When Your Budget Just Doesn’t Want to Balance
May 25, 2021
by Glenn J. Downing, MBA, CFP®
If you can pay all your bills with your monthly cash inflow, same some, and stay out of debt, you’re in good shape.
But if the bills exceed the income by even a nickel, you’re in trouble. And something has to change. There are but two choices to make the budget balance: increase income, and/or cut spending.
The picture we have at CameronDowning of a well-run household budget is one in which you have no debt (aside from your home mortgage or perhaps student loans), and anticipate the upcoming expenses and save into them.
Here’s an example. You know all year that Christmas and the December holidays are coming. Say the entire holiday costs you $1800. That’s the gifts for family and coworkers, the tree, the extra meal costs, the adult beverages – everything. That means you should have a budget line item of $150 saved each month toward Christmas. The benefit: No stress! If you see the perfect thing for someone on your list in July, you can go ahead and buy it. No going into debt.
Same with auto insurance. Typically, the policy renews at 6-month intervals. If the renewal is $1200, then you’re setting aside $200/month.
But how many people actually do this? Many charge the expense, and then pay it off. That’s bass-ackwards! Not only have you encumbered yourself with debt and limited your future opportunities, but you’re paying interest.
So how do you accomplish this monumental switch, i.e. paying off current debt and then saving into future expenses? Read on.
Necessary vs Discretionary Spending
In your mind separate out spending that is necessary and that is discretionary.
In other words, what do you need to spend for food, clothing, and other necessities – car payment, various insurances, etc. And then think about what is discretionary. What do you spend by choice and not out of necessity? Think back over just this last week. What did you spend? Was it on necessities? Or choice?
I’m focused here on cutting the fat out of your spending, and assuming you’re already earning at your capacity. If you’re not saving enough, or you’re in debt, it is the choice spending that has to get reigned in.
Here are some do-now suggestions
Here are some do-now suggestions to make it all work:
- If you still smoke, quit. I know that people have enjoyed strong tobacco for millennia. But smoking is not a necessity.
- Cut back on buying alcohol. I’m not a teetotaler. I enjoy a beer like any other guy. But beer and liquor are not necessities. Don’t waste money on something you’re literally going to piss away!
- Stop going out to eat so much. Doesn't your house have a kitchen? Go to Publix and eat your meals at home. With your family. Let eating out be a treat or a special occasion.
- Stop going to Starbucks. Want to know how to save $100/month or more? Buy a thermos. Brew a pot in the morning. It’ll last you all day.
- Stop buying lunch out. Bring it from home. You’ll save hundreds each month. Look: at $12/meal, 20 workdays, that’s $240/month right there.
So far I’ve saved you about $350/month. That’s $4200/year!
- No more lottery tickets. This is on my top 10 list of money-wasters. I wrote a separate blog piece on this.
- Ladies: can you paint your own nails? See what you can do to cut back on the salon services. Let me tell you – he’ll love you just as much with an Imperfect manicure.
- If the numbers still don’t balance, you can cut your own grass and clean your own house.
And gentle readers, as you work through this list, and find that you have some bitter medicine to swallow, best to take it in one big gulp.
Challenge remaining expenses and get out of debt
- Look at a refi. Rates are at historic lows. Get rid of any variable rate mortgages now.
- Shop your auto and homeowner’s insurance policies. Use a broker who can shop the market for you, rather than an agent who represents only one company. Nothing ventured nothing gained. At a minimum you’ll know that you’re not overpaying. Or you could save yourself hundreds if not thousands per year.
- Look at your cable bill. Drop all the movie channels you don’t need. Tell Comcast you’re going to cancel the service, and they’ll miraculously come up with a year-long promotional rate.
- Challenge your mobile phone bill. Make sure you aren’t paying for unnecessary features.
- Challenge your subscriptions. These used to be the newspapers and magazines, but are now Amazon Prime, Spotify, Hulu, etc. Drop what you don’t need. Emphasis on need.
Aggressively Pay Off Debt
By now you should have freed up lots of dollars to aggressively pay off debt. Start with the smallest bill and pay it off. Give yourself that first victory. Then roll that payment onto the next smallest bill, and so on. In this way you go from one victory to another. Do you have anything to sell on Ebay or a garage sale you can put toward debt repayment?
And then . . . as the debt gets paid . . . save like a madman!
Build a Foundation
- Establish an emergency fund of 3-6 months of bare bones budget. You will certainly need it someday – you just don’t know when. So save into it. Keeps you from going into debt.
- Buy enough life insurance. Term insurance is relatively cheap. Does your responsibility to your family cease because you’re dead? No. If you’re ex-military, USAA will be your best choice.
- See an estate attorney to get your basic documents in place: wills, trusts, living wills, powers of attorney. You can’t do these if you become legally incompetent.
Work Your Current Budget
- Once you’ve done these, your budget will most likely balance, and you will have extra cash flow to allocate toward future goals.
It if doesn’t, then you may need to dramatically alter your lifestyle. Maybe sell the boat, or the house you can’t afford.
- Continue to save into your emergency fund.
- Live within spending guardrails. Where to place the spending guardrails? That’s up to you to determine your lifestyle.
Let me give you some advice on how to tackle all this. Both spouses must worth together on this. You must both have a buy-in to the decisions being made. One spouse must take point to maintain the budget spreadsheet.
You can do this!
Questions? Feel free to get in touch at [email protected]. Also follow me on LinkedIn, Facebook, and YouTube for more personal financial information relevant to you!