Household budgets are like New Year Resolutions. We undertake the exercise with great enthusiasm, after reading an article or attending a workshop somewhere. In a couple of months, we have several reasons to explain why is it not workable.
Do we revise household budgets as an ongoing exercise, or create a budget every month? Maybe, some of us do, but the numbers are low.
Budget is a plan of action expressed in
- Budgeting apps
- Personal budget on excel sheets
- Kakeibo diaries
You may use any household budgeting tool, but a budget is just a plan of action for a defined period. The purpose is to tell your money where to go, instead of wondering where it all disappeared.
COMMON REASONS FOR FAILURE OF HOUSEHOLD BUDGETS
- Sudden expenses like attending a wedding or other social event
- Replacement of a gadget that breaks down
- Urgent repair needed in the house
- An accident or some other problem with your vehicle
- Demand for a donation
- Demands from your extended family
- Lack of co-ordination between family members
- Social esteem
- Claustrophobic feeling when you have to manage with less than you are used to
I’ll summarize a complex psychological process in a few bullet points here.
- Inability to say No
- Reluctance to share the plan with family or friends
- Focus on the short term
- Need for immediate gratification
- Reflection of disharmony in terms of money
- Misunderstanding the concept of a budget.
A BUDGET IS NOT A…
- watertight or non-fungible plan
- punishment for past financial misdeeds
- deprivation plan
When a household monthly budget does not go as per plan, the cause lies either in the money mindset or budgeting process.
Let’s look into a few common mistakes.
COMMON MISTAKES IN HOUSEHOLD BUDGETS
1. No emergency fund
You need to put aside an emergency fund to take care of so-called sudden expenses. It prevents outflow of funds from your monthly expense plan.
2. Under-allocation or no allocation for certain items
We don’t have to include only essential costs (needs) and debt repayment.
There is always a scope for discretionary items (wants), unless the income is very small, compared to cost of living.
Allocate a certain percentage of your monthly expenditure for discretionary items. If the amount is not spent, carry it forward.
Say you allocate Rs.5000/- a month for discretionary or lifestyle costs, but do not spend it in this month. Carry forward the amount to give you a larger fund in future. It eases the psychological pressure.
Bear in mind that there is no compulsion to spend it. If you save more, you contribute more to future financial goals or buy a pricier item in future.
3. Lack of co-ordination
You put money aside for a family vacation or your kid’s birthday bash, but fail to communicate it to your partner. Your partner spends the amount on his or her family or a group event with friends.
Both the relationship and budget are under stress.
Your children want something because all of their friends have it. You fail to tell them that this indulgence now would take money out of their college fund.
Related post: Financial Inclusion – Couple Finances
4. Focus on the short term
It is not always a choice between Can-have and Cannot-have. A third option is to have it at a later stage.
In my college days, I did not spend my pocket money on eating in the canteen. But I had a clear ambition of having a monthly lunch in an upmarket restaurant. I would imagine myself in the luxurious ambience of the restaurant, with the waiter serving a special dish. It took the pain away from saying No, when my friends indulged in mediocre vada-pav or masala dosa to satisfy a craving.
You can buy a new phone later, if the microwave or refrigerator needs to be replaced now.
Giving up something now certainly hurts, as it breaks a comfortable pattern. But remember that you are actually scrimping now for a bigger satisfaction to come later. Choose what matters more in the long run.
5. Not looking at share options
Have you asked your children to contribute a certain percentage of the cost from their pocket money? It will inculcate financial discipline, as well as enable them to buy what they want.
A money-savvy father offers to make the down payment for a house, for his daughter who has just started earning. He places a condition that she needs to manage EMI payments on the home loan in future.
Can you extend the concept in smaller ways to younger children?
6. Lack of annual provisions in monthly household budgets
You need to put money aside every month for fixed annual expenditure such as insurance premium, taxes, membership fees etc.
Build linkages such as receipt of a bonus to investments, or the annual increment being used to pay for extra-curricular activities. You are at peace that the extra element is not straining your expense plan.
7. Lack of Monthly modification
Try the zero-based budgeting technique.
Write the amount you will receive in this month.
Calculate the estimated expenses including insurance premiums etc. (if you have not provided for those earlier).
Now, see how you can rebalance to make two ends meet.
Flexibility is the name of the game, if you want to escape anxiety.
Just ensure that you are not taking money out from a long-term investment plan to meet short-term needs.
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8. Falling in Debt Trap
Do not incur credit card debt or use Buy Now Pay Later options, to compensate for a shortfall in household budget provisions. The interest can eat way into future plans, thus, adding to the stress.
Look carefully into Zero Interest EMI options. Sellers show a certain price with EMI options, and another price called a ‘discounted price’ for full payments. The discounted price is actually the original price. The interest amount is baked into the price, when they offer an EMI option.
The debt trap has a negative impact on financial wellness in future. It makes more sense to cut down on discretionary spending.