1. You do not estimate your income and expenses accurately
It seems simple: you need to make a table and record all income and expenses there. You can do it manually – in a notebook or in a file. Or you can look at your financial history in a banking app.
But there is one downside. It’s good if you are a pedant and for you keeping financial records is a favourite pastime. You’ll check every figure several times, and there will be no mistakes. But if you’re not an accountant by vocation, your spreadsheets can be inaccurate. Even in large enterprises, where accounting is engaged in a whole department of qualified specialists, the balance at the end of the month does not always converge. This is all the more possible with a non-professional.
With the category “income” usually everything is clear. Accruals are easy to control, if you have one salary card and the money comes only there. But if you have several sources of income, and part of the money you receive on one card, part – on another and some more cash, you can easily forget to put some of the amounts received in the budget table.
Expenses are even more complicated. We don’t get a salary every day, but we spend money almost daily. Again, it’s rare to have only one card. The banking application neatly records all transactions, but expenses on credit cards of other banks and cash payments will remain out of its sight. So, you may well forget about some purchases.
It turns out that precise control is possible in two cases:
You completely switch to paying with one card from a single bank. If you have other cards, you immediately transfer all the money they receive to the main card and pay only with it. Your financial history is saved by the banking application.
You make a file in Excel and enter all your expenses and incomes there every day. If you withdraw cash and then pay with it, you save the cheques. In addition, write down every situation when you didn’t receive a cheque. For example, paying for a trolley bus fare. Divide the table into several categories – for example, utility bills, supermarket purchases, clothes and shoes, eating out, transport, entertainment. This will make it easier to analyse your spending patterns.
By keeping accurate records, you’ll know how much of your income goes into each category. And there will be no situation when a week before the salary money ran out and you do not understand where it went.
2. You’ve mis-prioritised your spending
In articles about saving and financial control we are told: identify necessary expenses and prioritise them first. For example, for housing and utilities, internet and mobile phones. Then add a second circle of expenses – priority categories. These are food, transport, minimum for clothes, shoes and hygiene products. The third circle – optional expenses. For example, eating out, entertainment, shopping for hobbies. And if you need to save money – cut back on spending in the third category.
That sounds great in theory. But real life shows that only the first section – mandatory spending – is about the same for everyone. But even that’s not a fact. For example, for one person high-speed mobile Internet is a necessity. For another, minimal traffic and a cheap tariff are enough.
The second and third layers of expenses are similar for many people, but there are much more individual differences. One person can do with a minimum of food, and for him cooking and trying new recipes is relaxation and pleasure. That’s why his “eating out” section remains almost empty month after month.
For another, the need is to go to a café two or three times a week because he works late or, for example, takes vocal lessons in the evenings. “That’s excess!” – the austerity fans will say. But for this man, singing is an endeavour that energises him. He looks forward to each lesson and does not imagine that he will have to give up lessons. But he does not like cooking very much. For him, sometimes eating in a cafe means saving time and energy.
Yes, you can tell him: look for dishes that you can cook easily and quickly, because that’s what everyone who wants to cut costs does. But the money he will save in doing so will not compensate him for the time spent. So, he needs to save in a different way: continue going to cafes, but cut back on other expenses. For example, give up alcohol, biscuits and sweets.
Choose what is really important to you and make your list of priorities. One that meets your needs. Then it will be easier for you to make a financial plan that won’t be objectionable.
3. Your method of control is appropriate for a high income, while a more modest one needs adaptation
Any accounting method is good if your income is sufficient to live from paycheck to paycheck without problems. But many people have a different situation.
For example, one of the most popular ways to control expenses is the “four envelopes principle”. It works like this:
Allocate money for mandatory expenses – utilities, transport, internet, credit card payments.
Put aside 10% of your income.
Divide the rest into four parts. Put each of them in a conditional envelope – that’s your expenses for the week. Here is money for food, clothes, medicine, and entertainment.
The main thing – try not to go beyond the limit. If you have to spend more, take money from the next envelope, but remember that you will have to save on something.
In reality, not everyone will be able to save 10 per cent of any income into the account. He spends money quickly and finds himself in the same situation: the weekly limit is over, you have to open the next envelope. And then another. In the end, there is almost no money left for the fourth week.
