Budgeting may be one of the most frequently used words in the personal finance world because it’s that important for your financial health.
Think about it: Would you want your own business or the company you work for to spend more than they are earning? Probably not. I’m guessing you would find it irresponsible for a company to spend more than they were earning because of the financial risk it entails to take on debt without a plan to pay it off.
So why would you allow that to happen in your personal life with your personal finances?
As we’ve shared before, there are a plethora of possibilities when it comes to budgeting because personal finance is exactly that – personal. Still, there are some truths when it comes to budgeting such as having a budget in your head is not going to work as effectively as a budget that’s written down.
So that got us wondering – what are some other common budgeting mistakes?
14 Common Budgeting Mistakes
1. Thinking You Don’t Need a Budget
Ignorance is bliss, but being in debt sucks, for lack of a better word.
Although creating a budget may be scary and may show you that your financial situation is worse than you realized, it’s also key in turning your financial situation around. If you never take the time to sit down and write out a weekly or monthly budget, don’t expect your personal finances to improve. Fixing your financial outlook takes effort and work. It isn’t enough to say you want to change–you have to take actionable steps too.
There are a variety of free and paid budgeting templates you can use to help get you started.
2. Estimating Your Income, Expenses
Before you can create a successful budget you have to figure out how much income you’re bringing in each month, as well as your expenses. If you’re building a budget off of a guestimate, your budget is not going to work as well as it could. For example, you may find you’re spending more on monthly expenses than you’re aware of, or you may forget to include an expense entirely!
Imagine if you went to check your bank balance and the receipt said: “You have around $1,000.” Around? Not cutting it. You want to know exactly how much money you have so you can spend and save accordingly.
Give yourself that same advantage when setting up your budget. Track your spending for a few months before creating a budget and keep in mind that a budget is a living, breathing document. It can be adjusted at any time for any reason – whether that be you experience an unexpected expense or your boss gives you a raise.
3. Not Including Savings in Your Budget
For those of us on a debt payoff journey, saving money is not always top of mind, we’re trying to get out from what feels like a mountain of debt. But not paying yourself, or transferring money to your savings, is a common budgeting mistake that can keep you stuck in a cycle of debt a lot longer than if you had some money saved for a rainy day.
Start with a reachable goal such as saving 5 percent of your take-home pay and work up to 20 percent, after you’ve paid off your consumer debts. Pay your savings account just like you would a monthly bill or have it taken out of your paycheck and deposited in a savings account.
Why is paying yourself so important even if you have debt?
Without much or any savings to fall back on, you’re likely to incur more debt, which is why prioritizing saving money even on your debt payoff journey is key. Not only will establishing and funding an emergency savings give you a sense of financial safety, but you’ll also start to get into the habit of prioritizing saving for your future and not spending your entire income.
“It’s easy to spend money. Saving for needs and obligations must determine your spending. And, yes retirement is one of those needs, and it can be as simple as starting with $1 or $3 a day when you are young,” says Gene Natali, Jr., senior vice president of C. S. Mckee.
4. Unrealistic Budgeting
As many of us on a debt payoff journey know firsthand, changing your habits to pay off debt is much easier said than done. Because personal finance is exactly that – personal – there are a plethora of ways to budget and save money. But some of these financial independence budgets are quite extreme and require a 180-degree change in an individual’s behavior.
Although you may be eager to pay off debt as quickly as possible, remember you’re working to improve your finances for the long term. Extreme budgeting is not sustainable and is more likely to lead to burnout on your debt-free journey.
“Novice budgeters, especially those trying to pay off credit card debt, often get the numbers to add up on paper, but they have no basis in reality,” says Stephanie Genkin, a financial planner in Brooklyn, New York. “I look at these budgets and ask these folks, ‘Are you really going to stop eating lunch out every day when previously you were always eating out?’”
Instead, start small. What do you really use the most? What could you do without?
Take baby steps, Gherkin says, like try packing your lunch twice a week and gradually adding an extra day until you’re no longer eating out five days a week.
5. Basing Your Assets Off Your Gross Income
Knowing the difference between your gross income and net income could be the difference between a budget that either attracts or dispels financial stability.
Gross income is the amount of money you earn before deductions like taxes are taken out.
Net income on the other hand is what is leftover from your gross income after the deductions are taken out, which is why it’s also known as take-home pay.
For example, in California, someone earning a $50,000 gross income salary would take home or net about $38,697, according to an analysis of take-home pay rates in all 50 states by GoBanking Rates. That’s a little less than the national take-home pay average of $39,129, or about $3,260.75 per month.
6. Forgetting to Include Irregular Expenses
You added an unexpected expenses category in your budget for things like gifts, home improvements, and car repairs, but what about irregular expenses, expenses that happen quarterly or biannually like insurance payments and tax bills?
These are expenses that are commonly forgotten when individuals are creating their budgets. Instead of getting caught off guard by these expenses when they pop up, consider adding these expenses to your monthly budget, says Stefanie O’Connell, millennial finance expert and founder of “The Broke and Beautiful Life.”
“I try building those expenses into my budget by estimating the annual cost, then dividing by 12,” O’Connell said.
7. Forgetting Once-a-Year Expenses
It’s easy to forget to include the cost of birthday presents, holiday spending, haircuts, or annual bills in your budget. Without proper planning, these expenses can hurt your finances when it’s time to pay for them.
