If you are new to budgeting, this is just the article for you. If you think you have budgeting mastered, you may want to make sure you are not committing one of these mistakes. The simple truth is that everyone makes mistakes when it comes to budgeting and we should all do what we can to avoid these common mistakes.
Common Budgeting Mistakes
Ignoring Saving
It is easy to get in a routine of not worrying about how much you are saving each month and before you know it, you haven’t saved any money for the entire year. Many experts suggest saving first. This is a great policy to have because it ensures that it is valued just like other expenses on your budget.
I also like the idea of setting tangible goals with their associated costs. For example, if you know you want to sell your current car and buy a newer one in two years, calculate how much you want to save in the next two years and how much you should be saving each month. Doing this for multiple items ensures that saving money is not overlooked.
Don’t make the mistake of saving only pennies…
Over-Spending
Sometimes things do come up and you have to spend more money than you make each month. For example, I recently discovered that I needed to buy new tires for my car, which cost around $500 for the set of four and installation. This was unexpected and my wife and I overspent our income by a couple hundred dollars for that month. However, if this is happening on a regular basis, you aren’t budgeting correctly.
I had someone just tell me that for years they were budgeting, but were never coming out with a positive cash flow. Budgeting isn’t merely a task of tracking your expenses. It also consists of limiting your spending. You should be establishing manageable goals for your spending at the beginning of each month. Ensure, at the very least, that you have a positive cash flow most months (if not all).
Forgetting Some Items
I commented in my article on setting up a budget, that you need to include everything. By leaving some items out, you aren’t giving yourself an accurate picture of what you are spending.
Being Too Vague
If you are only budgeting total expenses instead of breaking it down into categories, you aren’t doing yourself any good. It is best to break it down into manageable categories (housing, transportation, food, entertainment, etc.) to give you a good understanding how much you can spend for each category.
This is very similar to the ‘envelope’ method, where families place designated amounts of cash in different envelopes at the beginning of each month. Once they run out of money for the envelope, nothing is purchased. You will need to find a balance between letting this occupy every thought and completely forgetting about it. Don’t let your budget control you, control your budget.
Copying Someone Else
While it can be beneficial to use someone else’s templates or system, it is best to experiment until you figure out what works for you. Once you have done that, you will be much happier than trying to follow someone else’s steps. While I provide a free excel spreadsheet for a Sample Budget, it is only that – a sample. Customize it and make it your own. This is the only way you will continue to budget in the future.
Being Too Confident
It is easy to become confident in your skills to manage your own money once you have been doing it for a while. This may lead you to become over-confident and ignoring the details or not being intentional about saving. Don’t let this be you – stay committed.
Forgetting to Celebrate
When you think of budgeting, it should be something that is exciting. Take joy in your discipline and celebrate your achievements! Don’t let it become too much of a chore that you end up discarding the whole process in a couple months.
Starting Tomorrow
If you currently do not have a budget, start today. If you say you will start soon, you may end up doing that – but probably not. Why wait? Start today and enjoy the benefits of financial security.
I think that being too vague is a mistake that pros and rookies make alike. Having a budget of $400 per month for miscellaneous will mean that, even if you have only spent $100 in the first 20 days, you will somehow miraculously hit that $400 mark by the end of the month. It becomes guilt-free and thought-free spending. Be specific!
Excellent article. I’d also add: not being consistent. You cannot do this for 2 months and then get back to recklessly spend.
Ignoring saving is a common theme I see with clients when it should be the first priority of a budget. People think that budgets are all about managing “costs” and they don’t view saving as a “cost.”
I’m a terrible budgeter, but I’m working to improve all the time. I often set unrealistic budgets (especially with food) and then get mad when I overspend. Oh and I forget things too! Usually annual things like car registration and zone permit for parking.
Leaving things out always gets me. I’m good at remembering to budget for what I need each month and then I just blank out on the once a year items like car registration or insurance (which is a huge one) and always wind up biting the bullet those months and messing up my financial goals entirely.
We have a hard time thinking of every item at the beginning of the month. We always have an “Oh ya – that expense!” moment before the month is over. Hopefully with more practice, we’ll get better at this. As for saving, we’re following Dave Ramsey’s debt reduction advice, and he claims it’s best to pay off all non-mortgage debt before putting aside savings. When the mortgage is the only debt left, he advises saving 15% of gross income while working that mortgage down.