5 Big Budgeting Mistakes to Avoid
5 Big Budgeting Mistakes to Avoid
A budget is the cornerstone of good personal finance. But a budget will only work for you if you work your budget. It’s not a “set it and forget it” financial tool. Rather, it requires frequent tracking and logical revisions over time. Without this active participation, you’re likely to overspend and undersave — a dangerous combination that goes against your financial health.
Want to stay financially fit? Make sure you avoid these five common budgeting mistakes.
Mistake 1: Not Tracking Your Spending
Back when writing checks was an everyday practice, people would write down the amount of each transaction and balance their checkbook. Now, people simply tap their debit card and go. But not tracking your spending can be hazardous. If you don’t know how much you’re spending, you could quickly find yourself overdrafting — spending more than you have in your bank account. And if you’re not careful, overdraft fees can total hundreds of dollars a day, making a bad situation even worse.
This is one reason it’s important to always know just how much you’re spending. You can do this by setting up spending alerts — in your banking account, your favorite financial tracking app, or elsewhere — if you don’t want to track your transactions by hand. Just make sure you track them. If you don’t, you could throw your entire budget out of whack before you realize it.
Mistake 2: Guessing at Costs
Many people make the mistake of guessing at their monthly bills. They might know the general ballpark of how much certain things cost, but not the exact amounts, which is worrisome. Because if you don’t know what your expenses are, you won’t know for sure whether you have enough income to cover them all.
Even a slight difference in expense amounts can start to add up, especially if it causes you to overdraft — or undersave. And remember that your current expenses can change, such as if a gym membership, streaming service, or other subscription plan increases. Or when your utilities usage varies throughout the year (the electricity bill looks a lot different when you’re inside all winter versus when you’re outside all summer).
So, just as it’s important to track your spending, it’s important to track your expenses. That way you can adjust your budget accordingly and, if needed, make money-saving lifestyle changes in advance.
Mistake 3: Not Having an Emergency Fund
Here’s a not-so-fun fact: Nearly 1 in 4 U.S. adults have no emergency savings at all. And more than half of American adults don’t have enough savings to pay for an emergency expense of $1,000 or more.
You don’t want this to be you. Because if you don’t have an emergency fund for when the unexpected happens (e.g., a job loss, a car wreck, a medical emergency), the unexpected could wreak havoc in your life. That’s why it’s good practice to include an emergency fund allocation in your budget — it helps you safeguard your family financially by steadily increasing your savings each month.
Building an emergency fund can be as simple as setting up an additional savings account with your bank and depositing funds as your budget dictates. Or you can open a high annual percentage yield (APY) savings account at a different bank, so your fund grows even faster by accruing interest. Either way, it’s good practice to keep your emergency fund separate from the rest of your savings. This can help dissuade you from using it for non-emergencies.
Mistake 4: Not Discussing Finances with Your Partner
Budgeting with a partner is often harder than budgeting by yourself. Simply because it’s harder to get on the same financial page with another person than it is to set and act on a financial plan on your own. And if you and your significant other can’t see eye-to-eye, things can get stressful quickly.
Many people make the mistake of not having an open dialogue about expenses. For instance, a couple may fail to inform each other when they make a purchase, even though they share a bank account, making it easy to purchase the same items twice or overspend in a category, such as eating out. This can lead to overdrafts and the correlating fees, adding an unnecessary financial strain on the relationship.
To avoid this, try sitting down with your partner and figure out a system that helps you both stay on the same page. And make sure you have regular check-ins, such as a monthly budget meeting. This helps ensure you are aligned about savings goals and other financial priorities, making it easier to achieve them while still setting aside funds for date nights. Talking about money may be uncomfortable at first, but it’s a breeze compared with the consequences that might come from not discussing your finances.
Mistake 5: Not Having a Budget
Nearly 8 in 10 Americans say they feel like they can get by without monthly budgeting. But if you don’t know how much money is coming in, where it’s going out, and how much is going out, there’s a good chance you’ll wind up in a tough financial situation sooner or later. After all, in addition to helping you track your current spending, budgeting helps you make sure you put enough in savings and investments. Without it, you might not set aside enough to put a down payment on a home or retire as early as you want to.
