The Importance of a Budget 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 get back on track or stay on track financially after a personal bankruptcy. Budgeting is a basic piece of advice any financial professional would offer. Although, you’d be surprised how few people do it and how inaccurate their budgets can be.
Each person who comes in for a consultation at Steidl & Steinberg will review their income and expenses with their attorney. This helps us determine which type of bankruptcy is right for them. People come to the consultation at various levels of preparedness. Some have 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.
Underestimation Can Hurt Your Budget
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 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 altogether: Common things that people don’t think of as home repairs, laundry/dry cleaning/cleaning supplies, doctor visit copays, 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, these irregular expenses 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.
Tips for Keeping Your Budget Intact
- Be realistic! When you first sit down and calculate your spending, it may not even equal out to what you bring home every month. However, if you’re not honest about what you spend, you’ll have a hard time ever getting your expenses in check. If receipts show you spent $100 a month on your clothing, you might be embarrassed, but you have to account for it 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. This sounds difficult, but some bills only come quarterly or twice a year. Your expenses may fluctuate from month to month so the longer you analyze, the better average you will get at it. Going back six months, you are more likely to catch those irregular expenses 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 are especially helpful if you’re 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 stick to your final budget after you work it out. Sticking to a budget will benefit you no matter your current financial situation.