Avoid These Common Budget Mistakes

Establishing a budget is an important step to achieving your financial goals and obtaining financial independence, but it does not stop with creating the budget. Instead, you have to be disciplined enough to follow your budget. To achieve this, you should consider the common pitfalls and take steps to prevent falling into the same trap as the majority of individuals. There will be times when you may have to deviate from the budget you established, but this should be the exception, not the norm.

Budget Mistakes

Not Tracking Spending

Tracking your spending is one of the most vital steps of budgeting. After all, if you establish a budget but do not monitor yourself according to the spending limits you established, then the budget is useless. There are several reasons why tracking your spending is important. First, it will help you set aside the appropriate amounts for each spending category (e.g. rent/mortgage, groceries, entertainment, insurance, etc.). Second, if you track your spending, then you can look at any individual spending category in real-time to determine if you are on track to stay within your projection. For example, if you set aside $150 per month for restaurants, and you have spent $100 by the end of the first week, then you need to curb spending considerably to make the remaining $50 last for the next several weeks. Finally, tracking your spending will let you know when the funds are exhausted.

What is the best way to track spending? It is highly recommended that you utilize a budgeting application (app). There are numerous apps available on Android and iPhone, but regardless of your operating system, you can find a good budget app from our top 7 picks. Zenmoney and 1Money both have substantial capabilities that will allow you to accurately track your spending and stay on budget. Additionally, the apps can be synced between your phone and your spouse’s, so you can both update expenses and view the remaining funds.

Forgetting Expenses

A budgeting app also comes in handy to ensure you are accounting for all your expenses. If you input an expense into the app and do not have a category to place it under, then you likely forgot an expense and will need to adjust your budget to properly account for this item in the future. For example, it is easy to forget about expenses that recur infrequently, such as birthdays and back-to-school supplies. While you may only pay these expenses once per year, the cost can be considerable, and failing to plan for these items will quickly get you off track. The best way to plan for these expenses is to estimate how much you will need to set aside, divide that amount by the number of months you have before the upcoming event, and contribute the necessary amount each month.

Not Establishing an Emergency Fund

There will always be unexpected emergencies that arise. These emergencies can take many forms, such as your refrigerator failing, your transmission going out, a root canal, or your pet sustaining an injury. It is impossible to account for every contingency, which is why you need to establish an emergency fund. It is unlikely that you have the funds to establish an emergency fund overnight, but if you consistently contribute a predetermined amount each month to this fund until it is fully funded, then you will be able to handle emergencies without breaking your budget or causing undue stress on you or your family. How much should you save in your emergency fund? Typically, you want to save three months of living expenses to establish your emergency fund.

Inconsistent Spending

Most of us will splurge from time to time and buy items that we did not plan to purchase, but the key to budgeting successfully is consistency. It is much better to maintain a moderate budget for 12 months than it is to maintain an extreme budget for 3 months. You have to establish a sustainable budget, something you can implement and utilize for the foreseeable future. For example, if you are currently spending $500 per month on entertainment, an extreme budget adjustment would be reducing your entertainment fund to $25. While you might be able to sustain this spending for a month or two, you would likely give up after a short time because the amount allocated is unrealistic given your past spending. Instead, establishing a monthly entertainment fund of $150 reduces your spending by 70% and you are much more likely to be able to achieve this objective. In some circumstances, drastic reductions may be required, such as reducing discretionary spending to pay off a credit card debt, but you must consider the long-term implications and sustainability.

Not Adjusting Your Budget to Reflect Wage and Salary Changes

While budgets do not need to be adjusted very often, there are certain situations in which you need to reevaluate and make refinements. One such situation is when your wage or salary changes. If your income changes from a raise or a change in hours, such as from a part-time position to a full-time position, you need to allocate the additional funds. This does not mean increasing the spending limits in all your categories. Ideally, you should allocate the additional income towards your savings and investments. If you maintain your current standard of living and simply continue living on your previous income, then you will never notice the difference, but your investments and savings will benefit. However, there may be some budget categories that need to be increased, if you anticipate those expenses will rise. For example, if your city was recently hit by a natural disaster or the number of auto accidents has increased, then your auto insurance rates are likely to increase.

Not Paying Yourself First

Before you spend your budget on entertainment, restaurants, and other discretionary spending, you need to “pay yourself.” In other words, contribute to your savings and investments first. If you prioritize these items, then you will pave the way for financial independence. Additionally, once you are consistent about contributing to your savings and investments before spending money on your “wants,” you will establish a habit, and you can benefit from dollar cost averaging by contributing a set amount at regular intervals.

Not Automating Saving, Investing, and Bill Payments

When it comes to budgeting, automation is your best friend. The more you can automate, the less likely you are to deviate from your plan. If you have recurring bills, such as rent or mortgage payments, set up your account to pay those automatically. Additionally, you should consider setting up autopay on your credit cards. Doing so will ensure you never have a late payment, helping build your credit score and avoid high interest payments. Not only should you automate your payments, but you should do the same with your contributions to savings. This will help avoid the common pitfall of not paying yourself first. You can set up allotments with your employer, which will ensure a specific amount from each check is contributed to the savings account you allocate. Alternatively, you can simply set up a recurring transfer from your checking account to your savings account. However, do not utilize a traditional savings account. Instead, you want to use a high-yield savings account, which has significantly better interest. Money market accounts are another option for your savings. Finally, you can automate your investments to buy shares of a particular stock, index fund (like the Standard & Poor’s 500), or other investment type.

Not Accounting for Payroll Deductions

Your wage or salary will reflect your gross pay. However, this is not your take-home pay. After all the deductions, such as state and federal taxes are removed, the amount you are left with is your net pay. This is the amount you need to utilize when allocating funds to each budget category. You should still be aware of your gross pay, so you can determine how much is being removed for taxes and other deductions, but this money will not be available to be allocated for other purposes.

Conclusion

Budgeting is a relatively simple concept, but putting it into practice and maintaining the budget you establish is often difficult. Understanding the common budget mistakes will help you avoid budget pitfalls. You need to track your spending, ensure all expenses are captured, establish an emergency fund, be consistent with your spending, adjust your budget when your wage/salary changes, pay yourself first (save and invest), automate as much as you can, and understand your gross versus net pay. If you follow these steps, then you are well on your way to achieving your financial goals.