5 Budgeting mistakes to avoid
Managing your finances effectively isn’t just about finding ways to maximize your income or completely cutting out your spending. When people think of “budgeting” they’re likely to conjure up images of pinching every penny. This can be an easy mistake to make. Budgeting can be a powerful tool to help you build better money habits. Let’s look at some common budgeting mistakes to avoid that can help you on your road to financial freedom.
Not having a budget at all
One common budgeting mistake is not having a budget at all. Remaining in the dark about your spending can limit your ability to save for important goals like a car, a home or your retirement. If you don’t know what you’re spending, there’s a reasonable chance you may be spending too much.
The idea of listing out every single expenditure for a month might seem daunting, but you don’t have to go that far. It can be helpful to create a budget that works for you, which includes making the budget manageable enough to take on in the first place. If you’re just starting out, it might be wise to create just a handful of budgeting categories to help keep things simple.
Not knowing your spending patterns
Staying entirely in the dark about your spending is one thing, but having only a fuzzy picture isn’t great either. Using guesswork when trying to allocate your monthly budget can lead to over estimating or underestimating how much to allot toward each budgeting category. This may set you up for failure.
While your zeal to implement a monthly budget quickly is admirable, this is a situation where it helps to take time to review your spending. Taking a month to assess and identify your spending patterns may help to establish a baseline as you’re setting your budget. It may also be helpful to track your spending in a monthly budget worksheet (PDF). Over time, you can adjust which budgeting categories to cut back spending on.
Not having an emergency fund
Life is unpredictable and having an emergency fund to pay for unplanned expenses may help you during that time. Without it, you may have to dip into long-term savings or use a credit card if the unexpected arises.
Creating an emergency fund may seem intimidating, but it doesn’t have to be. When you’re making your budget, you can include a monthly line item for contributions to your emergency fund. This can help build up your reserves over time. Many bank accounts even let you automate these emergency fund deposits.
Not differentiating between wants and needs
A common mistake that beginner budgeters make is mistaking “wants” for “needs.” Needs are essential items like utility bills, rent or mortgage payments, groceries and the like. These are things that you need to live. Wants, on the other hand, are non-essential expenses like dining out or entertainment.
It may still be possible to find room in your budget to accommodate a few of those luxuries, but being honest with yourself about what’s truly necessary may help you avoid this common budgeting mistake.
Not leaving any wiggle room
A meticulous budget plan is great, but life is full of curveballs. Planning for emergencies is important, but there are other ways in which your expenses may fluctuate month-to-month. Perhaps you decide to add a pet to your life, or your utility bill gets higher. Maybe you moved and need to start commuting further to work every day.
These scenarios and countless others could throw your monthly budget for a loop if you’ve already allocated every last dollar. Having some breathing room can help provide flexibility to zig when life zags.
In summary
A well-set monthly budget can go a long way toward helping build better financial habits. Many beginners make common mistakes like improperly classifying essential and non-essential expenses or neglecting their emergency funds. An imperfect monthly budget can always be improved, but there’s no substitute for taking that first step.
