There’s just no question that budgeting is by far the best to have an accurate picture of your personal finances. In addition, it’s the ideal tool for deciding how you will spend your money. Unfortunately, if you’re making any of these biggest budgeting mistakess you may be sabotaging all your best budgeting efforts.
While your budget doesn’t have to be perfect it’s important to recognize there are mistakes you may be making that are throwing your budget out of whack. What are these biggest budgeting mistakes? Here are nine of them.
#1. Failing to save for the unexpected
One thing you can expect for sure is the unexpected. It may come in the form of a huge automobile repair bill, the sudden need to relocate to a new town or a serious illness. According to a survey done by Bankrate, 3 out of 10 Millennials would use credit to help them survive unexpected costs. While you can’t know what unexpected thing will up and smack you in the head, you can budget for it. Once you have created a budget for your variable and fixed expenses, treat your emergency savings account as if it were just another item in your budget. Put away a set amount every month and you might be surprised at how quickly you have a good savings fund to handle life’s unexpected events.
#2. Having unrealistic expectations
You may have run into the idea of extreme couponing but don’t make the mistake of extreme budgeting. Don’t set your standards so high that you end up setting yourself up for failure. If you are trying to pay off credit card debts it’s easy to get the numbers to add up on paper only to find that they have no basis in reality. For example, when you look at your budget ask yourself can you really cut your grocery spending in half. Instead of setting really high standards one financial expert suggests that you start out with small baby steps – maybe try to cut your grocery spending by 20% this month, then 30% the following month until you do reach that 50% goal.
#3. Estimating your spending
This is the biggest budgeting mistake made by many people. You can’t have anything close to a realistic budget until you know where your money is going and your true cost of living. If you try to just estimate your expenses this won’t work because the odds are that you’re spending a lot more than you think each month. Based on a study published on UMich.edu, consumer spending is expected to rise in 2016 – the highest since 2006. Instead of making guesstimates you need to track your spending for at least a month. And two months would be even better. There are a number of free apps that make this almost drop-dead simple. Two of the most popular of these are Mint.com and Personal Capital.com. Or you could just log your spending in a notebook. But whichever method you choose make sure you log down everything down to that drive-through cup of coffee you had this morning.
#4. Failing to find cheaper alternatives
One good way to lower your expenses is to find cheaper alternatives. This can take some time and effort but there are very few expenses where you couldn’t find cheaper alternatives. As an example of this, you might think that your cable bill is a fixed expense and that’s it. But if you shop around it is almost 100% certain you can find a cheaper alternative. Or you might contact your current provider, ask for a retention specialist and threaten to move to another provider. We did this recently and were able to cut our monthly bill by about $70. The same is true these days of your telephone bill. With a little haggling or by changing your provider you could get your bill reduced substantially.
#5. One of the biggest budgeting mistakes — having too many accounts
Do you have several checking and savings accounts, multiple credit cards and maybe some student loan payments? This can be a big mistake because it makes it easy to lose track of how you’re spending your money and all your due dates. This can be a costly problem if you lose track of one or more of your credit card payment dates because if you’re late or miss a payment it will scorch your credit score. Plus, it can mean late fees and overspending charges.
What with all of the financial software programs, smart phone apps and websites now available there are certainly a lot of helpful budgeting tools to choose from. It’s important to understand that the software or app that works for one person may not be right for you. Before choosing one, you should compare several different options and then choose the program that you feel most comfortable with. As an example of this one financial expert says that about 3/4ths of the clients he sees actually hate Mint.com. He noted that they choose it because it’s the one they’ve most often heard of but then try it, don’t like it and forget about it. The key here is to find a tracking system that you will feel comfortable using day in and day out.
#7. Failing to adjust your variable expenses
When you get right down to it the objective of budgeting is to help you change your spending habits. Even if you’re very happy with the budget you’ve created it’s important to review your variable expenses from time to time to make sure that your spending is what you had anticipated. For example, if you’re not careful you might find that you’re spending too much on some of your categories such as shopping, entertainment, and recreation. If you find this is to be the case you will need to make some adjustments because if not you’ll just continue overspending every month. This means you will probably have to juggle your numbers by reducing your spending in some other categories to cover those where you’ve been overspending and it’s critical you do this.
#8. Depriving yourself
When you get serious about budgeting and reducing your spending it doesn’t mean you have to sit home night after night feeling bored. Don’t be too harsh on yourself. We understand that everyone needs to blow off some steam occasionally and it’s not irresponsible to have a little fun with your money. No matter how good a budget you developed it won’t work long-term if you’re too strict and don’t allow yourself to have some fun from time to time even if it’s as small as treating yourself to that drive-through coffee.
#9. Neglecting those irregular expenses
We hope that you’re definitely budgeting for unexpected expenses like car repairs, home repairs, and gifts. But there are also some irregular expenses you need to budget for. These are expenses happen yearly such as an annual auto insurance bill, property tax bill or homeowners association dues. One financial expert says the best way to build these into your budget is to take the total amount, divide it by 12 and then add this amount to your monthly budget. Naturally, you’ll want to actually stick the money into a savings account so it will be there when those annual bills arrive.