7 Costly Mistakes Well-Intentioned Budgeters Make Every Day
There are a few reasons why you probably feel like you’re chasing your tail when it comes to money. As a budgeting coach I hear misconceptions about money every single day in my conversations with people who are exhausted by the never-ending cycle of paying bills and creditors and never getting ahead. And all of them come down to misunderstandings people have about how you should budget.
Today let’s shine a light on some thought processes that may be holding you back from achieving control of your money and the life you want to lead.
#1 – “I read the Barefoot Investor Book – I should be able to budget now…”
At Bright Spenders we love the Barefoot Investor approach to debt, emergency funds and investing in index funds. What we see people finding tricky is the generic nature of Scott Pape’s one-size-fits-all approach. While it might work okay for regular wage earners, if you have any kind of unpredictability or irregularity to your income then his approach is pretty challenging to follow.
If you’re self-employed, freelance or working a few casual jobs and receiving varying amount payments into your account every single day, and you have to factor in GST and PAYG then things can get pretty complicated trying to figure the exact amount for each payment to transfer into your Smile, splurge and Mojo accounts.
And if people can’t figure something out, they tend to just do nothing. And that amounts to financial suicide.
If you feel like you’re a bit of a loser for not being able to follow the BFI approach then I want to reassure you now that it’s not you! It’s the system that just doesn’t work for everyone.
As long as you have a really good handle on what your expenses are (all of them) and when they need to be paid, then your Spending Planner will do all the number crunching behind the scenes and tell you what your bank balance needs to be on any given day of the year, so all you have to worry about is focus on income generation to make sure you cover it.
Julie struggled to apply the concepts of the BFI even though she was enamoured with the approach the first time she read it. While she earned a pretty stable government department wage, she also had a number of investment properties that each had variable incomes and expenses and really wasn’t sure how to apply the BFI concepts to her more complex finances.
In the property downturn, and unstable rental market, she was forced to use more of her wages to cover the costs of the rental properties and she was worried that she might lose them due to financial mismanagement. Once she got her Spending Planner up and running she could see her finances clearly, and knew exactly what she could afford to live on without sending herself backwards, and it was a huge relief.
#2. “I should be able to spend less than we earn because we earn a lot!”
This is flawed thinking because saving has little to do with how much you earn – it’s all about knowing exactly how much you’re spending and being able to control spending based on immediate and constant visual feedback. If you don’t have immediate and constant visual feedback then you’re likely to keep repeating the same mistakes of overspending because you’re not aware that you’re overspending until it’s too late.
Brook and Simon are high income earners living in Sydney with two small kids. Simon runs his own advertising agency and Brook is a marketing manager for a major TV network. They both earn great money but never seemed to have much, if anything, left over at the end of each month. They only had one credit card, which they used sparingly, but it just annoyed them that they never seemed to be able to save any money and get rid of the credit card.
Every now and then they would do budget on paper to try and figure out where their money was going, and it always seemed possible for them to spend less than they earn, but in reality it was another story. They would start out the month with the best intentions but by the end of the month they felt demoralised. Now they check in each week with their Spending Planner and it gives them the visual information they need to be able to stay on track with their spending and not go too far off course.
Brook and Simon have set up their Spending Plan like a zero-balance budget, so that every dollar is accounted for, and this means that they’re regularly putting money into their savings account. Over the past year alone they’ve managed to put away over $26k into savings that they know would have been frittered away had they not had such a good system. They finally feel in control at last.
#3 – “I downloaded this excel spreadsheet – now we should be able to stick to a budget!”
While an excel spreadsheet is certainly better than nothing, it’s a pretty 2-dimensional instrument that will tell you it’s possible to spend less than you earn but doesn’t show you how.
Excel Spreadsheets are generally based on either the month or the year. The problem with this is that most expenses don’t fit neatly into a month or a year.
Think about how often you need to replace car tyres (2-3 years), Car batteries (3 years), driver’s licenses (1,5 or 10 years), fridges (10 years), hot water systems (10 years). How then do you factor such things into an excel spreadsheet? You can’t. At least not simply and easily.
A comprehensive spending plan factors in all of these longer term expenses with the exact dates that you’re likely to need them and then does all the number crunching and makes sure that you have the right amount of money in your account on every day of the year to cover all of these things.
Lulu is another of our bookkeeper clients who was using excel for her family finances. When her husband Chris had a career change and drop in income she knew that they really needed to get more control over their spending so that their hard earned savings didn’t slip through their fingers, while Chris wasn’t earning as much. With their Spending Planner in place Lulu can now see exactly what they have as discretionary spending money and they know how to live within their means until Chris’ new job brings in as much money as he was previously earning.
#4 – “I should be saving right now, even if I’m in debt”
I totally understand where you’re coming from with this one. You know how important it is to save and to start asap. But unfortunately this way of going about it is a mistake, because the interest rate you get for saving or investing is much, much lower than your credit card or personal loan interest rate. Problem is, while ever you have debt and are paying higher interest than your savings rate interest you’ll be going backwards not forwards. And that’s not fun.
Lucy had $8000 in credit card debt at 19% interest when she came to us. She had a few thousand dollars sitting in a savings account at 2.9% interest, which she said made her feel better that she had managed to save some money. The problem was that she wasn’t making any headway on the $8k debt and the longer that debt hung over her the more money she was paying the bank.
