The Importance of Budgeting and How To Do It Right
By Lauren Lamb
It’s no big revelation that making and sticking to a budget can go a long way in helping you stay on track financially. Budgeting is a basic piece of advice that any financial professional would offer, but you’d be surprised how few people do it and for the people who do how inaccurate the budget can be.
Each person who comes in for a consultation at Steidl & Steinberg will review their income and expenses with their attorney so we can determine which type of bankruptcy is right for them. People come to the consultation at various levels of preparedness. Some have some random bills, some have fully-calculated spreadsheets and some can’t even make a guess as to what an average electric bill runs them. Needless to say, the more information a client has, the better their grasp on their financial reality.
Even those clients who seem to have a perfectly-prepared budget often make two mistakes; they underestimate how much they spend and they forget whole categories of spending.
It is easy to underestimate how much you spend on things. Especially when you are comparing your expenses to the money that’s coming in, people tend to think, “Wow, those numbers don’t seem to add up. There’s no way that I really spend this much on _______.” For expenditures like food, people will calculate their major weekly or bi-weekly shopping trips, but not include the trips in between the major shopping trips or eating out. Another mistake people often make is that they calculate their monthly budget based on just four weeks, when only one month has just 28 days. It may not seem like 2 or 3 days can make that much of a difference, but three more days of food and gas for a family could add up to $100.00 or more, which is enough to throw a budget for many of our clients out of whack.
Then, there are the expenses that get left off the budget all together. Common things that people don’t think of are home repairs, laundry/dry cleaning/cleaning supplies, doctor visit co-pays, glasses or contacts, car repairs, real estate taxes when not included in the mortgage payment, recreation, tobacco, haircuts and pet care. Some of these expenses can seem insignificant by themselves or aren’t expenses that occur on a regular monthly basis. Remember that small expenses add up. A trip to the movies here and a trip to the salon there can throw off your budget if you’re not careful. Also, the expenses that don’t occur regularly can often be expenses that are the biggest and hit especially hard. Many of my clients have not been financially prepared for a big car repair, having to pay for a new pair of glasses or paying their real estate taxes when they come due.
Luckily, there are a few things you can do to help ensure that your budget is the best that it can be. Here are a few tips:
- Be realistic! Yes, when you first sit down and calculate what you’re spending, it may be ugly and it may not be even close to equaling out to what you bring home every month. However, if you’re not honest with yourself about what you spend, you’ll have a hard time ever getting your expenses in check. If the receipts show that you’ve been spending $100 a month on clothing for just yourself, you may not want to acknowledge it, but you have to write it down on your budget, even if you plan on trimming it later.
- Go back through six months of bank statements and receipts to get an accurate picture of what you spend. Granted, this sounds like a lot of work, but some bills only come quarterly or twice a year so you’re less likely to forget them. Your expenses may fluctuate from month to month so the longer you analyze, the better average you will get and, if you go back six months, you are more likely to catch expenses that you don’t happen all of the time like car repairs and medical bills.
- Use a pre-prepared list of expenses as an extra check to make sure you’re not forgetting anything. Budget forms can be found all over the internet and here’s the one we use for our consultations, which is especially helpful if you’re going to be coming to see us.
It may not seem like it, but making a budget for what you’re currently spending is the easy part. The hard part comes when you’re trying to trim your budget so that your spending matches your earning and when you’re trying to stick to your final budget after you get it worked out. Being able to stick to a good budget will be a huge benefit to you whether you’re considering bankruptcy, in bankruptcy, moving on after bankruptcy, or just want to avoid getting yourself into financial trouble.