Budgets only work if you stick to them, and smart budgeters leave themselves some wiggle room for discretionary spending, or budget in some "mad money" to use as they see fit. In many cases, however, people make budgets that reflect an optimistic version of themselves. Your budget should reflect you as you are -- the you who occasionally spends too much on a night out, or the you who impulsively buys an expensive new gizmo that wasn't needed or planned for.
Millennials (ages 22-37) aren't exempt from these contradictions. Most (69%) responsibly weigh financial trade-offs weekly, according to a new study from American Express -- in fact, 25% weigh decisions like whether they should bring lunch from home or drink the free coffee at work rather than stopping at their favorite cafe. But weighing decisions does not always mean making the right call. The report also showed that Millennials make $411 in unexpected purchases each month. That's a budget-killing mistake that shows a disconnect between understanding the need to be financially responsible and actually being that way.
Dining out is a source of unexpected spending. Image source: Getty Images.
A reason for the season?
The holiday season can trip up even well-intentioned people. Nearly all Millennials (89%) said they spend more money during the winter holiday period than at any other time of year. That makes sense -- it's a time of gift giving, travel, and added expenses. The problem is that 62% reported that it's "impossible to plan ahead" for all of their seasonal spending according to the American Express survey.
Where is the money going?
Most Millennials (86%) reported that they shop for non-essential items an average of three times a week. The biggest culprits are entertainment (things like dinner or events with friends) (71%) followed by new clothing (such as seasonal items or clothes for special events) (62%).
In general, these are items that are easy to give into in the moment. They're expenses Millennials didn't budget for, but ones they easily should have seen coming.
What can you do?
Your budget needs to reflect your actual expenses. You're the only person who can make a budget that takes into account your habits, weaknesses, and guilty pleasures. There's no shame in having dinner with friends, having a two-latte-a-day habit, or sometimes going out for drinks, but your budget must reflect those potential expenses.
When you sit down to make a budget, start with your fixed expenses like rent/mortgage, car loans, student loans, etc., and then figure out other somewhat variable costs including food, utilities, and vehicle expenses. Be pessimistic in your guesses on the variable amounts so you have a bit of a cushion.
Once you have those numbers, examine what you have left. Assuming there's a surplus (if there isn't, you may have to cut some of your core expenses), set budget lines for saving, indulgences you know you're likely to make, and unexpected expenses. You don't have to spend everything in these line items each month -- any excess can go into a rainy day fund -- but you should budget clearly so your unplanned expenses become part of a bigger plan.
