But wait! That's not the only thing that happens towards the middle of the month, is it?
In the middle of the month, most people begin to experience a downslide in their cash at hand and in turn, their purchasing power. They begin to have many unmet expenses, and the bucket list begins to increase in volume. But they reassure themselves, there is always light at the end of the "month's tunnel".
Another "financial crime" we all have committed at one point or the other is having to spend and not realize that our little spendings will add up and get subtracted as a chunk from our current cash balance. I can't recall the number of times I have imagined to myself, what did I really use my money for that made it get so much thinner. But financial accountability seeks to help us break loose from becoming so reckless with our spendings.
Making and implementing a budget, though difficult, is a key tool for our financial accountability. There first has to be a list of needs and not just wants, in order and then, there has to be the commitment to stick to it. Here, you are going to find out more about how to successfully implement a monthly budget.
But just before we talk about what the problems of budgeting are, let us quickly find out what you are supposed to write in your budget plan in the next section.
Components of a BudgetAlmost every source out would state that a budget would comprise of two major components:
- Leftovers (savings)
Let's see all the components now;
- Net Income
- Projected expenses
- Investment costs
Net IncomeYour income determines your purchasing power. It is the maximum extent you can go as far as your expenditures are concerned.
It is important to keep the records of your net income at the back of your mind and on the top of your budget list. Your net income comprises of your income after taxes and levies and some other dues have been subtracted. This is the amount you are going to run within your budget.
I believe your goal for budgeting is to avoid overspending and manage your finances appropriately. So you don't want to actually overshoot your income on your budget paper already. So you really need to always remember your income statement.
Are you still wondering if it's actually possible to overshoot one's income? First, you need to agree that there are myriad things one would want to settle financially. And if one decides to represent all of them in the list, it would soon overshoot the income statement. The way out of this is to represent as few as possible per income with the most important needs coming first.
Projected ExpendituresIf you are just a regular salary earner, the basic income and expenditure statements would comprise of earning and spending and leftovers. But if you are an investor, you will set aside a proportion of your income for investments too. But let us first see the categories of expenditures we can have;
This includes the basic requirements for livelihood like food, shelter, and other basic necessities of the home. These are fixed needs that need to be met. According to Maslow's hierarchy of needs, these take precedence over all other needs and they form part of every monthly budget.
- Fixed basic expenditures:
These non-basic expenditures include items or services that you can do without and not required for survival. In other words, you can live on if these needs are not met. However, they will significantly improve your quality of life if they are met.
- Non-basic irregular expenditures:
It is important to account for this category of expenditure because failure to do so is one common reason for budget failure. Emergencies are those needs you do not see coming but just find their way into your life somehow. Nobody wants these unnecessary needs but they are rarely avoidable.
SavingsSavings is the proportion of your income that you have decided to set aside for future use or for contingent reasons. In cases when your allocation for contingencies/emergency above is not sufficient to handle whatever came up, this could be the only alternative.
The savings are usually not recorded in the budget because it is assumed that whatever is left of your income after all expenses is your savings. However, it is important to explicitly state this value somewhere on your recording notes.
Investments are better indicators of more gains to you in the long and short-run and savings, on the other hand, are solely meant for immediately contingent spendings.
Investment CostsInvestors have basic needs too. But what makes them different is that they also have a shared portion for their investments. Investments ensure that you are able to develop alternative means of generating income. But before they are fully established, they need some monetary and material inputs from your already established source(s) of income.
Most people who include investments in their budget are those who have already laid out some investment plans and are now ready to implement the ideas. They may have already calculated the costs and known the approximate amounts to set aside for them.
For note, investments are highly recommended for every financial manager, that is, for every individual who receives some form of income.
Another important thing to note is that the monthly long-term budget would usually need to be supplemented by periodic short-term budgets that will be used during the actual spendings. These periodic budgets are subsets of the bigger monthly budget.
Now that we have talked a little about the components of the budget, it is time to look at some problems of budgeting the people encounter. After which we will go on to look at how to successfully implement your monthly budget bearing the challenges in mind.
Common Problems of Budget Implementation and Possible SolutionsCommon problems encountered in budgeting include the following:
- Inadequate cash flow
- Indecisiveness and lack of commitment
- Improper accounting
- Over-abundant debts
- Communication Issues
Inadequate Cash FlowThis results from too little monthly or weekly income. When your money at hand is either not sufficient for most of your needs or now uniformly distributed across the month, problems can arise in your budgeting. A good example is when you are being paid once every month. A common observation is that the month would have some periods of abundance and financial scarcity. In most cases, people experience abundance at the beginning of the month or week after their salaries have been paid but witness financial famine when the month has gone way past the middle.
This problem is what budget tries to address in the first place. But it can also affect budgeting if not well attended to.
No matter how fixed one's income is, budgeting helps to distribute one's income all-month long. But simply adopting the monthly or weekly budget alone will not be sufficient to solve the problem of succeeding financial abundance and famine.
- The solution lies in adopting a system known as the envelope system which sharing the total income for each week of the month if income is on a monthly basis, or sharing it into days if income is on a weekly basis.
IndecisivenessMost people end up ruining their budgets because they are not committed to sticking to their budgets. They end up spending beyond their plans deliberately and uncontrollably.
The fact about budgeting is that any little over-zealous spending affects the budget is very significant ways. It encroaches into your budgeted amounts for other items on your list and before you know it some items are totally cut out.
- The solution to this is making yourself know the importance of your budget to your financial health and fixing your mind to stick to it no matter what. Another important solution to this is discussed in the next problem below.
Improper AccountingOne possible explanation to over-zealous spending, a situation where you find yourself uncontrollable spending beyond your budget, is that you did not properly account for your most pressing needs. You actually skipped out some more important needs and when you realized, you had no choice but to meet them at the expense of those already in your list.
In the hierarchy of economic needs, there is always a scale of preference. It is best to arrange your needs according to this scale of preference and meet them accordingly, stripping some out and push them further if necessary.
- The solution here also applies to the previous point of indecisiveness. Make an inventory of all your important needs. To achieve this, you need to do a little deep and reflective thinking to and like I already mentioned, meet your needs according to their scale of preference or importance, where the most important comes first before others below it.
Over-abundant DebtsWhen debts are accrued from the previous month or week, it totally messes up the budget plans for the new month. In dwindling economies of the world, the cost of living has increased so much without a corresponding increase in the wages and salaries of employees in the private and public sectors. So, with the same salary figure you have been receiving, your purchasing power reduces making you poorer in economic terms.
- The effects on your budget can be very obviously felt but the solution to this is that you make your budget plans to scale. That is, you will consider the prevailing conditions when making your plans so that the actual cost of expenses closely matches your values on the budget. Thus, avoiding budget failures that can be really frustrating and discouraging.
Communication IssuesYou may find that you are great at making and implementing your budget when you were alone, but when you are living with someone else either in a relationship or married, your budget plans begin to fail and you are not able to account for the expenditures. What you must understand is that as a couple, communication is very important because some expenditures are made by your partner. Communication ensures that you keep track of what leaves the home together as a couple and for accountability.
Successful implementation of your monthly or weekly budget happens when many factors are taken into consideration. No matter the level of available resources, a good budget tries to work within the framework of what is available. Some expenses that are "non-essential" to life could be stripped off until an acceptable limit of expenditures is gotten.
For optimal management of funds, the components of a budget including income, expenditures, savings, and investments should always be incorporated into the plan.