If there were one word that would perfectly describe what a budget should be in times like these, it’s “flexible.” With so much changing on a seemingly daily basis, it’s important that you try to stay flexible as well. This means that your budget today may have to change next month — and that’s definitely OK.
However, no effective financial plan would ever work without a comprehensive, written budget. As long as you do it right, you’ll have an accurate roadmap of your financial journey and better chances to financially survive this challenging time. It empowers you to direct how you should use your money and avoids a situation where your money dictates how you live your life.
You will know how much you should spend, how much you should save, how much to set aside for emergencies and aspirational purchases. You can also use it to plan for your retirement. Unfortunately, many household budgets omit some integral components of an effective budget. Let’s look at some of the common mistakes that people make when preparing a budget.
Mistake #1: Do Not Define Your Financial Goal
There is a common adage that goes something like: “If you don’t know where you want to go, you’ll get there no matter which road you take.” What’s the point of following a budget when you don’t identify what it’s for? If you don’t set a financial goal, your budget would be a formality rather than your main means of achieving your goals.
So, to avoid making that mistake, sit down and take time to define your goal. What do you want to do with your money? If you are setting a very ambitious goal, you might need to break them down into smaller chunks. Whatever it is, come up with a goal for your budget and then categorize that goal.
People on a budget often experience frugal fatigue because of their self-imposed restrictions which lead some of them to give up. To counter this mistake, include a provision in your budget for reward and celebration when you reach your milestones. Of course, it should not be an amount that would wipe out all that you’ve worked hard for.
But make room in your budget for a small token to recognize financial progress and boost your morale with a tangible tap on the back. It should be nothing fancy but simple yet memorable – like treating yourself to a double scoop of your favorite ice cream after reaching a saving milestone.
Mistake #2: Not Prioritizing Your Expenses And Saving Items
When you make your budget, think of your basic needs as of first importance. Allocate funds for food (basic groceries and not for dining out), shelter (mortgage/rent, utilities, etc.), transportation. The rest can come after these.
When you have your priorities lined up according to their ranks you can see if your budget will accommodate all of them. Or, show an area where you need to cut down. For example, you may cancel your Netflix subscription if you need to put more money for groceries.
Mistake #3: Making Unrealistic Assumptions
Underestimating your expenses could be a fatal error. Even if you follow your budget to the letter, you’re going to set yourself up for failure when you do not put realistic figures. Many people try to fit their income and expenses into their budget without being truthful and become frustrated right at the onset.
For example, if your normal grocery consumption is $500 per month, there’s no way $300 as a monthly budget would work for you. You’d always go over your budget month in and month out.
Be true to your spending first. You can do a few adjustments in the future. It’s okay to overbudget on several categories. Then check your actual expenses over the next three months to get a closer estimate of the amount that you need to set for each item.
Mistake #4: Ignoring The Unexpected
There are events that you don’t expect which could mess up your budget and financial life. The washing machine can conk out or the gasket on your car may blow out. Your budget should be able to cover these emergencies. If you don’t consider these things in your budget, you’ll wreck your monthly budget or use your credit cards to remedy the situation. You might end up going into debt.
Anticipate the things that can go wrong and have a contingency plan. You can start a savings account for emergencies, or keep a substantial buffer in your checking account in case you need more. Set a budget and accept that emergencies do happen. If they do come, you’ve got your back covered.
Mistake #5: Relying On Credit Cards
If you’re using a bucket budgeting system where you set aside a sum of money for your expenses (food, clothing, transportation, entertainment, etc.) tracking your expenses can make bookkeeping harder.
Going through your statements adds another step in the process. Also, when you rely on a credit card so you can use the statement to track your expenses, you open yourself to the risk of over-spending. Pretty soon, you might find yourself buried in debt.
What you can do is to switch to a ‘cash-only’ budget for the first month of your new budget so you can see where your money is going.
