With a few tips and tricks, it is not hard to create a simple budget. But a budget is only as good as your strategy, and if you don't have much guidance, you might make a few errors.
It helps to understand these budgeting mistakes and misconceptions you may have to help you get control of your money.
There are a handful of budgeting mistakes that throw people off, but the good news is: these mistakes are easy enough to fix.
Learn if you are making any of these budgeting mistakes and how you can fix them.
11 Biggest Budgeting Mistakes To Avoid
1. Estimating Your Monthly Costs
When you start creating your budget you have to know where your money is going.
It helps to look over your past three months worth of spending and base the amount for each category on the average that you spent.
If you are just estimating your expenses you will under-budget for them. It is natural to think that we don't spend as much as we really do.
2. Skipping the emergency fund
Your emergency fund eliminates the need for tapping credit cards or other loans when unexpected expenses happen.
It’s not a matter of if something will happen, but a matter of when it will happen.
Make a $500 emergency fund your first priority. Once that’s in place, set manageable goals for your emergency fund, working up to saving three and then six months of living expenses.
3. Trying To Do Too Much Of A Good Thing
When trying to get your finances in order there are alot of things that you need to do.
This includes expenses like building an emergency fund, paying off debt, saving for a vacation, and building a retirement fund.
Your cash will only go so far and you have to remember that.
Saving for multiple goals at the same time can be unrealistic. This can also add alot of stress to your finances.
4. Not Having Any Fun Money
When deciding on a budget it can be tempting to cut out everything that is not a necessity.
Getting on track with your money doesn't have to mean sitting at home bored all the time.
When you restrict yourself from all fun or entertainment spending, you are more likely to blow your budget completely.
You need to have a little fun money built into your budget because a strict budget won't work in the long run if you don't.
5. Budgeting Based on Your Gross Income
You might earn $50,000 a year, but after taxes, health insurance, and other payroll deductions, your amount of take-home earnings is much less.
For a realistic budget, you’ll need to create a spending plan based on your net or take-home pay.
6. Overspending On A House
Overspending on a house is a huge budgeting mistake.
Having a mortgage payment that is a majority of your income is a big mistake that can quickly destroy your finances.
Downsizing your home can give you freedom from that financial anxiety.
7. Never Updating Your Budget
From year to year, your income and expenses can change alot.
So, the budget that you create today could be completely irrelevant this time next year due to income changes.
To avoid any cash flow problems you need to be updating your budget on a regular basis and also add any increase to your income.
8. Thinking You Don’t Need A Budget
Fixing your finances takes effort and work.
If you never sit down and write out your budget then don't expect to be able to take charge of your finances.
You can talk about budgeting and gaining control of your money till you are blue in the face, but nothing will change until you take that first step.
9. Using Outdated Software
You know that software is great for your budgeting.
You can quickly track your expenses and make sure you never go over. However, you need to make sure that the software is up to date.
Outdated software will struggle to link to your different accounts and will not be suitable on the go.
10. Forgetting about the little things.
You've been tracking those ongoing, large expenses, but you're forgetting about those small ones.
It could be the $5 coffee now and then or that $20 on getting your nails done each month. These small purchases soon add up.
Just think, $5 per day on your coffee to work is $25 a week, which can add up to $1300 per year.
Track every little expense. It doesn't matter how small or random it is, it all adds up and will give you the true idea of the amount you're spending.
11. Not Having One
The biggest budgeting mistakes that people make is just not having one.
If you don’t have a budget, you are likely living in between financial crises.
You aren’t saving for the future and just floating along, while you may be able to get by, you are not going to move forward.
Take the time to set up your budget today.
What budgeting mistakes have you made?