7 Worst Mistakes To Avoid When Creating Your Ideal Budget
Talking about money makes people uncomfortable - and for good reason. We are made uncomfortable by what we do not know or understand - and the statistics surrounding the lack of financial literacy possessed by Americans are staggering. Last year I read an article in the NY Post that cited a recent study on the financial literacy of 1,000 Americans over the age of 30. This particular study found that only about one half of participants were well versed in 401(k) plans and the concepts of interest and bankruptcy. And yet, as of October 2018 Americans are carrying over $1 trillion in debt, primarily on credit cards, according to the Federal Reserve.
As an accountant and lover of all things finance, these statistics make me sad. I am 100% confident that you do not need to be one of these people, that you can become an expert on all areas of personal finance, and that you can set yourself free of money woes and live a life of financial independence. One of the first ways to set yourself on this path is to build a personal budget that is comprehensive and effective at helping you achieve your money goals.
Before getting to work on your personal budget, it is important to make yourself aware of the mistakes that are commonly made in budgeting so you can avoid them at all costs (money pun intended).
Mistake #1 Not Setting a Goal
The primary purpose of a budget is to track your spending but it will be much easier to convince yourself to spend the time on a budget if there is a reward at the end of the tunnel. When I create my annual budget, I earmark amounts for vacations, home updates, and my overall savings that will help me grow my bank account. Your budget should exist to help you meet your money goals - not torture you!
Mistake #2 Not Being Honest with Yourself
Each year when I make a budget, my starting point is what I actually spent in the previous year. You can come up with a number for what you would like to spend in any given category, but using history to plan for the future is the most rational methodology to follow when creating a budget. If you think you will only spend $100/month on entertainment but for the past 6 months have spent over $200/month, you will likely break your budget very quickly and become discouraged.
Review your expenses for the past three months across high level categories such as housing, utilities, transportation, food, household expenses, and entertainment. You can use your bank and credit card statements, electronic payment history (think Venmo and Paypal) and, of course, your memory to determine how much you spend each month. Then once you have fleshed everything out, determine where you need to make cuts in order to achieve your budget goals.
Be sure to really spend time thinking about the types of expenses you have, including those that are deducted directly from your paycheck (examples: health insurance, retirement contributions), paid with checks or via automatic payment. It is very easy to forget expenses that are infrequent (example: Amazon Prime membership), gifts, and seasonal items like Christmas trees and holiday tipping.
Mistake #3 Not Challenging Yourself
If you buy coffee everyday but can manage to reduce your dining out budget substantially by brewing at home - why not do it? Even if you already met your budget goals, challenge yourself to pinch in areas where you know you can. This will help to level out the areas that you undoubtedly go over budget in.
You should also challenge yourself to really differentiate between wants and needs. You may not be able to cut many expenses that relate to necessities (think rent/mortgage, car payment, electric bill) but you can almost always find ways to cut back on nonessentials (think dining out, expensive clothing, beauty treatments).
Mistake #4 Not Revising Your Budget
Your expenses will likely evolve during the year and your budget should follow suit. For example, if you buy a new car in July you should update your budget for the change in car payment and insurance, and account for any one-off fees and taxes that you paid. Each time you revise your budget you should ensure you are still on track to meet your goals by making cuts elsewhere where needed.
Mistake #5 Not Leaving A Buffer For Incidentals
It is inevitable that you will have unforeseen expenses during the year – or expenses that you just plain forgot about. If you leave a buffer in your budget for incidentals, you will not feel discouraged when they come up. In my budget I allocate about 5% of take home income (i.e. the total amount in my paychecks annually after taxes are withheld by my employer) for miscellaneous purchases, unforeseen medical expenses and other incidentals.
Mistake #6 Not Sticking To Your Budget
If you are not actively updating your budget or neglect to abide by it when making a purchase decision, you simply will not meet your goals. Sometimes this means making hard decisions – like not eating out over the weekend because you have already maxed out this category for the month. Updating your budget frequently is key for this reason. If you are spending without keeping track, you may find that you have already gone over budget for the month without even realizing it. I update my personal budget every Monday morning. It gives me a good handle on what I spent over the weekend and allows me to set expectations for what I can spend during the coming week.
Mistake #7 Not Giving Yourself Grace
Budgeting is tricky until you get the hang of it – so do not be hard on yourself if it takes some time to get used to. And if you absolutely must go over your budget in any category for the month, just try to balance it out by staying under budget in another category or in that same category in a subsequent month. If you stick with your budget for a few months, it will become second nature before you know it.
All good ideas and reminders on setting realistic budgets! We often buy pantry items on sale and sometimes the back stock builds up. Occasionally I try and do a $20 limit at the grocery store to focus on clearing out the pantry and saving some extra $$$ that week.
ReplyDeleteWhat a great idea Casey! I am always piling up in my pantry and often do not even know what I have in there!
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