But, what happens if you do not have any leftover money at the end of the month? What happens when you make it to the 22nd, you’ve spent all that you’ve brought home, and your child still needs to attend day care next week? A shortfall in your budget may be a result of juggling and underestimating expenses to make them equal your income. Perhaps you set a spending target and missed it. Regardless of why you “busted your budget,” it does not mean the budget cannot work. It means you need to set a more realistic target. This is an opportunity to make adjustments and keep moving toward your goal. When you are driving and make a wrong turn, you don’t give up and go home. Similarly for a budget, you readjust your route to reach your destination.
One modification you may have to make is to cut your spending by determining which expenses you can do without. Adjustments may be as simple as reducing how much you’ve allocated to clothing. Perhaps you don’t need a new pair of shoes each month. Adjustments may also be as difficult as having to downsize the family car or home. As difficult as it might be to give up some of your luxuries, now is when you need to remind yourself of your long-term goals. The reason you defined them in the beginning was to help you keep sight of what you ultimately want to do with your money.
There are numerous methods available to teach you how to cut expenses, but sometimes it is good to know if you are in line with average household budget percentages. Ideally, your household should be saving 10 to 15 percent of your income. Depending on your long-term goals, this may be more. Household expenses, including rents or mortgage, utilities and furnishings, are usually around 30 percent of your budget. The typical household also spends around 20 percent of their budgets on food, including dining out. Transportation and the associated costs of maintenance and insurance, generally, make up about 15 percent of a budget. That should leave about 20 percent for the expenses unique to your family, which may include child care, medical care, recreation or debt reduction. If your expenses are not in line with the average household budget, you may be able to find areas where you can cut your expenses.
As you adjust your budget each month, you should come closer to gaining control over your finances. Knowing the exact state of your personal monetary affairs and being in control of them, allows you to take advantage of opportunities that you might otherwise miss.
William G. Lako Jr., CFP, is an executive in residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Lako is a certified financial planner.The MDJ will periodically publish columns from KSU business faculty.