Despite a penchant for continually monitoring their accounts, most Americans are still worried about their financial future. Nearly half of US consumers say a $400 emergency would put them in financial hardship. Even more report their savings is less than $1,000 (CNN Money).
This tendency toward poor money management has spawned a plethora of mobile applications and has some financial institutions expanding their mobile banking initiatives to include tracking of expenditures. Even the recently launched Apple Card includes money management features such as spending summaries, color-coded categories, and an interest calculation tool.
With so much technology at our fingertips, why is it still so hard for Americans to stick to a budget? Here are five top reasons many find it difficult.
Let’s face facts. That $400 emergency is right around the corner. It’s an alternator. It’s new brake pads. It’s a much-needed transmission flush. Maybe it’s the co-pay at the ER for a broken arm. The point is, to use yet another cliché truth, we all need to expect the unexpected.
So, don’t call it a savings account. It is your emergency fund. Budget a specific amount every month and treat it like a bill. Then pay your emergency fund first. The goal should be to keep a minimum of 3-6 months’ worth of expenses in the account. But every little bit of buffer is better than none.
More than bills.
A budget is much more than keeping the lights on. A working plan for money management accounts for the complete flow of money within a household. Examples of “non-bill” expenses include home repairs, automobile repairs and maintenance, entertainment, gym memberships, hobbies, treats, field trips, daycare, and so forth.
When building out a budget, it is a good idea to track incoming and outgoing cash flow for at least 30 days. The further back you can review expenses, the greater the accuracy you are likely to attain.
Assuming each month will be the same.
Is your energy bill the same in January as it is in June? Maybe if you live in LA. But most areas of the US rely on air conditioners or heaters to regulate the inside of their dwellings for at least a portion of the year – which can cause spikes in energy usage and expense. Similarly, holidays and the end of the year are often more financially intensive.
Not accounting for fluctuations based on relatively predictable outside factors can play havoc on budget plans. As such, it is best to consider the time of year and what each month entails to build a realistic financial forecast.
Items placed on credit cards are still part of the budget.
New purchases on credit cards do not fall into an already existing “pay off credit card” category. Not only do those purchases add to the projected payoff timeline, but they also accrue interest. Which means you are paying more money for the convenience of having something now. If they are things you regularly need, they should be in the budget. If it’s an “out to eat with friends” that happens quite a bit, budget that, too. Do what you need to do to keep from looking at the credit card as a “get out of budget free” tool.
Track, don’t react.
Despite putting the time and effort into creating a household budget, most US consumers fall apart when it comes to execution. Following a financial plan requires faithful tracking and categorizing of expenses as they occur for comparison against budgeted amounts.
In the past, consumers handled this planning phase when “balancing their checkbooks.” At which time, individuals would compare receipts and written checks to bank statements to get an accurate picture of their current financial situation. The practice became more difficult as credit cards gained steam, with a heavier reliance on keeping and logging receipts.
Now, however, consumers looking to stick to their budget have a variety of options for helping them stay on target. Those who need a more hands-on approach can choose to manually track and compare their cash flow to their budget using a notebook or spreadsheet. However, there is also a wide range of budget applications for mobile devices.
Americans are having a hard time managing their money. Whether it is a lack of financial education or a multitude of other factors, one thing is certain…proper budgeting can help.