She decided to take her chunk of savings and use it to pay down the credit card. That allowed her to reduce her credit card principal significantly so that she wasn’t paying so much interest. With her Spending Plan she was able to see the date by which she could have it all paid off and then she was able to get really intentional.
With her new found momentum Lucy was able to pay off the debt within 8 months. She no longer uses a credit card and instead has savings for her goals and also for unpredictable expenses. She says she feels a weight off her shoulders and is much more in control of her finances.
#5 – “It looks like I have money in my account, so I’m sure I have enough to buy X”
Do you recognise this train of thought? It reeks of ‘winging it’, doesn’t it? Crossing your fingers and hoping you have enough to cover everything.
This is flawed thinking because without a comprehensive Spending Plan, one that factors in all your unpredictable and long-term expenses, you can’t really know whether you have ‘spare’ money or not.
And If you spend money that’s not truly ‘over and above’ money, then it’s only a matter of time before you’ll have to reach for a credit card to cover those unpredictable or long-term expenses, leading you into, or further into, debt.
Camilla, a client of ours, earns great money as an IT systems manager, and she always seemed to have enough spare cash around to take an annual trip home to England and to pursue her absolute passion of equestrian riding. The problem was that over the years she hadn’t factored in unpredictable expenses like household service repairs, illness and car repairs and then had to reach for credit cards a number of times to cover these things.
After 10 years she found herself 16k in debt. Having a comprehensive Spending Plan has changed everything for her because now she’s able to see exactly what she has left to spend for discretionary spending. We separated out her predictable from unpredictable expenses, including her goal of paying down her debt in the fast possible time, and now she can see exactly when she is over or under ‘target’ on any given day of the year.
She now knows exactly when she can afford to take a holiday, go out to dinner, or buy a new horse without sending herself backwards, and she’s been able to pay off a significant amount of her debt.
#6 – “My accountant/financial planner/bookkeeper should be able to help with with budgeting my finances”
This is flawed thinking because while these professionals are excellent for helping you keep great records for the ATO, reducing your tax, or helping you invest, they don’t specialise in getting people’s budgets working. As a result of making this misjudgement people grow to be annoyed with their accountant, bookkeeper or financial planner because they are wanting to fit a square peg into a round hole and tend to give up altogether, sending themselves further backwards financially.
Kelly and her husband Mark have run a successful fabrication business over the past 20 odd years. Their business turnover and cash flow was always considerable and so they believed they could live the lifestyle of their dreams because cash was always available. Over the years they racked up a considerable amount of credit card debt for the business and were straining under the weight of it all.
When we spoke, Kelly told me that her accountant and financial planner were both ‘hopeless’ because they couldn’t seem to give her any advice about their cashflow or debt. I explained that accountants are essential for helping us get the most out of our tax return and make sure we’re tax compliant, and financial planners are essential for looking after our protection (ie insurance) and investing needs.
Everyone needs a good one of each of these professionals on their team, but it’s not their role to help you manage your spending. Now Kelly and Mark understand the proper role of these professionals, and also have a great system for managing their day-to-day spending they’re finally able to pay off their debt and start saving for the future.
Another client of ours, Vivienne, actually a bookkeeper herself, thought she had her finances all wrapped up until we had a chat. She realised that her fancy excel spreadsheet only allowed her to see what she’d spent (past tense) rather than giving her the information she needed to inform all her future spending decisions.
She had avoided putting extra money into super because she was worried that she might need it down the track. With a comprehensive Spending Plan in place, covering for all predictable, unpredictable and long-term expenses, she could then see exactly how much she could afford to pay into her super without leaving herself high and dry down the track. Vivienne then felt assured that she could make this positive change to her finances and see her super balance grow. She knows that this is going to make a massive difference to her retirement lifestyle.
#7 – “I’m putting money into separate savings accounts – that should make sure I have the money for when I need it”
Many people think that if they have money separated out into different savings accounts for things like utility bills, holidays, rates & education that this will solve their ‘lack of money control issue’.
What inevitably happens though is, because they don’t have a system which factors in every bill including all their due dates, all their unpredictable expenses, and their goals to pay down debt, when their accounts fall too low to cover a debt they then have to ‘Rob Peter to pay Paul’ and scramble for money wherever they can find it.
Thus, all their good intentions go to waste, they throw their hands in the air and say ‘what’s the point!”
Suzanne manages her family finances and she had at least 14 accounts, all with pretty low balances, when we started working together. Whenever she would need money Suzanne would shuffle money from one account to the next. She never felt like she was getting anywhere, her accounts were confusing, and her debt wasn’t going anywhere fast.
We worked with Suzanne to streamline her accounts down to 3 accounts for personal (Bills, Unpredictable expenses and weekly expenses) and two for business (a main business one and a tax one).
In conjunction with her Spending Planner, Suzanne can now see exactly what her bank balance needs to be in each account on every day of the year. Because all her expenses are programmed into the Spending Planner, it’s not hard to reach her weekly target.
Every day we meet people whose flawed thinking patterns are holding them back from achieving their dreams financially. Once they break out of these holding patterns they finally get the clarity they need to make really good financial choices. It’s so exciting to witness their blossoming. And that’s why we do what we do.