Getting a hold of your finances can mean a lot of things. It can mean reducing or demolishing the debt you have, keeping spending down by saving on little things or saving even more money with bold moves.
No matter what your financial goals are, one thing you shouldn’t live without is a budget. This simple tool will keep you on track and help you take a hard look at the reality of your spending. But to get the most out of it, make sure you’re doing it right.
Some Budget Basics
The idea of the budget is that you already know how your money will be spent before you even earn it. At home you keep things tidy with the mantra “a place for everything and everything in its place.” A budget is like the financial equivalent of that. You won’t be (as) tempted to spend a chunk of your paycheck on a fancy dinner out if you’ve already committed that $200 to paying extra towards your mortgage. That’s the idea.
At its simplest, a budget is a list of things you want to spend money on, how much you plan to spend, and how much you actually spent after the fact. Simple. What could go wrong?
A lot, as it turns out. Making budget mistakes could mean blowing it, much like eating a cookie on a diet and then deciding to scrap the whole thing. Know what the mistakes are before making up your budget and you’ll be setting yourself up for success.
Budget Mistake 1: Not Leaving a Little Wiggle Room
If you’re creating a budget because you feel your spending has gotten out of hand, it can be tempting to create a very strict budget that cuts down expenses to the bone and looks really good on paper. The problem is, it won’t work. The first time you buy a pack of gum that’s not in the budget, you’ve blown it, and you might be tempted to give up.
To make it work, you need to give yourself some room to spend a little money any way you’d like. It’s kind of like the allowance you got as a kid that you could spend on candy and cassette tapes; now you’re giving yourself that pocket money to spend as you please. It doesn’t have to be a huge amount, but having some moolah set aside to “blow” on whatever you want will make it easier to stick to your budget.
Budget Mistake 2: Thinking Your Budget is Set in Stone
Consider the first few months you follow a new budget a test phase. Don’t get too downhearted if it turns out you forgot a major category of expenses and have to factor those in, or if you’re beginning to realize how much you really spend on fancy coffee every week. The more information you have, the better equipped you are to tweak your budget so it’s more in line with your lifestyle and the reality of how you spend money.
At the end of the month, go back and look at what you planned to spend versus what you actually spent and check for discrepancies. What was right on target, what was too high, what was too low? Then adjust it for the following month and at the end, compare again. After a few months, your budget should be a real reflection of your life and should be easier to follow.
Budget Mistake 3: Forgetting About Giving
It’s easy to write down a long list of things of money to spend on things you have to pay (rent, utilities, student loans) and things you want to buy (concert tickets, holidays), but it’s easy to overlook the money that falls in between.
Don’t forget to include money that you’re giving away or spending on other people. That includes charitable contributions, tithes to your church, and gifts for holidays, birthdays, and weddings.
Budget Mistake 4: Not Factoring in Irregular but Recurring Expenses
You can be rolling along fine with your budget and then Bam! You’ve blown it. All because you forgot to include your dog’s annual (expensive) visit to the vet on your budget.
These recurring but irregular expenses include things like dental cleanings, doctors’ appointments, car maintenance, insurance premiums, and yearly subscriptions to magazines and clubs. Go through last year’s bank and credit card statements and look for charges that occur annually, quarterly, or semi-annually and find out approximately what you can expect to pay this year for similar charges and when.
Note that these expenses are not the same as emergencies. These are things you know you will need to pay for over the course of the year. Emergencies, like a broken timing belt or a visit to the E.R., cannot by definition be part of your budget because they’re unexpected. Instead, work towards saving up an “emergency fund” that can cover these types of expenses. (But the amount you save every month towards building up your emergency fund can go on your budget sheet, since you know it’s an upcoming expense!)
Budget Mistake 5: Assuming That Expenses Will Stay the Same
This is true for things like cable TV bills, which have a curious way of creeping up every month, and insurance premiums, which can change depending on the claims you made or the group you’re insured with. While many expenses will stay relatively stable from month to month and even year to year, don’t forget the expenses that will change, as they could throw your whole budget off.
Budget Mistake 6: Not Consulting With the Family
If you live alone and handle your own finances, this isn’t applicable to you, but if you’re budgeting for the household, listen up. You’ve got to take the needs and wants of the other family members into account. Ask what their regular and occasional expenses are that come out of the family budget. If you have kids, you have to consider expenses related to school, after-school activities, trips, clothes, and allowance. Also factor in money for family trips and events.
Budget Mistake 7: Not Saving, Not Even a Little
The best way to save is to put away a little at a time, so make sure that’s part of your monthly budget. Don’t wait for the magical day where everything is fully paid off and you have gobs of extra cash lying around before you start saving for your future, because that day may never come.
The easiest way to do it is to make things automatic. You can arrange direct deposits from your paycheck into your IRA or other savings account, for example, or set up a savings account related to your checking account and transfer funds automatically every paycheck. Once you’ve saved a certain amount, you can take that money and contribute to a retirement account or invest in the market.
The beauty of this method is that you never really see the money in your checking account, so you’ll never miss it.