Everybody makes mistakes. It’s just how quickly you discover them and if you recover and learn from them that makes the difference. Make a mistake and ignore it, and you’re likely headed for disaster. Learn from the mistake, and avoid making it again, and you just might save yourself.
Recently, while catching up on our budgeting, we noticed a pretty large discrepancy in what the bank said we had (or didn’t have as the case may be), and what our budget said we had. I’m used to some difference, but it’s not all that much normally. This time, we’re talking about a very large difference. Our budget said that we had nearly $2000 left over from the month of June. Our bank? Said we were nearly overdrawn. Something was seriously not right.
And we had to figure out what. I’m no accountant. I don’t do math well (I took Trigonometry in college 5 times before I passed it.) and I am horrible at accounting math. I’m a computer guy. Computers are good at math, I leave it to them. Unfortunately, as I was soon to learn, they are only as good as the data that you feed them. And boy oh boy have I been feeding them some fun numbers.
Here’s what’s been happening, as best as I can figure. As part of my payroll, I have child care flex taken out of my check. Each month, about $400 is taken out of my check. Each time I pay my daycare, I send in a form to HR and they reimburse the amount that I’ve taken out of my check. So, at the end of the month, that $400 has been reimbursed back into my account. Because of the way this works, I decided (when we started using the program) to not enter either transaction into my register or my budget. My reasoning was solid. A debit followed by a credit makes, essentially, a non-transaction. Or so I thought.
Some of you may already see the problem. Some may need this extra bit of information. In determining the amount of income we budget for, we use the gross pay amount from my check. Why is that important? Well, let’s say, to keep the numbers easy to use, that I make $1000 a check. I add $1000 to the income column on my budget. From that $1000, my employer takes out $200 for the Child Care Reimbursement. Now I have $800. I then pay my daycare $200. Now I have $600. My employer reimburses the $200 to me. I am back at $800. That’s how the accounting should have been done.
Now, let’s take a look at why the way I was doing it was wrong. I get paid $1000. I put that in the income column of my budget. I pay my daycare $200, but because that amount is reimbursed, I don’t enter it into the budget. I also don’t enter the reimbursement or the initial withholding into my budget. With no transactions, my budget still says that I have $1000 in income that I can spend. When I really only have $800.
Of course, I’m using some simple round numbers, but you can see why that would be a problem. Especially if it’s been building that way for at least the entirety of this year. If I’ve been padding my budget-able income by $200 a check ($400 a month) for 7 months, that gives me $2800 in income showing that I don’t actually have. And that is why my budget and my bank statement were so very far off.
Whoops. Luckily, it didn’t cost us much to find the problem. Unfortunately, we don’t have that much money just lying around. Especially since we’ve been overspending by $400 a month. So, we have to cut back as far as we can and watch our expenses until we can manage to bring that deficit back to $0. Not any fun at all. But, that’s the price you pay for a mistake. At least we learned from it (enter all transactions, no matter whether they zero out or not), and will recover from it. It’ll just make life a little bit harder for a while. But, if we hadn’t caught it, it could have bankrupted us. It could have, essentially, cause our financial ruin.
The only thing that saved us is doing a budget and keeping track of our money. Which is yet another reason that I advocate so strongly that you keep track of your money. Even if it’s only going so far as balancing your account statements at the end of the month, you’ve got to know where your money is going. It may save your financial life.
What mistakes have you made in your search for financial independence that set you back? Or, maybe, that cause a bit of a windfall?