You will be able to tell whether a category overran because of a one-off, a wrong estimate or a habit.
When several budget categories go over plan in the same month, the usual response is to promise to try harder on all of them next month. That fixes none of them, because each category goes over for its own reason and each reason needs a different fix. A category usually runs over plan for one of three reasons: a one-off, a wrong estimate or a habit. Most of the work is finding out which cause applies, and the fix follows from the cause.
A one-off is a cost that happened this month and will not repeat next month. Hosting a birthday dinner, a gift for a colleague who is leaving and a one-time repair are all one-offs.
A wrong estimate means the planned figure was too low. The cost is real and recurring, and you are spending the way you meant to. You guessed the figure wrong, or prices went up.
A habit means the planned figure was right, but your behaviour did not change the way you meant it to. For example, you plan to order delivery twice a week and still order it four times a week (a made-up case).
To tell a wrong estimate from a habit, ask whether you bought more than you meant to, or whether the things you meant to buy cost more than you expected. Buying more points to a habit. Paying more for the same things points to a wrong estimate.
One month on its own can mislead you, because an overrun might be a one-off or the start of a pattern. At a close, find every category that went over. Before you change the plan, line up each one's actual spending for the last three months against the plan.
Wei Ling, the course's example person, is three months into her budget. Her figures are made up. Three categories are giving her trouble. Eating out ran S$140 over in May, with S$560 actual against S$420 planned. Groceries and delivery have been over every month so far. Her first instinct is to try harder on all three next month, which would fix none of them. Instead she lines up March, April and May.
Eating out is planned at S$420. She spent S$395 in March, S$410 in April and S$560 in May. The jump in May was her own birthday dinner for six friends, which cost S$170. Without the dinner, May would have been S$390 (S$560 minus S$170), which is under plan.
Groceries are planned at S$260. She spent S$300, S$310 and S$295, so she was about S$40 over every month at an average of about S$300. She checks whether she was buying more than she meant to, and she was not. She was buying the same things and they cost more than she had guessed, so groceries are a wrong estimate.
Delivery is planned at S$100. She spent S$140, S$150 and S$165, so it was over every month and creeping up. This one is a habit. When she looks at when she orders, it is almost always on weeknights after 9pm, after long days at work.
For a one-off, make no change to the plan. If you change the budget for something that won't happen again, you build in slack, and that slack gets spent on something else. Still make a note of the one-off. On a closer look, many one-offs turn out to be yearly costs missing from your irregular costs calendar, and those belong in sinking funds. Wei Ling keeps eating out at S$420. Then she realises her birthday comes every May, so the dinner is a yearly cost and not a true one-off. At her next close she will add it to her sinking funds (lesson 3.4), so the money is ready for next May's dinner.
For a wrong estimate, raise the category to what it really costs. Then cut the same amount from another category so the budget still balances. If you leave a wrong estimate in place, you fail the same line every month until you stop believing the budget at all. Wei Ling raises groceries from S$260 to S$300 and takes the S$40 from shopping, which drops from S$200 to S$160.
For a habit, keep the planned figure where it is. Find out when or why the spending happens, then add friction or make a cut. Wei Ling is tempted to raise delivery to S$150. That would make the overspend disappear on paper, but it would quietly drop the behaviour change she decided was worth making in module 4. Instead she moves the delivery apps off her home screen. She deletes her saved card from one of the apps, an idea from lesson 4.3, "Small habits that slow impulse spending". She also starts batch cooking on Sundays for late nights. Delivery stays at S$100 for June.
Judge each habit category again at your next close, as Wei Ling will with delivery. If a habit category is still over after two or three months of honest friction, it may be a wrong estimate after all. Make that call at a close, with the trend in front of you. If it is a wrong estimate, fix it like one: raise it to what it really costs and cut the same amount from another category.
Go back to your last close and find every category that went over.
For each category that went over last month, write whether it was a one-off, a wrong estimate or a habit, and what you will change.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).