It happens to the most budget-conscious among us.
Some unexpected expense rears its ugly head, and all of a sudden, our perfect budgeting streak is over.
We’re staring at a negative number in our budget that screams out failure.
But you’re not a failure.
Unexpected expenses happen.
We try to plan for them, but even if we knew the car was on its last leg, it takes time to save up, and maybe you just haven’t had enough time yet.
Don’t lose faith in your entire budget just because something causes you to break it.
Follow these steps to deal with budget-busting expenses and get back on track.
Step 1: Identify the Problem
The first step in recovering from a busted budget is to recognize that these things happen.
Acceptance is right up there with awareness when it comes to taking control of your finances.
Once you’ve accepted that your budget needs some repair, it’s time to figure out why.
The reason for breaking your budget usually falls into one of two camps: an unexpected emergency or undisciplined spending.
It’s just part of life that bad things happen and we’re not always prepared for them.
If your budget gets blown because of an emergency or other large unexpected expense, it can feel crushing both to your finances and your momentum.
But take heart in the fact that what you’ve been doing has been working. Don’t let the unexpected completely derail you.
Roll with the punches and re-commit to your budget moving forward.
If your budget-busting expense was more to do with poor spending choices than true emergencies, you’ll need to accept that you’ve still got some work to do.
We all make mistakes. The key is to learn from them and avoid making them again.
The best way to get a grip on your spending is to make sure you know where you’re spending.
If you’ve been tracking your expenses it should be relatively easy to look back and see what’s causing the issue. If you haven’t been tracking your spending, it’s time to start.
Once you know where you’re overspending it’s easier to determine why.
Overspending usually happens for one of two reasons:
- You didn’t budget enough
We often set spending goals based on what we think we spend instead of what we actually spend. Typically this happens in the gas or grocery category where we underestimate our needs. It’s always good to try to reduce your spending, but it’s important to be realistic in your goals.
- Your priorities aren’t accurately reflected in your budget
You may be trying to make your budget fit someone else’s priorities. One of the easiest places to save money is to stop eating out. But if you value the convenience or experience, you’re not likely to stick to a budget with no allowance for dining out.
You need to be honest with yourself as you evaluate your overspending. Is your spending reflecting what you claim to value?
Step 2: Review Your Priorities
The next step in getting your finances back on track after you’ve blown your budget is to re-examine your priorities.
Did You Overspend Because of a Change in Priorities?
It’s possible the reason you broke your budget was that it wasn’t an accurate representation of your values.
If you were feeling restricted to the point that you just said “Aw, screw it. I’m buying it”, you were likely trying to budget according to what you thought you should do versus what you wanted or needed to do.
Your budget is just a tool, and being crystal clear on your priorities will let you wield it effectively to reach your goals.
Don’t let family, friends, or society at large dictate what you value.
Make sure your budget reflects your goals and ambitions, not someone else’s.
How Does the New Debt Fit into Your Priorities?
Assuming your expense was of the unexpected variety (vs. lack of restraint), the bulk of your budget may still reflect your priorities.
In that case, you’ll just need to figure out how you want to prioritize any new debt. Think about how the debt repayment fits in with the rest of your budget.
If possible, it’s best to tackle the debt head-on and pay it off immediately.
Depending on how large it is though, working it into your budget over a longer stretch of time might be more practical. Things like medical expenses and car payments aren’t as easy to get rid of as debt from Christmas overspending.
Step 3: Re-work Your Budget
Once you’re clear on your priorities again, it’s time to make sure your budget is reflecting them.
Typically you’re going to want to pay off whatever expenses broke your budget ASAP.
That means pulling money from other less important areas of your budget, especially if the new spending has created or added to your debt.
Look to non-essential categories like entertainment and clothing for any extra cash you can throw at your debt.
Also, check for areas in your budget where you may be over-planning or over-estimating.
I like to work with round numbers, so I usually have some excess in most categories from rounding up my bills.
Those extra pennies start to add up over a while and can be used to help cover your overspending.
As you re-work your budget, make sure to have an open mind about your regular expenses and how they align with your new priorities.
Trying to figure out how to make that new car payment might have you more inclined to cancel or rein in some other expenses that you may have prioritized before.
Step 4: Deal With the Debt
Depending on what your actual budget buster was, you may be dealing with the debt for a while.
