80% of Americans are in debt.
I know, I know. You are going to tell me that there are good kinds of debt like mortgage debt. I’m with you.
In June 2017, American revolving debt (mostly credit card debt) hit an all time high of more than $1 trillion. I don’t know about you but the only way I can imagine that much money is by thinking of Scrooge McDuck swimming in it.
Let me throw one more statistic at you.
60% of Americans do not have a budget.
Now, I see a thread between all of these statistics. Most of us are in debt. Credit card debt is at an all time high. Nearly two thirds of Americans don’t budget.
I’m going to go out on a limb and say that if more people created and followed a budget, we would be living with less debt and be better managers of our money.
Why do people not budget?
Because budgets fail. Or I guess I should say people fail with budgets.
I often compare budgets and money management to someone trying to lose weight. I know when I’ve tried to lose weight I can be all in for a few days or even a few weeks but then…
I fall off the wagon.
And when I fall off the wagon, I say forget it and go back to my cookies and mashed potatoes.
The same thing happens with budgeting. People get overwhelmed by unexpected expenses, loss of income, or a large-ticket item that they can’t pass up and the budget goes out the window.
#1 Reason That Budgets Fail
Budgets fail for many, many reasons. We forgot to account for the car insurance payment. We had an accident and had unforeseen medical expenses. We got invited to a birthday party and needed a gift. The list could go on forever.
But there is one major reason that budgets fail.
Most budgets fail because they are not realistic for us at the time. Click To Tweet
What do I mean?
I’ll go back to my dieting example. Many people have unrealistic dieting expectations. We think we can cut out 1,000 calories a day and live on rice cakes and water. And maybe we can, for a day or two. But not for long.
Or we want to see the difference on the scale in an unrealistic time frame. We eat healthily and work out for two days and want to have lost 10 pounds. But we step on the scale and we’ve gained a few ounces.
Or we are in the dieting groove,seeing results, and feeling good, and something derails us. And we decide dieting isn’t for us and we go back to our old ways.
The same thing happens with budgets.
You sit down and look at your income and all of your expenses and start to trim here and there. By the time you are finished, you have decided that you can go from spending $400 a month on food to $25, from $150 eating out to $0, and from $100 on gas to $10. You’ll have your debt paid off in no time. But 3 days into it and you have already blown your budget for the month.
Or you set a budget but you get discouraged because you haven’t paid off your $20,000 in credit cards and student loans within the first month of budgeting.
Or you hit a bump in the financial road and decide budgets aren’t for you and instead of adjusting for the unforeseen expense or loss of income, you decide you’ll try to budget again some other time.
How do you make sure your budget is realistic?
Be honest. Look at last month’s expenses and be honest with yourself about what you can cut back on without feeling so deprived that you end up going overboard on spending.
Part of this honesty is being thorough. Make sure you are thinking of ALL of your expenses and breaking down expenses that may not occur monthly (taxes, insurance, etc.) into a monthly cost so when it comes time to pay them, you are ready.
Be patient. You are going to make budgeting mistakes or oversights. Be patient with yourself and don’t throw in the towel just because you spent a little more than expected in one of your categories. Make adjustments where you can and learn for the next budget.
Build in rewards. There are many different budgeting philosophies and different ones may be right for you based on your situation. But I have found that for me, I need rewards built into my budget. Even if I have debt that I need to pay off, I set aside a small portion of my monthly income as savings for an item that I want.
Say I want an iPad (which I so totally do!) but I know that I need to pay off student loan debt and build up my emergency fund. The logical and sensible thing to do would be to wait to save for my iPad until my debt is paid off.
But, humans are not always rational and paying off debt or building up a savings account is not FUN. Which means that you are less likely to stick with it if you don’t also have a reward built in. So, I choose to put aside a portion of my income toward a fun savings goal, my iPad, to keep me on track with everything else.
Budgets are full of numbers and nothing is more rational than numbers (there’s a bad math teacher joke in there). But humans are emotional and not always rational. So, we have to make sure that our budgets are realistic for us. If we can be honest, patient, and build in rewards, we will be well on our way to a successful budget and better financial situation.
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