Five Common Budgeting Mistakes
While most people have a single source of income (or maybe two or three during this economic pinch), there are an infinite number of places to spend money. It’s easy to lose track of where it all goes. The mismanaging of money is a slippery slope and can get anyone in a bind with banks, creditors, landlords, utility companies, etc. Avoid this downward spiral and implement a personal budget. Monitoring expenditures through a personal budgeting has many benefits (start with a simple budgeting spreadsheet). It helps you gain an awareness of where your money is going, how much you can reasonably spend and sets an expectation for how much you can save.
Of course, there are dos and don’ts when it comes to setting a budget. Although the biggest mistake one can make when it comes to budgeting is not implementing one at all, these tips are essential for anyone who is creating a budget for the first time or tweaking a preexisting one.
Not Accounting for Irregular Expenses
A slew of regular expenses are due at the same time every month along. Even if you could take into consideration every monthly cost (rent/mortgage, credit card, insurance, car payment etc.) and savings, your monthly budget is still incomplete. Car registration, oil changes, vet checkups, and miscellaneous home and car repairs are some only fees paid once or twice a year. Account for infrequent purchases with a two-pronged approach: first, review your previous years expenditures; the next is to anticipate where money might be spent in the future. If you know you have an aging car, it’s probably you are going to have more expensive maintenance fees.
Not Having Savings and/or Emergency Funds
Although it’s easy to monitor monthly and yearly expenses, unless you have a magic eight ball that really can predict the future, ironically, the most important expenses to plan for are the ones you can’t foresee. It’s nearly impossible to expect a trip to the emergency room or a blown out tire. People planning solely for monthly expenses may have a difficult time coming up with quick, yet necessary cash. They feel like they can never get ahead. If you dream of a buying new or larger home, upgrading your car, or starting your own business, the only way to get these is to plan ahead and save money. So many forget to set aside for the future, but do so like you would a utility bill. It’s highly beneficial to have a savings account in addition to your every day checking account. Setting aside money in a separate account reduces the temptation of spending it. Be choosy when deciding how to spend it, and shy away from making frivolous purchases with your savings. At the same time, don’t feel like the money is completely off limits. Remember, an effective budget includes a savings plan, but an even better one has both a savings and an emergency fund.
Budget Tunnel Vision: Keeping Track of Everything
Keep it simple, don’t overthink your budget. If you allow yourself $50 per week for groceries, do your grocery shopping and focus on your end goal. As long as you stay within your $50, feel free to buy whatever you please. When you log your expenses, list “groceries: $49.25”, and not “apples: $3.63, salad dressing: $2.46, popcorn: $2.89 …”. It’s important to know where your money goes; what is less important is exactly how you spent it. Overthinking your budget can lead to mismanagement of time and unnecessary stress.
Neglecting Trivial and Frequent Purchases
It’s only a $3.40 latte. But your morning workweek ritual requires one a day. And you work 240 days a year. Your meager daily purchase in actuality is costing you $816 per year. Failing to account for seemingly trivial expenses on a regular basis can undo all of the work you have put forth when creating your budget. In order to find these seemingly small expenses, backtrack your spending for the last four to six months and see if you recognize a pattern of small purchases. If you feel these are necessary purchases, either account for these monthly by including them in your budget or explore a cheaper alternative. Consider making your own latte at home instead of taking a daily trip to the coffee shop.
Make Adjustments When Needed
Many people view a budget as set in stone. Ideally, you want to stick with your budget. Review your budget a few times per year. If you feel your budget looks better on paper but doesn’t work in reality, instead of scrapping it altogether, adjust it. Maintaining a budget isn’t synonymous with tightening your spending or never treating yourself again, it’s a systematic approach to prioritizing your spending. Working within your budget will allow you to gain control over your finances; sticking to your budget is meant to empower, not limit you.