People are always willing to volunteer their wisdom about budgets to me. I'm a budget-discussion magnet and, nine times out of 10, people want to tell me why budgets don't work. I agree. Most people's budgets don't work for a few basic reasons.
Here's my Top 5 list of why:
Wrong income projections
I can't believe the number of people who don't know how much money they make. I know there are a variety of pay periods -- monthly, semi-monthly, bi-weekly and weekly -- but all you have to do is look at how much is coming into your accounts to know how much you actually make. If it varies from one month to the next, then use the lowest income you have as your basic income.
Too few categories
People generalize their budgets too much to get an accurate picture of where their money is going. I swear if I see one more budget with "spending money" as a category, I'll spit. It's all spending money. What are you spending it on? You have to have enough categories in your budget to give you a real sense of where the money goes and where you may be able to cut costs.
Not all expenses come in every month. Insurance bills can come annually. Property taxes can come quarterly. Service contracts, dental bills and health-club renewals are all periodic expenses. If you don't include them in your budget, you won't have the money at the ready when the bill comes in.
People spend cash without keeping track of where it's going and that throws their budgets out of whack. Some people use ATMs like a wallet, pulling $20 here and $40 there. Then the money flows away without any record of where it's gone. This can be a problem if, for example, you know you have a bill coming due in a couple of days, but your partner doesn't and (s)he goes into the account for cash, then you won't have the money available to pay the bill.
No plan to save
Despite how well known the "pay yourself first" rule is, people still don't follow it. They wait to see how much they have left to save. And it's usually zero. Zip. Zilch. If you're serious about saving, it has to be a line item on your budget. You have to identify a specific amount you're going to save (both for long-term savings and for emergencies), and you need an auto-deduction to a savings account to make it happen.
Gail Vaz-Oxlade's latest book, Money Rules, is published by HarperCollins and will make you say, "Really? I didn't know that!" Visit her website at gailvazoxlade.com.