Not sure how to create a budget? Not to worry. You can do it in three easy steps:
- Step 1: Tally Your Income. Have a day job? Multiple side hustles? Expecting $100 from grandma? Tally how much income you expect to bring in next month. It’s hard to make the most of every dollar if you have no idea how many dollars you’ll have.
- Step 2: Subtract Your Expenses. Just as you tallied your expected income, you’ll need to tally your expected expenses. Everything from your rent bill to your groceries to your streaming subscriptions. Then you’ll need to subtract the dollar amount of these expected expenses from your expected income amount. If you still have money left over, great! If not, you may need to cut down on expenses or find ways to grow your income until you have more money coming in than going out.
- Step 3: Decide How to Use the Remainder. Create a plan for how you’ll use the income you’ll have left after your expenses. This is the money you can use for your savings goals, investments, sports tickets, and more. So, for instance, if you have $1,000 left after all your expenses, you could put $300 in an emergency fund, save another $300 for a future house downpayment, use $200 to make an extra student loan payment, and use the last $200 as your “fun allowance.” In any case, all the income you have left after your expenses is for you to use however you see fit. Want to have more money in this pot? Keep lowering your expenses and growing your income.
If you don’t have a budget, now is as good a time as any to sit down and make one — either from scratch or by using a budget template. It won’t take a long time to complete, and it may provide the peace of mind that comes with knowing where your money is going. Even if you doubt the value of budgeting, it’s better to be safe than sorry.
Top 5 Budgeting Mistakes and How to Avoid Them
There are many factors to consider when following a budget, including the mistakes. Often, people create a budget without thinking about the potential mishaps, which leads to setbacks and other challenges. Although budgets should be flexible and can be adjusted if you run into an obstacle, it’s best to avoid making these mistakes altogether. This starts with educating yourself. Here are the top five budgeting mistakes people make and how to avoid them:
1. Forgetting to Save
Many people only think of a budget in terms of income versus expenses. While this is true, there’s much more that comes with managing a budget, including savings. Forgetting to save is a huge mistake. You never know when an emergency or unexpected situation may present itself, so placing savings into an emergency fund is an important step. Similarly, you may want to make a large purchase in the future. With no savings to back you up, this could make the process more difficult. Always make sure that saving is a priority in your budget.
2. Underestimating Expenses
One of the biggest mistakes you can make when it comes to your budget is underestimating your expenses. This could mean forgetting certain expenses or using calculations that are too close to the actual figures of each bill. It’s smart to overestimate your expenses, so if they’re larger than you expected, you’re covered. For example, if your electricity bill is usually around $115, plan to allocate $140 in case it’s a bit higher from one month to the next. You can do this with all your expenses, especially the ones that fluctuate.
3. Not Tracking Spending
Although you may not realize it at first, not tracking your spending can significantly impact your budget. “Set it and forget it” is not a good way to approach your finances. It’s common to think that if you set aside a certain amount of spending money, small purchases don’t have a substantial effect. But these small purchases add up over time, and if you’re not tracking your spending, it’s easy to spend more than you planned and throw off your budget. Whenever you go out or plan to make a purchase, review your finances first and see exactly how much spending money you have. From there, set a limit for what you can spend that day. These are all important steps in tracking your spending.
4. Ignoring Debt Payments
Thinking about your debt can be overwhelming and stress-inducing. This is the reason why many people tend to ignore it. However, this can have large consequences on your overall financial picture since your credit will be impacted. The money you’re spending could be used to pay off debt and secure a stronger financial future.
A good way to make sure you’re not ignoring debt payments is to use financial concierge services, like the ones offered by AutoPayPlus . Through personalized automated payment arrangements, you can ensure that you never miss a due date and stay on track with your budget. These services can help you become debt-free sooner, allowing you to redirect the money once spent on loan payments into your savings.
5. Being Too Rigid
Budgets are meant to be flexible and evolve over time. Your life and financial situation change more frequently than you might think. Being too rigid in your budgeting can make it hard to stick to, leading to failure, especially when unexpected life events change your circumstances. When creating or managing your budget, plan to review it regularly and make adjustments as needed to prevent budgeting burnout.
Now that you know the common budgeting pitfalls and how to avoid them, you’re prepared to make smarter decisions regarding your finances. AutoPayPlus is here to support you on your financial journey through accelerated loan payments, automated payment plans, and credit monitoring. Visit our website to learn more about our services and how they work.
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