While you can usually cut expenses pretty low when you need to, it still may not be enough to pay things off in one shot.
Here are a few other ways you can deal with the debt.
Increase Your Income
There’s a limit to how much money you can cut from your budget, but there’s no limit on how much you can earn.
Find additional ways to bring in some extra cash and help pay off your debt faster.
You can start by selling stuff you don’t need from around your house.
Then consider starting a side hustle or joining in on the gig economy by delivering groceries or walking dogs.
Make Sure Your Debt is Cheap
The average credit card interest rate is over 20%.
Carrying your debt at a high-interest rate like that will take you forever to make any headway.
For credit card debt, look into finding a low or no interest balance transfer to consolidate your payments, lower your minimum payment, and reduce your interest.
There are a few things to keep in mind when considering this strategy:
- Length of Offer
Most low-interest offers are considered introductory and expire after a certain length of time. You could be looking at a massive interest charge if you don’t pay off your balance in time.
- Balance Transfer Fees
Most balance transfers are subject to a 3-5% fee on the balance of the transfer so it could cost more than it saves. You’ll have to do the math with your specific numbers to see what’s best for you.
- Stop Spending
The whole purpose of consolidating your debt is to help you pay it off. Adding to it by continuing to spend on your card defeats that purpose. Plus any new spending will incur interest immediately.
Balance transfers can be a powerful way to take control of your debt and pay it off quickly as long as you’re aware of the terms and disciplined in your payments and spending.
Step 5: Change Your Habits
Do you have spending categories you consistently go over budget in?
Some areas, like groceries and dining out, can be tough to estimate or stick to and quickly become black holes in our budgets – sucking up dollars from other categories as we mindlessly swipe our cards at checkout.
For categories you consistently overspend in, you might want to try going on a cash diet.
A cash diet is a mini version of the envelope system. It will help you negotiate trouble areas in your budget without committing to switching everything over to cash.
A cash diet will make you more aware of your spending habits and help ensure you’re more intentional with your purchasing decisions.
If you follow the steps above, you should have a good grasp on how to move forward and get your finances back on track.
But there are some things you’ll want to avoid to be successful.
Don’t Take Out High-Interest Loans
The idea of consolidating your payments into one low monthly payment can be appealing. Still, if the interest attached to it is higher than what you’re already paying, it’s a bad idea.
High-interest loans, payday lenders, and cash advances from your credit card are all terrible options for paying down your debt. In all likelihood, you’ll only add to your debt over time.
If you want to consolidate and simplify, make sure you’re looking at rates that are cheaper than what you’re currently paying.
Don’t Give Up on Budgeting
When you break your budget, it can feel like the whole thing just doesn’t work for you.
You may want to give up and just bury your head in the sand, ignoring your finances forever.
I understand the frustration and stress you feel when you think you’ve finally got a handle on things, and then wham, something else knocks you down.
The appeal of just throwing in the towel after you’ve been repeatedly pounded by expenses is strong.
But it won’t solve your problems and will likely make them worse.
Budgeting according to your priorities is the only way to have a happy, healthy relationship with your money and it’s the best way to work yourself out of whatever spending hole you find yourself in.
Don’t Steal from Your Future
A lot of people consider raiding their retirement funds to cover their debt.
Withdrawing your retirement before you’re eligible will cost you a fortune in taxes and lost interest.
It’s also shortsighted to use your future funds to pay for your current woes.
Imagine the future you having to work two part-time jobs because no one will hire an older person full time. Not to mention your healthcare will only get more expensive as you get older.
It’s better to get creative in dealing with your debt today than hope you can figure things out down the road.
Who knows, maybe the scarcity you feel now will help you create positive money habits that will get you to your financial goals even faster.
Stop Making the Same Mistakes
One-off large expenses can be difficult to anticipate, but that doesn’t mean you can’t plan for them.
Start an emergency fund to cover catastrophic events like medical emergencies or losing your job and sinking funds for everything else you can think of.
Work them into your budget based on priorities, and hopefully, by the time the next emergency hits, it won’t be so unexpected.
Wrapping Things Up
Building a budget that works for you is a learning process. While it can be deflating when you break your budget, don’t let it deter you from diving back in.
The steps and advice above will help you reset and renew your commitment to budgeting, no matter how far you’ve fallen from your plans.