Budgeting is a helpful process for many Americans; whether you’re running a business, household, or just want to see where your money goes every month. With a good budget in place, you can identify expenses, income, and where you need to cut back or increase savings. Here are five common budgeting mistakes and how to fix them.
1. Missing Expenses
Minor expenses can easily fall through the cracks when you’re creating a budget. Things like your morning coffee, eating out every Thursday, or your cell phone bill may not seem like large expenses, but should nevertheless be accounted for in your monthly budget. Even the smallest of expenses can add up over time, creating a sudden out-of-pocket cost you hadn’t accounted for.
How do you include each and every expense in a budget? The simple answer is by taking a look at your bank statement (and credit card statements). You’ll be able to see every single transaction that was made during the month, allowing you to be inclusive of everything; even the smallest transaction amounts.
From there, you can identify your top expenses, as well as create a hard spending limit for variable expenses and extras.
2. Not Keeping Up With Your Budget on a Monthly Basis
One major pitfall that most budgeters find themselves in is the accountability trap. It’s easy to not hold yourself accountable for not keeping your budget updated, and it’s even easier to make excuses for spending money we don’t have on extra things at our favorite stores.
It’s imperative to your financial success that you keep up with your budget, and update it on a monthly basis. You need to hold yourself accountable for your own spending (and saving) and identify where you’re slipping up. Even a minor mistake can set you back several months if you don’t catch it until much later.
Make sure to update your budget every month. Set a reminder on your phone or on a budgeting app like Mint, so you’ll be constantly updated on your spending and how it’s affecting the success of your budgeting efforts. You can also work with a financial advisor or planner to get your budget under control (and they’ll help hold you accountable). If you’re on the west coast, you can learn more about the best financial advisors here.
3. Being Too Strict
Leisurely activities must be included in your budget. Life isn’t all about money, and missing out on experiences due to no “fun” budget can be impactful to both your mental health and your relationships. Make time and set aside money to go out to dinner, see a movie, or visit a favorite location (like sunny California or the beaches of the East Coast) so as to keep yourself motivated and happy.
While budgeting can create financial freedom, which is an important step in attaining happiness, it’s not everything. Be firm with yourself about what you spend money on, but don’t restrict yourself to no pleasure spending. This will likely have the opposite effect; causing you to resent budgeting and actually creating unhappiness.
Remember, saving money means nothing if you can’t enjoy your life with what you’ve saved. Don’t be too strict with your budget. Include some pleasure spending to keep your mental health intact.
4. Not Including Reducing Debt in Your Budget
Many people who create a budget simply include their monthly costs and don’t create any financial space in which to pay down debts. Paying down your debt is the most important step in obtaining that coveted financial independence that we all seek. Make no mistake; living debt-free is the new wealthy. Without debt, you can effectively reduce your monthly financial obligations and put more into savings.
When you create your budget, include resources to allocate to your debt balances. This includes credit cards, minor personal debts, etc. Even just a little bit every month can start whittling away at those large balances, and you’ll be able to see your progress each month and know you’re one step closer to your goals.
5. Forgetting Annual or Semi-Annual Costs
Did you forget about your property taxes in your budget, or any other annual/semi-annual costs? This can leave you scrambling when the due date arrives, stretching out or maximizing your budget to meet these sudden costs. A good way to avoid such surprises is to also include your yearly calendar in your budget planning.
With a bank statement, calendar, and budget app at your side, you’ll be fully aware of all of your expenses and able to account for each month accordingly. You may have higher expenses around tax time than usual, so it’s important to remember that you’ll need a more flexible budget during those months.
Budgeting is incredibly useful in any household or organization. Simply spending money and not keeping track of what you’re spending can spell disaster, and not chipping away at debt can leave you stranded with extra expenses in the future. Be sure to take the time to craft a meticulous budget, complete with all of your monthly expenses and any annual or semi-annual costs. The better your planning, the better your results will be.