5 Common Budgeting Problems & How To Solve Them

If you have ever tried to implement a monthly budget, you can attest to how difficult it can be to be successful at it. Sometimes, you spend beyond your budget. Other times, you miss out on important things you should have included in your budget. And also, sometimes, you are unsure how to allocate your money to different expenditure domains.

Inadequate budget planning causes most individuals to run into a cash deficit by the middle of the month. This can make them accrue debts in a bid to meet their basic needs in the absence of any cash, only to settle these debts when the next salary comes in hand.

Budgeting failures like the previous example are due to one of five common budgeting problems which include inadequate cash flow, indecisiveness, and improper accounting. We will explore these in this post, as well as provide solutions to those budgeting problems.

Why is a budget important?

Spending money from our cash balance without allocating how much we want to spend is another financial crime we all have committed at some point. Indiscriminate spending such as that makes us spend wastefully without restriction.

Sometimes, you might wonder how your money went. The major reason for that is the lack of adequate budgeting. Making and implementing a budget might look daunting but it holds key to one’s financial accountability.

Budgeting helps you organize your spending and plan adequately for your needs and wants. It also accounts for your investments and savings, as you will see shortly.

The components of a budget

To make a successful budget, one must know the major components a budget should comprise. These include the following:

1. Net Income
2. Projected expenses
3. Savings
4. Investment costs

1. Net Income

This is the maximum amount of money you have at the beginning of a new financial period after bank charges and other related charges have been removed. Your net income is your total purchasing power for the period.

You want to account for your net income in your budget because this is the take-off money against which you will plan the rest of your expenditures and other financial investments. The goal is to plan within means so that you don’t overshoot your income.

2. Projected Expenditures

Expenditures are your spending. There are three major types of expenditure as follows:

a. Fixed basic expenditures: Fixed basic expenditures involve the basic requirements for livelihood like food, shelter, and other necessities in the home. According to Maslow’s hierarchy of needs, these needs occupy a high-priority position and need to be met.

b. Non-basic irregular expenditures: These include items or services that you can do without and are not required for survival. In other words, they are not essential to life. But they can significantly improve your quality of life when met. Examples include quarterly or once-yearly expenditures like car insurance, health insurance, mortgage, etc.

In reality, these expenditures are not the usual culprits for overspending or budgeting failure because people usually have enough time to plan and account for them.

c. Contingencies/emergencies: It is important to account for this category of expenditure in your budget 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. While nobody wants emergencies, they are rarely avoidable.

It is worth noting that some seemingly emergencies are not true emergencies. For example, being pressured to buy a luxury product quickly because there is a huge price discount is an untrue emergency.

3. Savings

Savings refer to the proportion of your income that you have decided to set aside for future use or for emergencies that your miscellaneous budget for emergencies could not carry. It could be a specific purpose, for example, saving for a car, or for unforeseen expenses as defined.

The exact proportion to allocate for saving varies with individuals but a very useful and highly recommended guide is the 50-30-20 rule which describes that 50% of your income should go to your essential expenditures, 30% to your non-essential wants, and the last 20% to savings and investments.

4. Investment

Still using the 50-30-20 model, you can allocate a proportion of your monthly income to investments. If you don’t have an active investment portfolio yet, you can consider saving up until you do.

Investments are more advantageous than savings because they are more resistant to inflation and depreciation. Hence, it is important you quickly think of an investment opportunity to put your money into, while taking precautions not to fall into money scams.

Common Budgeting Problems and Solutions

1. Inadequate cash flow

Inadequate cash flow is one of the common problems of budgeting. This refers to insufficient money in hand at any given point to service your basic needs and wants.

For example, when you get paid once a month or once a week. This is the commonest way workers receive salary or wages, as against business owners who get to receive incomes daily or more regularly.

This problem of inadequate cash flow is one of the budgeting problems that causes a transient period of abundance at the beginning of the financial period, followed towards the middle and end of the period.

To fix this problem, the solution lies in adopting what is called the envelope system which involves sharing your total income into equal portions for each week if you receive salary on a monthly basis, or for each day if you earn on a weekly basis.

2. Indecisiveness

Indecisiveness is when one fails to keep to the terms and allocations of one’s budget. It is the failure to stick to one’s budget and spending beyond one own’s budget allocations.

Small “over-zealous” expenses affect the budget very significantly. Hence, one needs to be decisive and deliberate about sticking with one’s budget plans.

The solution to this problem of indecisiveness is straightforward. Orient yourself on the importance of your budget to your financial health and security. This is not something you should play with no matter what.

You should also consider making an inventory of your important needs to see that you attend to them adequately and in order of priority. This is to ensure that you are motivated to avoid wasting money on frivolous aspects of your budget.

3. Improper accounting

Improper accounting is another reason why most people break their budgets. You could have skipped out some of your most pressing needs, and when you realized later, you had to meet those essential needs by breaking your budget plan.

Improper accounting also results when one fails to record their expenses and deduct them from the allocated portion. Forgetting to deduct what you have spent from the rest of the budget can make you spend more than you planned to spend.

Similarly to the problem of indecisiveness, making an inventory of your important needs will help you allocate money to them first. There are also budgeting apps that can help you track your budget and expenses.

4. Over-abundant debts

Debts from previous months or weeks can totally mess up budget plans if not well managed. In a bid to try to service those debts, you may end up encroaching into your working capital for the new financial period.

Debts can also be a result of failed budgets in the past, or some urgent emergencies one was not financially prepared for.

To solve this problem, the 50-30-20 rule of budgeting still applies. You want to create a portion that can safely service your debts without intruding into your active working finances.

The 20 in the 50-30-20 also includes repayment of high-interest debts, alongside savings and investments. Pay your old debts with parts of 20% set aside using the 50-30-20 rule of budgeting.

5. Communication issues

When you are living with someone else, for example after marriage, implementing your budget is no longer the same way it used to be. You now have more expense domains, and you may have an additional income as well.

You both need to come to a point of understanding on things that are essential and those that are not. You don’t want to spend money on frivolities because one of you thinks something is worth spending on when it is actually not.

Couples or living partners should and must come to a mutual understanding of expenses that are not essential so that they can be stopped from eating into the budget for essential needs. This requires good communication and understanding among the partners.

Final words

Making and implementing a budget is not an easy thing. It requires a proper understanding of what a budget entails, the common problems of budgeting, and possible solutions to them.

This article dealt with these aspects of budgeting to make you more successful at making and keeping a periodic budget.

FAQs on Common Problems of Budgeting