Your household budget is one of your most important financial tools you will ever use. Without it, managing your finances is an uphill battle. It is a chef going into the kitchen with very dull knives trying to whip up a special on the menu. It can also be similar to a soldier going into heavy gun battle with just a knife on hand.
As the year is about to start, you need to take control of your budget which is easier said than done. However, it does not mean that it is impossible to achieve. One good approach in taking control of your finances through your budget is managing expectations. This is especially helpful when you try to anticipate what could go wrong.
However, you should now know that there is no way to predict what will happen down the line. The idea here is to try and find out potential pitfalls that you might encounter along the way. This can help you prepare and take on a proactive approach. It helps you save your resources such as time and even money in resolving your mistakes.
This is because every time you encounter financial mistakes, it would often have a dent in your finances. They are usually in the form of fees, interest, penalties or worse, missed opportunities. When you are talking about your budget and you encounter problems, the effects are more immediate. This is because it affects your month to month expenses.
Here are a few of the instances where you would be exposing your household budget to risk. It is helpful to know these beforehand to have an idea how to handle them.
Not having one in the first place
It is one thing not to have any savings account. Forbes.com even shared how over 60% of Americans does not have money to cover a $500 emergency. This can be chalked up to bad budget management or a case of prioritizing one debt payment. However, the problem starts when you do not have a budget, to begin with. You would have a hard time managing a budget when you do not maintain one.
You can start with lining up all your income sources on one side and tallying them. Next is to do the same with all your expenses. The idea is that your total income should be more than enough to cover your expenses. If it is the other way around then you need to make some immediate changes. Increase your income, lower down expenses or do both to address the issue.
Thinking your budget is a mere suggestion
If you do have a budget, then that is a good start. You can start planning for your finances. However, you need to make sure that you use it. Stick to your budget and not treat it as a suggestion on how you should run your budget. You might have spent time putting it together so do not leave the list at home or on your computer.
If you are still using pen and paper then you need to keep your list in an accessible area. It should be within arm’s reach whenever you need it. Today’s technology allows you also to have a digital copy of that list. You can even sync it with your multiple devices such as laptop computer, tablet, and smartphone. This way, you can have access to it whichever device you have on hand.
You rely on guesstimates for your household budget
In case you are wondering what this means, it simply means that you are guessing your figures. You are relying on estimates to come up with your numbers. This method can work if you are just trying to get a quick ballpark figure. However, your household budget should not be riddled with guesses and estimates. It has to have exact numbers.
The difference with being assessed fees and charges on your credit card bill apart from late payments is sending in the wrong amount. If you just keep on guessing how much your bill would be and you send less, then you are in trouble. Your lender can start tacking up penalties and interest on your next bill because of this mistake.
Not having a goal to aim for
Your household financial budget needs to be aligned with your long-term goals. They have to work hand in hand to get you closer to your targets. Think of your budget as the ladder you use to reach your goals. Just like a blueprint, you need to map out a strategy to use to get to where you want to be. That would be hard to accomplish if you do not have a goal in the first place.
If your goal is to pay off your house in 15 years rather than 30 years then you have to double up on your payments. Your budget has to find a way to allocate a bigger portion for mortgage payments every month. This is how your budget fits into your long term goals. It does the legwork for your finances so you can accomplish your target. Without your goals, your household budget would be similar to a ship in the sea sailing with no direction in mind.
Setting unrealistic goals and expectations with your household budget
Now that you have goals that you would reach out for, the next thing to do is to make sure that they are realistic. It is so easy to jot down targets you want to achieve. Pay off your house in half the time, pay off your car in three months or even paying off your student loans this year. You might also want to retire at 40 years old just travel the world.
These are all great plans but you have to look at your existing finances and household budget to see if these plans are doable. You might be earning below minimum so paying off your debt at record time might be out of the question. Also, if you are not making any retirement plans then it would be hard to retire at an earlier age. If you put in unrealistic goals, you would be stretching your budget too thin which could hurt you in the long run.
Parking the need for reserve funds
One of the biggest mistake you can ever make with your finances is to think that you would never need reserve funds. There are some people who believe that nothing will ever go wrong. The thing is it trouble usually comes at a point when you least expect it. That is why the idea is to prepare before it even happens.
WSJ.com shares that consumers would need about 6 to 18 months worth of reserve funds. This depends on their status in life from being employed, running a business or even for retired people. The more secure a monthly income is, the lower the amount of reserves they would need. The idea is to understand that you need one in your budget.
Your household budget is a crucial part of your financial management and can help bring you closer to your goals. It is important that you take control and be proactive in addressing potential mistakes along the way.