2. Wrong Starting point
Most budgets that don’t work, start with a focus on income. I.e., how much comes in.
By turning that around and focusing on what needs to go out and not how to spend what comes in you are turning the whole game on it’s head.
Most people start with income because it is easily measured. They may have only a few sources of income so it is easy to start there. However the outcome is invariably ‘income spent’!
We all have hundreds of expenses so it is a lot harder to measure them. This is why we don’t start there. However, by focusing on expenses first you automatically overcome the No1 problem of not having targets. You set targets and the resulting budget shows you what your income needs to be to meet them. If the income is not enough you can take a negative step and start slashing from the budget, or you can take a positive step and start planning how to earn the extra income (of course there could be a bit of both in reality).
The crucial thing though is that if you start with income you will plan to spend it all (or more).
The other major point to see here is that when you start with income and try to list how that income will cover all your expenses, you need to average your expenses down to the same frequency as your income.
You end up listing things like; Telephone – $25 a week and Electricity – $30 a week and so on. However you don’t pay for them every week so when the time does comes to pay each of these expenses, rarely is the money available to completely pay them. In theory it could have been but in reality it was not.
The reason is because the correct Starting Point for the plan was not known. There was no consideration given to ‘where should I be as I start off on this journey?”
It would be common for there to be no more than 3 or 4 days in a yearly bills cycle where you could start with a $0 bank balance and never have a time in your yearly cycle when bills arrived and you were unable to pay them on time.
Your ideal starting point is a critical piece of information that is usually not known. In fact that is what my Simply Budgets software was designed for; to work out the plan for the yearly cycle so you know the starting point and every other point along the way to successfully pay your bills on time every time.
If you know what your bank balance NEEDS to be every day of the year for you to be on track you can actually get on track, even if you are not there at the beginning. Knowing where you should be allows you to get there. Not knowing is just flying blind and way too scary for me!
So that’s reason number 2. Also pretty basic, but rarely understood. Also extremely important!
If you have this one mastered then give yourself a tick.