“What I see people fail to do is account for big purchases that occur once a year,” said Michael Solari, a certified financial planner at Solari Financial Planning, LLC. “That may include life insurance premiums, car maintenance/registration, and especially in my case, wedding gifts.”
To avoid surprise once-a-year expenses, put special events, birthdays, and vacations on a calendar. This will help you budget accordingly when those seasonal or one-time expenses are coming up.
8. Depriving Yourself of Fun Money
Spending less money doesn’t have to mean you’re bound to sit at home bored. Everyone needs to blow off steam from time to time, and having a little fun with your money isn’t irresponsible. It can actually be helpful on a debt-payoff journey to budget fun money or splurge money you can spend on yourself.
Besides, a budget is about taking control of your finances so you can spend your hard-earned money on things that actually matter to you. It’s about living the life you want to live. If you cut out fun then what’s the point?
“No budget on Earth will work long term if you don’t allow for some fun stuff, even if it’s as small as a chocolate bar once a week,” says Avery Breyer, best-selling author of “Smart Money Blueprint: How to Stop Living Paycheck to Paycheck.”
9. Trying to Keep Up with the Kardashians
It is entirely possible to have a different money mindset from your family and/or friends. Some of your family or friends may be extremely budget-conscious whereas others may appear to spend money like they have an unlimited supply or a money tree in their yard.
Be mindful of who you are spending your time with and how you feel about your financial situation after spending time with family and friends. “In an effort to keep up with your spendy friends, you may be blowing more money than you should,” Breyer said.
This doesn’t mean you have to cut these people out of your life, but you may need to adjust how and where you spend time with them. For example, going shopping with your spend-heavy friends who are trying to Keep up with the Kardashians? Probably not the best idea.
10. Dictating the Family Budget
For individuals on a debt-free journey, there’s no one you need to check in with when creating a budget other than you. You’re the one deciding what to cut, how much to save, and how much to lower your spending. But for couples, creating a budget can be a little bit trickier.
When one person dictates the family’s budget and decides what money can be spent on and what is not allowed, it can create a lot of tension. And in truth, the budget may not work, family members may not choose to follow a budget if it feels too restrictive or affects one person more than another.
A budget is most effective when both parties communicate and agree to follow the budget. Consider having a budget date night with your significant other if you haven’t talked to your partner about your spending and saving goals recently. Even if you have created a budget with your spouse, it’s important to regularly check in with your partner and budget to ensure that it’s still working for all parties involved.
11. Never Updating Your Budget
Even if your income doesn’t change all the time, expenses are likely to change from year to year.
For example, due to inflation in order to live the exact same life you lived in 2021, it will cost you an extra $5,200 in 2022. Broken down across 12 months, that $5,200 breaks down to consumers paying an additional $433 a month for the same things they bought in 2021.
Another reason to check in with your budget regularly? You may notice that an expense like a new streaming service you just signed up for has not been added to the budget. Or perhaps you notice that you’re still including the cost of your gym membership in your budget, but you canceled your membership five months ago.
Make sure you revisit your budget monthly and consider the following prompts in your review:
- Are all my expenses accounted for?
- Are all my income streams reflected?
- Am I overspending on anything I don’t care about or don’t need?
- Am I tracking well towards my saving goals?
- Am I paying down the right debt?
12. Stealing Money From Other Savings Funds
As tempting as it might be, try to avoid dipping into money from other spending categories in your budget. For example, if you’ve already spent your allotted clothing budget for the month, don’t take money from your grocery or savings fund just because there’s a sale.
Unless you’ve had your eye on a specific item for a while, sales often encourage us to spend more money than we would have initially spent because we’re under the impression we’re saving money, that we’re getting a deal.
13. Review Fixed Expenses, Ask for Discounts
Lowering fixed expenses is one way to reduce the cost of expenses in your budget. For example, your cable or cell phone bill may be the same amount each month but you may be eligible for a more affordable plan or you may be able to negotiate a better rate for yourself at least temporarily.
Money-saving expert Andrea Woroch recommends reviewing monthly utility bills and looking for ways to save. You can search for new providers and compare rates, or speak with a retention specialist to see if you’re eligible for a discount or special promotion. The company might lower your rate to retain your business.
14. Not Using Goals as Money Motivation
You’re more likely to commit to your budget and be disciplined in your spending if you’re working toward a specific milestone. To avoid this common budgeting mistake, write down the goals that make you tick and how much you’ll need to save to accomplish them. When you’re tempted to stray from your budget, review your goals for the motivation to stay on course.
“I initially created a budget because everyone said it was the responsible thing to do,” says personal finance writer Chonce Maddox. “After a while, I started to resent my budget because it felt like it was keeping me from doing the things I wanted to do.”
Her “aha” moment came when she realized she actually did have the motivation to start budgeting: She wanted to get out of debt. “At this point, I realized I wanted to budget, and it helped me be consistent with planning my spending,” Maddox says. She ended up using a budget to pay off more than $30,000 in student loans in less than three years.
So what are your money goals?
- Do you want to pay off those student loans once and for all?
- Save for a down payment for your dream home?
- Travel the world?
What tips do you have when it comes to creating a successful budget? Share with us in the comments below!