7 signs your budget isn't realistic


While clamping down on spending is the best way to a debt-free future, tightening the purse strings too much could be detrimental. Is your budgeting feasible - or too extreme?

"People have good intentions, but if they're too eager to pay off debt, they may be building budgets that aren't sustainable in the long run," Pat White, executive director of Credit Counselling Canada, says.

"It's like a crash diet - they don't work," says Scott Hannah, president of the national Credit Counselling Society. "Looking back at clients who've failed, a majority fail on their budget, and there are a number of commonalities."

In a December 2016 CIBC poll, 52 per cent of those surveyed planned to reduce their spending on non-essential items, but only 26 per cent said they're setting household budgets. This indicates that many Canadians think they can "wing it" when it comes to their budgets - but this method isn't feasible.

Here are seven signs that your budget isn't realistic:

1. Your numbers are arbitrary.
Thirty-two per cent of Canadians polled in the CIBC survey said managing day-to-day spending beyond their monthly income was what got them into debt. This is why budgets are key - they help you figure out how to spend within the parameters of your income.

But don't pull your numbers out of thin air. While your budget may balance on paper, the figures need to be based on concrete spending patterns. For instance, you can't decide that you're going to spend $1,500 a month and save $500 if your monthly income is less than (or right at) $3,000.

What you should do instead is track your expenses and income for about six months to determine how much you spend in various categories, such as food, housing, essential bills, entertainment and miscellaneous items, such as gifts.

"If you don't do this, you're setting your budget up for failure," White says. "You need to have a firm understanding of what your spending is to have a successful budget."

2. You haven't involved your family.
You want to pay down debt fast, so you make cuts to groceries, entertainment and wardrobe expenses. Maybe you plan to sell a secondary vehicle or nix an annual trip. That's all well and good - if you're single. If you have a family, however, you can't make executive budget decisions without them.

"You could have people revolt," Hannah says.

Call a family meeting and make sure all family members are aware of the changes. This also gives your kids an opportunity to bring up legitimate expenses you may not have factored in, such as field trips, driving lessons or university applications.

3. You aren't including seasonal and irregular expenses.
You need to account for birthdays, weddings, vacations, annual car maintenance and other miscellaneous (but recurring) events.

If you don't factor in these infrequent costs, your budget won't have room for them and you'll turn to your credit card.

"Nobody thinks of things that happen maybe once a year, like Christmas gifts or getting your license plate sticker renewed," White says.

Be prepared by setting aside funds at the onset. Go through your calendar and determine how many birthdays you'll need to buy gifts for in the next year, and how much you roughly spend on those gifts. Factor in your winter holiday budget, car maintenance costs and any other semi-regular expenses.

This area of your budget is not the same as an emergency savings. You should make building an emergency savings a priority, but don't tap that financial cushion for events that you could technically have planned for; instead, use it only in true emergencies.

4. You're overshooting your income.
An important part of the equation in your budget is how much money you're pulling in. If you're setting that number too high, this could be a recipe for disaster.

"People set themselves up with something that isn't realistic, like putting their income on the generous side or counting on windfalls," White says.

Bonuses and cash gifts need to be stashed away into emergency funds or used to make extra debt repayments. Don't factor them into your monthly budget.

5. There's no room for fun.
In the CIBC poll, more than half of Canadians said they planned to reduce their spending on non-essential items.

But don't take things too far, Hannah says. Your budget has to have a cushion for treats, as long as they're within reason. A budget that is too stringent is difficult to keep up with, he says.

"People make budgets in January and by March, we get a lot of calls saying it's not working or they couldn't stick to it," he says.

There are ways to reduce costs while still leaving room for treats and fun.

For instance, if you're used to buying lunch at work daily, scale it down to three times a week at first, and then only on Fridays. If your family is used to going out for dinner and a movie, try cooking at home and renting a movie instead.

Make changes and tradeoffs one at a time instead of taking on too much at once. You don't want to be taking the bus, eating leftovers at lunch and skipping your afternoon Starbucks treat all at once or you'll be scared off your new budget.

6. Your budget is too rigid.
No budget is set in stone. In fact, Hannah says it'll take about six months until you fully understand what works best when it comes to your budgeting.

"It takes time until you're comfortable and confident with managing a budget, and along the way you'll make mistakes, but it becomes much easier," he says.

"You're always evaluating and reassessing," White says. "Your first plan won't always be the best and final plan. It's a stepping-stone and it needs refinement over time."

7. You don't have goals and checkpoints.
There has to be a reason - if not many reasons - why you're taking on a budget. For example, in the CIBC poll, 28 per cent of Canadians said they needed to pay down debt, 16 per cent were keeping up with bills, 8 per cent were saving for a vacation and 6 per cent said they were saving for a house.

But 10 per cent didn't have any financial goals at all.

You need to determine what your financial priorities are and how long it will take you to get there. There are short-term goals for the year, and long-term goals looking further ahead and your monthly financial planning to stay on top of.

Write your goals down so you have a reason to stay accountable and set checkpoints so you can measure your progress, add in line items you may have forgotten, remove items you don't need anymore and keep your budget as realistic as possible.

See related: 4 ways to make digital convenience work for your budget, How to budget on an unpredictable income, What's first to go when downsizing budget?
Published May 11, 2017

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