How to Avoid the Top 5 Budgeting Mistakes
Learning to budget properly is a marathon endeavor rather than a sprint. Budgeting mistakes are common, especially when you’re starting a new financial journey. There are no quick fixes when it comes to revamping your financial wellbeing, especially if you’ve lived without a plan for a long period of time. Keeping focused on your financial goals is a great way to avoid the most common budgeting mistakes. Knowing why you’re working hard towards financial health can help you stick to your plans. Are you working to build your retirement savings or planning a dream vacation? Planning to pay off debt? Saving for a rainy day? Evaluating your goals can help you not only create detailed plans for success but also motivate you to say no to unnecessary expenses when they arise. Although budgeting is a process and it should be expected that it may take you a few tries to get it right and become comfortable with your routine, there are also common mistakes that you can avoid with preparation. Let’s review five tactics you can employ to help you circumvent the most common budgeting mistakes.
Make a Plan for Every Cent When Budgeting
If you want to reach your financial goals, sacrifices and commitment will be a part of the process. Put pen to paper and plan how you will spend the money you earn each month. Specificity is the key to success. Do not estimate2 the cost of your monthly grocery expenses or your fuel charges. Instead, review your expenses from the past three to six months to find an average for your monthly, recurring spending. Keep an eye on your spending and make budget adjustments as needed if something unexpected comes up.
Start by creating a budget that works with your lifestyle after reviewing your spending and identifying the true cost of your bills and lifestyle items. You’ll create a list of budget categories and allocate how much money you will have to spend each month in each category. Here are a few examples to get you started:
- Housing Costs
- Medical Costs Including Prescriptions
- Miscellaneous Spending
If you’re new to budgeting, check out our comprehensive budgeting guide for beginners! Our guide makes it easy to create, implement, and stick to your budget. Once your budget is in place, commit to working on it consistently!
In practice, what does this look like? Consistency is the key. Each day, set aside a mere ten to fifteen minutes to review your expenses from the previous day and track expenditures in the correct budget categories. If you’re just getting started, you’ll want to utilize tools for budgeting that can help you set things up and get going. If you struggle each month to stick to your plans, you might consider using cash only for certain expenses until you can hit your goals month after month thus forming budget-friendly habits in your day-to-day life.
Expect the Unexpected Expenses When Budgeting
Speaking of unexpected expenses, building in a small amount of flexibility in your budget3 is important. Medical emergencies, repair costs, and unemployment are just three of the major budget disruptions that can occur. There are, however, many smaller variances that can occur. For example, grocery prices can fluctuate as can the cost of fuel. Creating budget flexibility can help you absorb these changing costs without issue.
After all, there are no expenses that are 100% unexpected. Even emergencies can be planned for—a fully funded emergency fund can create peace of mind for your family and your future. If anything pops up that you cannot afford with your monthly income, an emergency fund can cover it. Now, before you click away from this article thinking easy for you to say but I can barely make ends meet! I don't have the budget to save up for an emergency fund. Listen, I get it. Habits, however, can move mountains. Even if you’re just saving a few dollars a week by walking somewhere instead of driving, opting for a night in instead of a trip to your regular hangout, or skipping one treat in exchange for a homemade, cheaper option—the money saved can add up.
Use Your Net Income When Making Your Budget
Understanding your income5 is the foundation for your budget. Your gross income is the amount of money you earn before taxes, insurance, and retirement savings are deducted from your paycheck. Budgeting precisely requires you to use your net income4 which is the total amount you “net” or receive. I always imagine a fishing net—what you catch is what you receive. Making sure you are starting your budget with the proper numbers will ensure accuracy. It is also important to base your income on actual dollars earned not what you expect,1 particularly if your income varies. If you earn tips or work on commission, you will want to create your budget each month using the previous month’s earnings if possible. It can be tricky when getting started, but if you can manage to get a month ahead, you will have a more manageable and accurate budget.
Get Everyone on Board
All adults who contribute income to the household should be on the same page2 about the budget plan. It’s so important that all contributing parties be a part of the budgeting process that this might, in fact, be the most crucial of the budgeting mistakes to avoid. Early in my marriage, my husband and I were not on the same page about our finances. We were in a constant state of wonder about the other person’s spending habits. On more than one occasion, we did not have enough money to cover something important because one of us spent money on something that we couldn’t really afford. What was our problem? A lack of communication. Had we spent time each week talking about our spending, creating a monthly budget, and working hard to accomplish common goals we would be much further along in our financial journey. We’re on the same page now, and we rarely worry about what’s going on with our finances because we know exactly what’s going on. We talk about it, we look at the numbers together, and we have shared goals that we’re working towards. If you’re new to budgeting, this may feel like the trickiest bit of the process. Aligning your goals with the goals of your partner might not feel or be easy. It is, however, imperative that you find common ground and make budgeting a priority and that you share the responsibility.
Make Saving Money a Priority
Spending every penny you earn is a recipe for disaster. For many people, however, it can seem impossible to save anything when the budget is stretched so thin. If you want liftoff where your budget is concerned, you have to make saving for the future a part of your plan. You can work hard to take those first steps and create a budget, but if your budget doesn’t allow room for growth towards a better future, it’s not going to be sustainable. Goals motivate us to stick to things that are hard. And budgeting can be hard for many people. I struggled when starting to live within a budget. In fact, I used to joke with my friends that I was very allergic to the word budget. Now, I look at a budgeting app daily and work with my spouse to accomplish financial goals I never would have dreamed possible years ago. I’m not talking about extravagant goals, and no matter what kinds of goals you have for your finances, it all starts with a budget.
1Scott, Daniel (2022, Nov 14). 4 Budgeting Mistakes You Are Probably Making (and How to Avoid Them) Retrieved from: https://www.entrepreneur.com/money-finance/4-budgeting-mistakes-you-are-probably-making-and-how-to/437693
2Waugh, Evelyn (2022, Jul 23). 7 Budgeting Mistakes to Avoid Retrieved from: https://www.experian.com/blogs/ask-experian/budget-mistakes-to-avoid/#:~:text=The%20biggest%20budgeting%20mistakes%20to,%2C%20they're%20all%20avoidable.
3Johnson, Emma (2016, Jan 4). Top 5 Budgeting Mistakes - - And How To Avoid Them Retrieved from: https://www.forbes.com/sites/emmajohnson/2016/01/04/top-5-budgeting-mistakes-and-how-to-avoid-them/?sh=42af92b25892
4Kerr, Emma (2022, Jun 30). 10 Most Common Budgeting Mistakes (and How to Fix Them) Retrieved from: https://money.usnews.com/money/personal-finance/slideshows/8-big-budgeting-blunders-and-how-to-fix-them
5Dantus, Courtney-Rose (2019, Jun 5). Budgeting: How to create a budget and stick with it Retrieved from: https://www.consumerfinance.gov/about-us/blog/budgeting-how-to-create-a-budget-and-stick-with-it/