Banks that gave loans to people who couldn't afford them. People who leveraged way too much on their credit cards. Real estate bubbles.
There are a lot of reasons given for our current economic mess, and each of them definitely contributed to the mess we're in today. But I'd like to throw out another reason for your consideration: As a country, we're failing at household budgeting.
I used to think that everyone else had it all figured out and it was just me who couldn't manage to bring in more than was going out. But now I think my problem is more universal than I suspected.
So assuming I'm not the only one who could use a remedial course in Household Budgeting 101, I logged on to BidaWiz, a site where you can submit a tax, student loan, accounting or any other financial question, then you hear from numerous professionals offering to answer your question for a fee. You select the professional with the credentials you like and the fee you're willing to pay, and you get a customized answer.
I submitted two questions ("Do you have any guidelines you'd suggest for successful household budgeting?" and "What are some places people tend to not budget for?") and received an answer from Scott L. Clark, a CPA from Indiana. Clark and I conducted a brief interview via e-mail (and I wasn't charged) to discuss the essentials of household budgeting.
According to Clark, one of the key mistakes people make in budgeting for their household expenses is to not continually fine-tune their budget. In fact, he endorses doing it monthly. His method? He advises everyone to add up their actual expenses every month, putting each one into specific budget categories -- you know, groceries, entertainment, utilities and so on -- and then comparing them to the budget you currently have.
"Overages -- where you spent more than you budgeted -- should be noted," says Clark. "Actual expenses that were not in your budget should be evaluated, and if needed, a new budget item should be set up for those expenses. Of course, you'll need to reduce another expense in order to add a new one."
I have to admit, I don't analyze my budget from month to month. I think about money every waking minute, it seems, but actually adding up everything we've spent, comparing it to the previous months and then using that data to tinker with and change next month's budget? No, it's more of a hit or miss thing for me, and I suspect that's the case for a lot of people. In fact, I think that lack of oversight is at least partially to blame for the credit card debt so many people have racked up. When we aren't budgeting properly, we tend to find the extra dollars each month by turning to a credit card.
That's why it's even more important to look out for what I'll call "financial quicksand" -- those seemingly common expenses that are just uncommon enough not to make it on to most household budgets.
For those of you who don't have school-aged children, move right along to the next paragraph. For the rest of you, I'm assuming you're nodding your heads. I'm pretty good about budgeting for my daughters' lunch expenses, but we generally have to cough up something extra for field trips, school photos aren't free, and there are numerous school fundraisers, some of which we wearily ignore and many of which we don't. This category is a tough one to estimate because it's not like there's a set amount of money anyone spends each month on this sort of thing. Yet you can't ignore it when compiling your budget.
"Wedding gifts, birthday gifts, graduation gifts, Christmas gifts -- it can all add up to an amount easily in the hundreds of dollars," says Clark. Agreed. I think most people do some sort of planning for holiday gifts, but it's so easy to forget about the random birthday, graduation and wedding gifts that come up throughout the year.
"It's usually the emergency or unplanned items [you have to buy] that tend to destroy a budget," Clark says, "such as vehicle repairs or unexpected travel. That's why it's important to budget for your savings, so these unexpected expenses can be paid from there. A good rule of thumb is to put aside 5% of take home pay per month."
I suppose you could lump in fees with emergency items, since some fees can be something of an emergency (an unexpected $150 speeding ticket or $200 in bank overdraft fees one month). In general, however, we all pay fees, some of us more than others. Credit cards have random fees, and there are annual DMV fees, library book fines and DVD late charges (if you still use a video rental store or use a service that tacks those on your bill). If you're continually late paying your utility or cable bill, or any bill, really, chances are, you're racking up fees. And they can add up.
I'm not suggesting that you jot in your budget, "Expect to be late with cable bill and pay an extra $10 every month" because that's like waving the white flag of surrender and declaring that you can't fix your budget. But if you're constantly paying fees, you have to take that in account because if you don't think about them and plan for them, they have the potential to do some serious damage to your budget.
Unnecessary snacks and junk food
I just had to throw that in there because this has been a hot button issue for me this year. I've been cutting back on my junk food and snacks and writing about it every week for WalletPop, and I have to admit, I'm finding that I used to spend quite a bit on items I never really budgeted for. Now, I'm not saying people shouldn't enjoy that spontaneous ice cream cone every once in awhile or that they should plan every outing to Taco Bell months in advance, but if you're prone to doing that sort of thing, you might want to make sure you're accounting for these habits in your food budget.
My parents bought my girls a Wii for Christmas. Did I immediately calculate a Wii game allowance for the year? I thought about it, but I never actually added it to our budget. I probably should add it the next time I rework my budget, given the fact that we've already purchased two games this year, and I know we'll end up buying more.
If you have an iPod, you can expect to pay for songs; iPod also has an entire Web page devoted to its accessories. If you're not careful, you could easily outlay quite a bit of unexpected cash on speakers, cables, docks, cases and other "necessary" items.
If you buy a computer printer, you're going to need paper and printer's ink, and don't even get me started on a computer (printer, mouse, keyboard, network adapter...). A digital camera? Don't forget the batteries and memory card. Bought yourself a smart phone recently? Do you know how many cool ring tones and apps are out there? Even at just $1 or $2 a pop, those things add up.
It all adds up, these seemingly random but regular expenses. If you think about these uncommon "common" purchases before paying for them, I guarantee you'll be paying for it in the long run.
Geoff Williams is a frequent contributor to WalletPop. He's also the co-author of the new book "Living Well with Bad Credit."
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