Having a budget should give you peace of mind and help you reach your financial goals. But unfortunately, common mistakes made in budgeting can easily leave people feeling too restricted and uninspired.
Whether this is your first budget or your starting over again, you can create a budget that empowers your life, not drags you down. Just watch out for these common budget mistakes:
Not Setting or Knowing Your Financial Goals
Setting a budget (and sticking to it) is nearly impossible if you don’t know what you’re working towards. Whether you have debt you’re trying to pay off or if you’re saving for a house, having a “why” behind the work will give you the extra motivation needed to plan your spending and then commit to it.
Our advice for setting goals: think in micro actions. Decide on your overall goal and then set achievable milestones. For example, saving $500 might initially feel unattainable. Instead, try focus on saving just $50 a month until you’ve reached your $500 goal.
Using the Wrong Budgeting Tools
Financial apps and free budgeting spreadsheets can make managing your money easier, but you have to find the one that works best for you. Before you choose, know that different software track budgets differently — and just because one has thousands of five-star reviews doesn’t mean it’s the right one for you.
Compare styles and options before deciding on which tool to use. Also, don’t forget to consider any potential fees into your budget.
Playing the Guessing Game
When it comes to planning a budget, you need to lay a good foundation, and that means knowing your true living expenses. The reality is that you probably spend more than you think each month, which makes it pretty difficult to hit your goals.
Go through your bank and credit card statements and track your spending for one to three months. Make a note anytime money is pulled from your account or charged onto your card, and then use that as a basis for your budget. This is also an easy way to see where most of your paycheck goes each month.
Forgetting an Emergency Fund
Not to be confused with your normal savings, an emergency fund accounts for just that: emergencies. Not planning for the “what ifs” is one of the most common budget mistakes, but a good budget should make you feel secure in your finances no matter what life throws at you.
Expect the unexpected. Most experts recommend saving at least six months’ worth of expenses, but it is OK to start small. Decide what you can comfortably afford to save and include that number in your budget. Over time, you’ll build a comfortable safety net.
Not Revisiting Your Budget
A budget isn’t written in stone. It’s dynamic, ever changing, and meant to be revised as your life changes. For example, your budget might change with the seasons, too. During the holidays you might expect to spend more on gifts and get togethers with friends and family, or during summer you might plan to splurge on a vacation. During spring and fall, perhaps you put away a little extra to save for the holidays and vacations.
Your budget doesn’t have to be the same each month. But not revisiting your financial plan when things change, even temporarily, can be a mistake.
Making Your Budget Too Strict
Tight budgets that leave no wiggle room for spontaneity might actually work against you, as they can test your willpower. Just like a too restrictive diet can lead to binge eating, a too restrictive budget can lead to you throwing your spreadsheet out the window in frustration.
Budget in fun where you can. Try giving yourself a limited discretionary amount each month or “fun” money. By setting a cap, you won’t go over, but you also won’t deprive yourself of the things and experiences that make you happy.
Not Counting Small Expenses
Leaving out the “spontaneous” coffee that you seem to get once or twice a week can lead to problems reaching your goals.
Instead, be honest with yourself. If you notice a weekly Postmates splurge — add it into your budget. Remember that budgets are guidelines and should show the real picture. If you want to spend your money on something, go for it. Just make sure you have an honest plan.
Not Budgeting at All
Financial planning can feel daunting, especially if you’re worried you’ll make mistakes, but remember: It is always worth it. The alternative — playing a guessing game of spending, not saving money, and not planning how to attain your goals — might feel more fun in the moment, but ultimately sets you up for disaster when money is needed.
Remember that budgeting is a practice, and you don’t have to get it perfect the first time. Continue to revise and revisit your spending plan, and don’t give up.
Committing to a budget could be one of the best financial moves you make this year. Though it does take discipline and planning, the tradeoff is a more financially secure present and future.