Have you ever been hit with some unexpected expense(s)?  You know, your best laid plan for this month's income and expenses and one more, one you had not planned, has cropped up. Maybe it was not an expense, but some income (how nice!) shows up out of no where or from something you did. How do you react?  

Sometimes those decisions are critical and need to be made very quickly. You need to understand your "what if" scenario. What will you do? Are you prepared. Are you ready?

Recently, I was at a softball game that my wife was playing in. In that game the ball was hit to the pitcher with runners on second and third. The pitcher was surprised because the ball was hit so quickly that he just threw his glove towards the incoming projectile and he now had it. Like a hot potato, he was now considering what to do with the ball. All you could see on his face was a look of indecision looking back and forth around the infield. Before he knew it all runners were safe and a run was scored. Why? He did not know what he was to do with the ball - there was no "what if plan" on his mind.

The very next day I had a followup meeting with a great couple who had just experienced a very bad financial month. Their family is going through some serious issues and it was one of those months, as they described, that they did not know "who to throw the ball to". As it ended up with no "what if" plan their finances got away from them.

Regardless of your planning, things are gong to come up and you need to be prepared on how to react.

1.  Be ready for the unexpected.  Things will happen.  Make sure you have money ready for those situations.

2.  Prioritze!  If an opportunity presents itself, how to you capiatlize and still stay on track - what do you give up?  You only have so much income, how do you spread it out to make sure you stay within your financial boundaries.

3.  Live  by your spending plan each month!                            

What is your plan? How do you anticipate your next move? Regardless of they area of your life, who will you throw the ball to?

I speak professionally to employees at Fortune 500 companies all over the country. Whenever a question is asked, invariably the person will begin with, “My next-door neighbor…” when we know it’s really the person asking the question.

People try and hide the shame intertwined with their financial mistakes. I would love to know: why? More often than not, it’s not their fault. Many times, the hand of fate writes our balance sheets.

Our Litigious Society

People trip in Wal-Mart and sue the store. Some sue MacDonald’s because they’ve gained weight, while others sue Starbucks because they burned their mouth on the coffee.

For several years I served on the board of the Texas Jumpstart coalition, a coalition to teach financial literacy to schoolchildren. What we discovered, to our horror, was that financial literacy isn’t taught in Texas, or the other 49 states. Generally, mom and dad don’t talk about money around the dinner table. So what’s left? Ourselves. It’s really up to us to teach ourselves about money and how it works. Could you teach yourself nuclear physics? That would be a challenge. Well, so is financial literacy.

The irony is that sometimes we’re quick to point the finger of blame, except when it comes to our poor financial knowledge. It isn’t our fault that we grow up financially illiterate.

Take the First Step

Too many folks look into the past and try and figure out their mistakes. You cannot change the past; it’s done. Forget it!

Start with the here and now; that means start with your income. This is what you get to spend. There’s only one catch: you cannot spend any more. That’s it; if you spend more than your income, you have to cover the shortfall, which can only be covered in one of two ways (or both): cash-in your investments, or go into (more) debt. Neither option is a good solution.

The Most Often Asked Question

It used to be that participants in my workshops asked how to invest their money. With the advent of the financial crisis, there has been a paradigm shift in the most popular question. People are beginning to realize that if they’re in debt, which is charging them upwards of 20%, and their investments are merely paying 5% at best, they’re just digging their hole deeper by investing. They need to get out of debt, and the only way to do that is to save money. Hence, the now most popular question is: how do I save my money?

There is a simple answer: budget your money and track it as you spend it. Sure, you can get an app or software that creates a budget for you (Mint.com comes to mind,) but that would be just like having someone practice for your piano recital. What do you think would happen when you walk across the stage at the recital and begin to play if someone did your practicing for you? The result would probably not be ideal.

So, the best way to save is to create a budget and track your spending. We start with income. The next most popular question is: how do I parse out my income?

I call it the 25/25/15/35 Rule. Based on Gross Income (the top number on your paycheck,) 25% goes to taxes, 25% goes to housing, 15% goes to paying down debt and simultaneously creating an emergency fund, and 35% goes for everything else. Need I remind you that everything else is a lot of stuff and 35% of your income probably isn’t a lot of dough?

What does it take to be successful in managing your money? Just a little over 7 years ago, our family began a life changing journey with our money. Based on the results, I feel I can answer that question from my own experience. The truth is that having a working budget every month is the key to winning with your money.  

As I have written previously, I believe having a monthly working budget is the key to your financial success. If you can’t control your money via a budget, you can’t build savings, you can’t pay-off debt, and you can’t plan for the future.

However, it is quite possible that as you are getting started with the budgeting process, you are running into some issues. Here are 5 Common Budgeting Mistakes and how to solve them. 

1. Failing to Track your Monthly Expenses

Remember that a budget is simply a plan for your money. And the only way a plan of any kind works is if you can measure the results against the intent of the plan. This works whether you are discussing a schedule for building a house or a weight reduction program. You need to face the reality of how you are spending your money.

I will admit that I am a bit obsessive with tracking spending but I have a system that works for me. Every expense is tracked in Quicken and I also keep tabs of the actuals in an Excel Spreadsheet. I can always tell where we are at any given point in the month. It gives me great peace of mind.

Whatever budgeting system you are using, do not neglect to track your actual expenses as it will give you a good view on how well you did in planning your budget.

2. Preparing a Budget but not using it

This is closely related to item #1 above. You may have done all the preparation work on Quicken, YNAB, or an Excel Spreadsheet. You even did it before the month began and you allocated every dollar to a spending category.

But now, the budget is filed away and the month goes by without you checking how you are doing against the budget. Remember, the budget gives you the boundaries for your spending (like the foul lines on a baseball field that enclose the fair area of play). You should keep an eye on how the actual spending matches against the planned spending.  

So I don’t’ suggest you look at your budget every day but at least take snapshot once a week. Get the budget out and see how you are doing in staying on track with your money plan.

3. Failing to Adapt/Change When it is Needed

As you keep an eye on your expenses against your planned spending, you will be able to gain insight into any required adjustments. For example, you may have an unexpected drive out of town and you need to increase the allocation for gasoline. And perhaps your clothing needs are not as high this month as you thought. So you make the adjustment in those categories and balance your budget.

Remember that this is your money and your budget. It is not written in stone so if the conditions of the month change, hold a budget committee meeting and make adjustments as needed.

4. Forgetting to Prioritize the 4 Walls

Your budget is a great tool to help you prioritize your spending. First and foremost you need to take care of your family and yourself.

This means that the 4 walls need to be protected by allocating the spending first those categories. The 4 walls are: food, shelter/utilities, transportation, and clothing. If you take care of those items first, you will be in a better position to deal with the rest of your spending because you would have taken care of your family first.

5. Making it too complicated

The final mistake is making this process of budgeting too complex. The reality is that the concept of budgeting is very simple: lay out all your income side by side with your expected expenses. Then allocate each available dollar to a spending category. That’s it.

You could get bogged down with all the configurations of a tool like Quicken or build an Excel spreadsheet with 20 tabs. Don’t do this. Keep it simple and it will be easier for you to stay with the budgeting process.

Are you making any of these budgeting mistakes? What are some of the challenges you experience in using a monthly budget? Let me know what you think!