One of the most important and first tasks that anyone shooting for Financial Independence and Early Retirement does is create a realistic and sustainable budget. However many budgets fail. Here are some Reasons for Budget Failure. Understanding why a budget may fail will help you design the perfect long-term strategic budget to support a spending and investment plan that is just for you.
Lose Track of Your Motivation.
What are your primary and secondary goals? Your motivation and goals may impact your budget but more importantly it is what keeps people going. Establishing your primary and then secondary goals where your progress can be measured will help with sustaining your budget over the long haul.
For example, there may be several things you want to get serious about accomplishing financially.
- Emergency fund (6 months expenses)
- Contribute up to the 401k match by employer
- Debt repayment/Avoid any new debt
- Roth IRA
- 401k fully funded
- Fund Taxable investment accounts
As you complete your primary or first goal your next or secondary goal moves up in priority. Instead of focusing solely on primary goals. Your plan could be to apply a higher percentage of your available money to a primary goal. Then apply a smaller percentage to all or some of secondary goals.
In any case, by tracking your progress you are able to stay motivated and continue with your budget. Of course your budget has to be realistic to be successful and stay sustainable.
If your goals were set too high and your income and/or the budget cannot sustain them.
Then make necessary adjustments to your financial goals or look for other sources of income instead of losing your motivation.
Reasons for Budget Failure – You went too far and cut too much.
Setting an unrealistic budget is a recipe for failure.
Setting a budget includes knowing where all your money goes and then creating a new plan for where you want your money to now go to improve your life and reach your financial goals. This should include making cuts of unnecessary spending waste so that more money can be freed-up to apply to your targeted goals.
However it easy in your initial enthusiasm to go way too far and cross your frugal living threshold. Maybe it isn’t an issue early on but over time you may end up feeling like your life is deprived. All because of your overly tight budget.
You just might find yourself cheating on the budget. After a while the budget then becomes more or less ignored. You can track your spending but if you are not honoring your budget you only hurt yourself and the budget is a failure. It is necessary to cut spending waste and live a life that is focused on what really brings you happiness.
Basically if you wish to squeeze the most out of your income it means pushing your frugal threshold without breaking it. Breaking your frugal threshold is what ultimately leaves you feeling deprived. Don’t cheat on or scrap the budget if you hit that moment then rethink your budget and what it is that needs adjusting. Tweak it but still challenge your frugal threshold. Make it work by making an informed change for your budget success.
Believe me, as time goes we get better at this. Some tweaking became necessary for us but later on we were able to return to our more aggressive budget without the side effects of feeling deprived.
Underestimated the Miscellaneous Non-Fixed Costs.
It is much easier to budget fixed lifestyle costs like mortgage, utilities and groceries. It’s the monthly unexpected costs that can be for the most part unpredictable. If you have a bad run of auto and home repairs and you don’t have the emergency fund yet to handle it you will end up busting the budget by diverting money from your focused goals. Or worse yet, having to take on more debt and then giving up on the budget.
Make sure you allocate a little more than you initially believe to your miscellaneous budget. I used a 2 year average to set my Misc. budget and then added 4%. That way it is slightly padded and I have a monthly surplus on the budget log until the unexpected occurs.
Since I have an emergency fund I don’t sweat any bad months as a blown monthly budget. I look at the Misc. budget as a Yearly amount and then divide by 12 for my end of year Misc. budget tracking. Don’t let a run of bad luck and large expenses have you jump ship. Hang tight and adjust your budget as necessary.
If you have to divert money normally destined to goals then make it up in the next months so overall for the year you come in on budget.
No Room for Fun.
You have to allow yourself to still live a happy life. Making a budget that has absolutely nothing there for even a short close-to-home vacation or any other fun will hit your deprived life buttons sooner or later. Being able to go out once in a while or enjoy a trip somewhere is necessary to experience more than just existing.
This is all about having a smart frugal and balanced living budget that allows for some reasonable pleasure now and then. Live your life but do so purposely.
Budgets are set to allocate as much money as possible to your targeted goals. Some may believe that the perfect budget would be overly padded under every category. But that isn’t a budget.
If your income is that high then you don’t need a budget. If your income isn’t super high and you can pad the snot out of everything then your financial goals are too low.
A successful budget that meets your goals and is sustainable while not making you feel like you are living a deprived life is a balancing act and requires constant tracking and monitoring.
Be willing to make hard choices and tweaks so to stay on your budget and meet your financial independence goals.
Budgets also must be flexible enough to handle sudden cost increases (like medical insurance) and make the adjustments to keep things realistic.
Be willing to look at your goals and lifestyle costs to make adjustments when it is necessary.
Understand the Reasons for Budget Failure and head them off if you see them coming.