You knew you were not saving enough. So, you decided to track your expenses by drawing up a budget. You created a budget and made categories for the expenses. When things were all set, you started using it. You diligently filed expenses as soon as you incurred them. But come 25th of the following month, you find that you are in the same position. What could have gone wrong? There are many reasons why your savings plan didn’t work. Here are a few.
It’s miscellaneous, honey!
Is your ‘miscellaneous’ category burgeoning? Do you categorise many expenses as ‘miscellaneous’ because you don’t know where to put them? Then, it’s time to create better categories in your budget. Do you, for instance, categorise certain expenses such as smoking and shopping as ‘miscellaneous’ because you don’t know where to put them?
It is important to make proper categories for these spends. For instance, smoking should come under ‘indulgences’ and shopping can be made into a separate category to check your impulse purchases. This will help you figure out where your money is actually going and help cut down on unwanted expenses. Be sure to include eating out and snacking under a separate category. This could be labelled ‘Entertainment’. Found you are entertaining yourself too much in a month? Take steps to fix that.
Additional Reading: Learning to live within your means
Card, card, everywhere?
Are you spending too much on your Credit Card? Do you pay the minimum balance every month? You could miss this even if you put your expenses under the right category. How? For instance, you go shopping and swipe your card to buy clothes. You do the same thing with your restaurant bill and taxi bills for the month. Now your budget looks all nice.
At the end of the month, you pay your minimum due on your Credit Card. Where do you put that under? Nowhere! Naturally, over a course of time, your Credit Card bills pile up with all that interest. Ideally, you should be paying your total due on your Credit Card every month. If not, put those bills under your ‘Loans’ category. This will give you the feeling that you have too much of debt and will help curb your Credit Card swiping.
Investment, what’s that?
You made so many categories in your budget but you forgot that one important category called ‘investment’. Typically, people make the mistake of creating a category called ‘savings’ and there, they put in the amount in their savings account. This way, they will never be able to save much. Savings grow only when you invest them. Consider this: a savings account can earn only 4% while a Fixed Deposit can give you more than 8%. Start making investments every month and, over time, you can see how much your savings have actually grown. Auto-debiting your savings account for this purpose is a good way to start.
Additional Reading: Understanding Systematic Investment Plan (SIP)
Taxes ate them!
A number of people, especially those belonging to the middle class, do not account for taxes while spending money. They typically spend through the year and then grapple to make those investments at the last minute. Many miss making their investments leading to huge tax outflows. There are some who take a Personal Loan to make those investments which is a big no-no. The best way is to make those investments upfront or at least allocate an amount every month so that you are not left in the lurch at the end of the year. Plan your taxes early and include it in your budget so that you know that ‘that’ money is sacrosanct.
How to fix those leaks?
The first thing to do is to divide all expense categories into two heads – savings and spending. This will help you find out how much you are over-spending. Then move to individual categories. Write down the categories where you can cut down on expenses. Prioritise them. For instance, you can do without that impulse shopping more than you can do without snacking, right? Decide how much you want to spend and save and make tweaks to your budget.
And finally, stick to it! Warren Buffet didn’t become a millionaire in a day. It takes time to build savings. Put this sticky on your heart – “Patience pays”!