A Gallup poll found only “32 percent of Americans prepare a monthly budget,” which means that many people live each month without a spending plan or a guide for their money. We continue to hear from experts about the importance of budgeting. We know we should have one but the thought of budgets makes us cringe.
I confess I didn’t have a budget for years. It took me a really long time to understand why it was important. And when I started budgeting (because it was the financially smart thing to do) I was making mistakes along the way.
Achieving your goals begins with a budget. Living within your means to reach those goals is made possible with a budget. Reducing expenses and impulse spending happens with a budget. It’s far too easy to overspend when you don’t know what’s coming in and what’s going out.
But even if you’re on the other end of the spectrum and you follow a budget, you might be making a few mistakes. Here are 6 budgeting mistakes to avoid.
1. Guesstimating Your Income and Expenses
Everyone has their own tips and advice for preparing a budget. But many experts agree that budgeting doesn’t work if you cut corners. If you’re impatient and don’t want to sit down and add up all your expenses and income, you might get into a bad habit of guesstimating these numbers. The problem with this approach is that it doesn’t provide an accurate picture of your finances.
“A budget should always include actual numbers, such as the actual income received that month and actual expenses,” says Michelle Schroeder-Gardner, blogger at MakingSenseofCents.com. “Too many people use numbers that they estimate or numbers where they wish they were at, which is a big mistake because an estimate doesn’t help you grasp the real picture of your finances.”
Take a look at your paychecks to see how much you bring home every month, and factor in other sources of consistent income. Next, make a list of all your monthly expenses. Grab monthly bill statements and review bank statements to get an idea of how much you spend in variable categories, such as groceries, transportation, entertainment, etc. This process is called a personal financial analysis.
2. Forgetting to Budget for an Emergency
Life happens, so you need to budget for unexpected expenses and emergencies. Ideally, your monthly expenses shouldn’t be the exact amount of your take-home pay. It’s important to leave wiggle room for expenses that occur outside your budgets, such as a home repair or a car repair.
“Most of us have a hard time setting aside the recommended six months’ worth, and no one gets there by magic,” says Kimberly Rotter, personal finance expert, and contributor at CreditRepair.com. “Take it one step at a time. Ideally, save 10 percent of each paycheck. If that number isn’t realistic, set a smaller dollar amount and stick to it.”
Make room to allocate money into a rainy day fund. A rainy day fund will help you pay for immediate emergencies like a flat tire or medical bill.
3. Never Budgeting for Annual Expenses
There’s nothing like an annual expense to bust your budget—but these expenses don’t have to catch you off-guard. Technically, you can always dip into your emergency fund to cover these expenses, but you should try and limit needless withdrawals from this account. A better approach might be including yearly expenses in your monthly budget.
Think back to your past spending habits. If you typically spend about $800 a year on annual expenses (gifts, personal property taxes, etc.), you can divide this number by 12 and deposit the appropriate amount into a savings account—preferably an account other than your emergency savings. Expenses that are infrequent but expected isn’t an emergency.
4. Forgetting to Revisit Your Budget
A budget isn’t something you set and forget about. Your income and expenses can fluctuate up or down. Gas prices and food costs can change, so you may need to adjust how much you spend in certain categories to continue living within your means.
“Costs change all the time, so avoid any cash flow problems by updating your budget on a regular basis,” says Barry Choi, a personal finance expert at MoneyWeHave.com. “Don’t forget to add any increases to your income. Instead of spending that raise, add it to your savings or your emergency fund.”
Never reevaluating your budget can be just as bad as guesstimating.
5. Taking Money from Other Categories
Occasionally robbing Peter to pay Paul isn’t the worst thing that can happen to your budget. Sometimes, you might need to pull from another category to deal with a situation beyond your control. But you don’t want to make this a habit.
Let’s say your budget includes $150 a month for recreation and you’ve allocated $200 a month to grow your emergency savings account. It may be tempting to steal cash from your savings category in order to pad your recreation budget and have a little more fun. Understandably, this is your money—but fight the urge.
You could end up hurting yourself in the long run. The less you put in your emergency savings, the less you’ll have available for life’s unexpected events, such as salary disruption or job loss. To help keep your budget on track, consider the envelope system for variable expenses like groceries and entertainment.
6. Depriving Yourself
If you’re serious about getting your finances under control and paying off debt or saving money, you might reach your goals by any means necessary, even if it means depriving yourself of all fun. Committing to a life of free entertainment and Netflix weekends can put you on the right path, but everyone needs a little cash to blow off steam.
“No budget on earth will work long-term if don’t allow for some fun stuff, even if it’s as small as a chocolate bar once a week, says Avery Breyer, author of Smart Money Blueprint: How to Stop Living Paycheck to Paycheck. “When you get to a stage where the money is more abundant, you can start to splurge on bigger and better things, like that vacation you’ve always wanted!”
Preparing a budget might not be the most exciting task, but it is a powerful tool for gaining control of your finances and reaching your money goals. If you don’t have one, it’s time to prepare one; and if you do have a budget, there’s always room for improvement. Learn how to create a spending plan and other financial wellness tips.