Friday, October 18 2019, Contributed By: NJ Publications

WHY DO BUDGETS FAIL?:

Budgeting. It is one thing that every business and even every household should do. We all must have read much on budgeting and I would be surprised if anyone did not know about the importance of budgeting in personal finance. Yet, it is very rare to find an individual who is committed and consistent in preparing and following budgets for his/her household expenses. In this article, we will talk about budgeting try to find reasons as to why budgets and the budgeting exercises fail?

What is budgeting?

Let us start with the understanding of budgeting. Simply put, 'budgeting' is the process of creating a plan to spend your money during a particular period. This spending plan, along with the limits on different types or heads of expenses, is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do. Budgeting is simply balancing your expenses with your income.

Typically, the budgeting exercise for a household would be done on a monthly frequency. It would include all your net income cashflows and also your net outflows and expenses. As such, you will have a clear idea where your money is coming from and going into.

Purpose of budgeting:

The purpose of budgeting is basically to ensure the following things:

  • you are never over-spending in any area

  • ensure that you never run out of money

  • you want to save some money to invest

  • you have control over your spending habits / behaviour

  • plan expenses so as to avoid discretionary expenses

The 50/20/30 Rule:

It is important here to talk of this very popular thumb rule for budgeting called as the 50/20/30 budget rule. The idea here is to divide after-tax, net income into different baskets with limits. The first basket of 50% would be your 'needs'. The second basket of 20% will be allocated towards your savings. The remaining 30% will be on for your wants or discretionary spending. The proportions of this thumb rule are very generic in nature and you will be advised to fix a proportion that is more suited to you.

Note that the 'needs' here are mandatory expenses that you cannot ignore or push forward. These will include things like house rent, utility payments, school fees, maid salaries and grocery bills. The savings component gets a higher priority over optional / voluntary spendings.

Why we fail:

  1. Wrong Plans /Inadequate Limits: Quite often, in the initial zeal of preparing a budget, you may likely go more strict. Inadequate limits on a certain type of expenses may feel very restrictive and thus may lead to a breach. A wrong plan may also mean that you entirely underestimated the expenses or over-estimated the income. There may also be a possibility of any expense head missed out. To be successful, every plan has to be properly prepared in light of your historical spending habits so that there is a sense of continuity.

  2. Lack of self-control: Too many people spend money they earned, to buy things they don't want, to impress people that they don't like. This popular is so true for so many of us. Lack of control on what you need to buy or on what things you need to spend are the biggest reason for the breach of budgets. Having self-control on your spendings will go a long way in securing your finances and meeting your budgets.

  3. Lack of discipline: Lack of discipline in preparing and following a budget is often the next culprit for failure of budgeting. We often get tired very easily in the process such that we lose track of our progress. For the success of the entire budgeting exercise, one has to be very disciplined to record and track your progress. Over time, one is also likely to lose interest in this exercise believing it to be boring and uninspiring.

  4. Lack of appreciation: Most of us may begin the budgeting exercise without an adequate level of conviction or commitment to follow the same. This may be due to the person not really understanding and appreciating the full benefits of budgeting. Keeping yourself half committed is never going to work.

  5. Lack of team work: Budgeting for a household is a team effort. Your spouse, children and even parents would be expected to agree to and follow the budget. Even your children would be given fixed pocket money or budget limit for managing their affairs. If any family member does not

  6. You missed out emergencies: It is very likely that one misses out for accommodating any emergencies since these emergencies do not occur very often. We are not even talking of big emergencies here since we believe you would be having an emergency fund to look after the big ones. What we are talking here is about the small, unexpected emergencies like, loss of your mobile phone, a car repair expense, your child falling sick for few days, unexpected medical checkups for parents, and so on. It would be advisable to keep a small portion of your budget, say 5% only for unexpected small emergencies for the month.

  7. Give it time: Rome was not built in a day and neither can you hope to build a perfect budgeting culture in your home from day one. Budgeting may require a behavioural and even a lifestyle change. It may take some time for the people to adjust their spending habits as per budgets. Be patience and be considerate enough when you start the journey. Perhaps the first few months will be more of learning for everyone but one should not lose hope and keep committed to this over the long term.

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