Mistake #6: Losing Sight of The Irregular Spending
You might forget that you have expenses that happen only quarterly or once every year and not include them in your budget. These are irregular expenses. They come, but not as often as the others – summer vacations, gifts, pet care, holiday spending, and back-to-school needs. The point is, you have to expect them and consider them in your financial plan.
Even if some expenses don’t come regularly, you can still plan for them. Here is how to do it. Take a look at your spending last year for the irregular expenses – it doesn’t have to be very accurate because a good estimate will do the job. Then, divide that figure by 12 (the number of months in a year).
Set up an item for those expenses and schedule an automatic transfer from your checking account to your budget account. This will allow you to have the funds when the need arises such as when it’s time to go on a holiday. Even if this would require a substantial amount, you won’t turn your household budget upside down.
You don’t have to be legalistic about following a certain budgeting formula. You can always scrap a budgeting process that doesn’t match your lifestyle. Remember that an effective budget must accurately reflect your income and expenses and should help you reach your financial goals.
Your budgeting process should be able to adjust to significant life events such as a new addition to the family, change in income (especially a decrease), or the purchase of a new home. Review your budget at least every month to make sure that you are on the right path to your financial goals.
Mistake #7: Giving Up Too Soon
Budgets are not 100% fool-proof because some events can mangle your figures. This is why many people throw in the towel early in the game and fail to achieve their goals. For example, you might have a budget of $500 for groceries but some guests arrive and your expense for that month goes up to $600. You might become disappointed and decide to throw your budget out the window.
Revisit your budget at the end of each month so you can see what adjustments you need to make. Was it an isolated case or something that would go on for a long time? Do you need to modify next month’s budget or recast an item or two to cover the extra expense? Is it time to adjust the emergency fund for next month?
You can’t perfect it in one sitting. It will take a few months of tweaking, adjusting, and monitoring. People want everything in a snap, including a home budget. But a budget is one of those things that take time to do. If you want a budget that will fit your purpose to a tee, prepare yourself to go through several revisions over a few months.
Mistake #8: Making a Budget Without Tracking Your Spending
A great start for an effective budget is to track all your spending for 30 days or a month. Doing this will let you see how your spending compares to your income. It tells you where you are spending so much and where you can cut back on.
For example, if you’re currently spending $500 on restaurants/take away, reducing this expense might mean looking for less expensive restaurants. You might be able to bring it down to $300. However, if you target a $200 monthly expense for this, it might not be realistic and could later lead to frustration.
If you don’t know how much you’re spending, you wouldn’t know whether you’ve reached your spending limit. It’s important that you find a budgeting method that will work according to your situation. It doesn’t matter whether you’re using an app or physical envelopes for your budget as long as it works for you. If you know where your money goes, you can make a realistic plan for how you can allocate your funds better to reach your goals.
Mistake #9: Creating The Exact Same Budget Every Month
You can’t have a budget that looks the same every month. It’s a huge mistake. The things you spend on will not be the same every month nor would their amounts be. It depends on holidays, birthdays, vacation time, energy costs during warmer or cooler months, taxes, or car/home repairs.
To have a more relevant budget, plan each month out one at a time. It is better to do it before the start of the month.
Mistake #10: Forgetting Your Fun Money
When you scrap all the money for fun and entertainment, you tend to blow your budget even more. Indulging in your favorite meal or entertainment is okay as long as you prepare for them. It should be in your budget every month (or less frequent) and then discipline yourself to stick to the amount you have set.
Otherwise, you might spend more than the limit you have provided and wreck your entire month’s budget.
Mistake #11: Not Budgeting At All
You should have a budget before you let go of a single dollar. So, take advantage of being stuck at home and spend some time to look at your spending habits. Then, write down a detailed spending plan that considers the income that you expect for next month.
Remember what we’ve said that it takes a few months for you to become used to it so avoid becoming frustrated and keep on. Once you become comfortable preparing a monthly budget and sticking to it, you can go through each month with a sense of security. Then, your financial goals are easier to realize.