How to identify problems with your budget

Once you learn how to identify problems with your budget, fixing up those issues is only one step away – no guesswork needed.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Close-up Of A Piggybank With Eyeglasses And Calculator On Desk

Image source: Getty Images

A realistic budget can be a lifesaver, but one that doesn’t work for you can lead to serious financial stress. Learning how to identify problems with your budget is the first step in making positive financial changes.

According to The Money Charity, the average UK citizen has £4,264 in unsecured debt. Over 12.8 million households in the UK also have either no savings at all or less than £1,500 put away for emergencies. While there are no statistics on how many of those households keep a budget, it’s a fair to guess that a large number don’t.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

If you’re the kind of person who cringes at the idea of setting up a personal budget, there’s good news. An effective budget doesn’t have to be complicated. In fact, a realistic budget can be very basic and still work very well as long as you keep track of your money properly. 

Here are some potential budget problems you should address right away:

Your budget is not realistic

Maybe you’re a bit of an optimist and think you’ll only spend £100 a month on food. Or perhaps you only allocate £50 for entertainment each month when you really spend three times that. While reducing your expenses is a great goal, you need a clear plan to do that. Otherwise, you’ll overspend in each category and bust your budget by the end of the month.

If your current budget isn’t working, consider starting again from scratch. Decide how much to allocate to each category but then keep track of all your expenses for a month. This can give you a realistic view of your money and allow you to adjust your targets, if necessary. If your actual expenses are much higher than you want (or can afford), start by reducing your total – but keep it reasonable. Cut your food category by 10-20% in the first month rather than trying to spend 50% less. Then, revise your budget again to see if you can realistically cut down even further. 

You don’t know what to do with irregular bills

Once you’ve acknowledged the problems with your budget and redone it based on your actual income and expenses, there’s one thing left to account for: those pesky irregular bills.

Chances are you have at least some bills that are only paid once or twice a year. This includes things like your car tax, car servicing and holidays. If you do pay for these expenses annually but don’t make them part of your budget, they can wreck your financial blueprint.

The answer? All irregular expenses should be part of your monthly budget. The easiest way to do this is to add up all of your yearly expenses and divide the total by 12 to get a monthly figure Every month, factor that amount into your budget and move it into a savings account until it’s time to actually pay that bill.

You don’t regularly evaluate your budget

Simply put, spending changes over time. Problems with your budget start as soon as you assume your expenses will stay the same forever. Some change because prices go up, others because your circumstances change. If you move house, have a baby or adopt a dog, your budget will have to adapt to those changes.

A budget is only good if it’s re-evaluated on a regular basis. Monthly might be necessary at first, while you’re still trying to figure out your expenses. After that, you might assess it every three months or every time you change your circumstances, goals or lifestyle.

You’re not ready for emergencies

When people think of emergencies, they usually thing big, such as a job loss or a flooded bathroom. But small emergencies such as car trouble or an unplanned trip to visit a sick relative can result in unexpected expenses that will throw your budget off track. It can even be as simple as relatives visiting and increasing your food budget or your pet suddenly developing tummy trouble that requires a vet visit.

These month-to-month “surprises” can completely destroy your budget if you don’t have some breathing room.

You can solve this problem with your budget in two ways. The best option is to have an emergency fund saved up for these challenges. You can start by putting aside £500-£1000 as the start of an emergency fund, and then add to it over time.

If you don’t have such a lump sum available, the other option is to add a buffer into your budget. For example, if you have a household category where you estimate expenses of £100 every month, you could budget £120 for it and put the extra £20 aside. After a few months, you’ll have some money saved up that can help if something comes up.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »