybe you’ve finally finished paying off that clunker in the driveway, and you have more disposable income than you expected. Alternatively, maybe your 18-year-old has worked on your defenses long enough that you’ll be adding a car payment in 2016.
Last year’s expenses will often bear a close resemblance to this year’s, but just as often there will be changes, both subtle and significant, that will necessitate some adjustments. Keep in mind that these changes may not just be in your expenses—they may come in the form of revenue or earnings changes as well. A crusty budget is most likely a broken budget.
Too Much (or Too Little) Miscellany
Ah, the comfort of the catch-all “miscellaneous” category in your budget. We all have one; all that differs is what percentage of the budget and the actual expenses fall into this vague category.
Too much miscellany can mean you haven’t drilled down enough into the categories of your budget. Too little is another problem. Miscellaneous expenses are actual expenses that crop up every so often. Not accounting for them at all is as big of a mistake as using the category too much. Things will come up. You don’t have to have a line item for each and every one of them. But failing to monitor the miscellaneous category at all is a sure sign of a broken budget.
Budgeting on Faulty Assumptions
No one can know exactly what twists and turns await this year or next. You might find yourself suddenly out of work or on the doorstep of a lucrative inheritance. Some potential changes can be anticipated. But if you’re going to include them in the actual budget, make sure they’re based on reality and a realistic timeline. I made an alternate budget when the Powerball went over a billion recently, but fortunately I didn’t spend based on it until after I discovered that I didn’t win. That story isn’t quite true, but you get the idea. Are you overly optimistic in your projections? If so, your budget may be broken.
Budgeting Outside Your Objectives
A budget is a tool to help you meet your financial objectives. It is not, in and of itself, a financial mission statement. The point seems fairly obvious, but it is often overlooked: budget only after you’ve fully and firmly established your financial goals. Otherwise, your budget will lack both structure and purpose, and the temptation will be to ignore it. And an ignored budget…well, you get the idea!