Due to common budgeting mistakes, things can go wrong when budgeting without you knowing it. Proper budgeting involves two main steps: creating and sticking to a budget. When one of these steps goes wrong, your budgeting strategy does not work. This is why you should avoid the budgeting mistakes most people make.
If you can’t stick to your budget or yours is not working as intended, you are making one of the budgeting mistakes I listed below. Knowing which budgeting mistakes you have been making is essential in taking control of your finances and boosting your savings.
In this article, you will learn the 8 common budgeting mistakes and how to avoid them.
Without further ado, let’s get started.
Why do you need a budget?
You need a budget to help you manage your expenses, save for a particular goal, or avoid making financial mistakes. For example, if you make $5,000, spending half of it on rent alone would be unwise.
Some might argue that spending half of your income on rent is okay. However, it is never a good idea, given that this amount comes from your after-tax money. In this case, a budget can help you open your eyes and realize that your rent alone is taking more than half of your gross income.
Now that you know why you need a budget, let’s look at the first of many people’s budgeting mistakes.
1. Creating a strict budget
The first and most common budgeting mistake is creating a very strict budget. Just because you want to save for a wedding does not mean you must starve yourself. A strict budget eliminates your basic needs and life necessities.
Instead of achieving what you created the budget for, it plunges you deeper into more serious problems. This kind of budget does not bring you happiness or financial wellness. For example, you could decide to eat once a day because you want to save more money.
For sure, you will be saving more money by skipping one meal every day.
What is wrong with this budgeting practice?
You are right if you think about malnutrition, which results in a weak body and mediocre performance. In addition, you get more health problems when you are not adequately fed.
The money you think you are saving will not be enough to restore your health to optimal performance. It is also possible to have long-lasting medical conditions that will leave you in a coma or unable to be yourself afterward.
TIP: If you want to take it to the extreme, eliminate your wants and minimize your spending on needs. For example, you can cancel all your streaming subscriptions and other entertainment expenses and stick to free services. In addition, you can buy cheap foods, DIY what you can, and buy used everything. This way, you will minimize most of your expenses without starving yourself.
Read more on how to make a budget.
2. Budgeting Mistakes: Creating a budget using gross income
Before you start making a budget, you must know the proper income to use. Just because you make $80,000 annually, it does not mean it is all yours. Remember? The government must have its share through taxation. Other deductions get taken out of your gross income.
What is a gross income?
A gross income is the sum of all the money you make before tax and other deductions. Your gross income will include the sum of all salaries, wages, interest payments, rents, and other earnings you make. Gross income makes you think you make more money, whereas you don’t.
When you create a budget using gross income, you include money that is not yours. Based on false calculations, you could bump your expenses and make expensive purchases, which can later cost you arms and legs.
The solution to this problem: Always use your net income when creating a budget.
What is net income
Your net income is the total amount left after tax and other deductions. This amount is the one you take home and, therefore, yours to keep and use.
When making a budget, it is important to use net income/ your take home rather than gross income. Net income gives you accurate calculations. Those with combined incomes, such as couples, can use their net incomes.
3. Budgeting Mistakes: Not being serious about your budget
There are two important steps involved with budgeting.
(1) Creating a budget. This step involves creating your budget from start to finish, with all details on a piece of paper, in Excel, or using an online budgeting app.
(2) Sticking to your budget. This is the hardest part. Sticking to your budget means following exactly what is written in it.
Most people never create their budget. Those who do make one of the most common budgeting mistakes.
The mistake is to create a budget and never look at it again. That is, you put all your numbers down but never follow any of the things you wrote down. You decide to spend only $300 on food per week and spend $600. Such expense violates your budget’s requirements.
If you keep going over your budget, you are not serious about it. As noted in the first budgeting mistake, your budget could also be strict, making it difficult to follow.
To succeed at budgeting, you must understand the true meaning of the numbers you put down and why they are essential in your life. It is also important to focus on the benefits of creating a budget instead of how difficult it is to budget. Another strategy that works for creating a successful budget that is easy to follow is to make a budget that aligns with your financial goals. For example, if you want to save for a house down payment, create a budget to save extra cash for your down payment. The progress you make in your savings becomes your motivation to keep going.
Yes, budgeting is hard, and that is what makes it a great tool for financial planning. If it were easy, everyone would have done it. So, keep your mind on the prize and keep budgeting.
4. Having an unrealistic budget
A reasonable budget helps you achieve your financial goals without negatively affecting your standard of living. For example, you can create a budget to help you save $5,000 in six months for a car purchase. If this budget enables you to save this amount in that timeframe without compromising your livelihood, then it would be safe to say it is reasonable.
Some people choose to create unrealistic budgets. In other words, they make budgets nearly impossible to follow or unrealistic. If something does not make sense on paper, it will be 10x harder in practice. Do not be like those who overestimate what they can achieve in 1 year and underestimate what they can achieve in 10 years.
5. Not budgeting every expense
To make good financial decisions, you must have a budget that includes all expenses. This is the only way to know exactly how much you can save, spend, or invest.
Millions of people make the common budgeting mistake of not budgeting every expense. They think some expenses are too small, but the truth is that no expense is too small to ignore a budget.
Have you bought something such as a drink from a vending machine? I know it is only $3.0 per drink. Some of them go for $5 or more. Is $3.0 big enough to be on a budget? The answer is yes. If you get one drink, you will only pay $3.0. What if you can repeat this once a day for a month? In this case, you would spend $120 for that month.
Now you see how small expenses can add up. If I told you that your vending machine drinks would cost you $120 monthly, you would probably create a budget.
This amount is significant enough to mess up your budget. To avoid budgeting mistakes like this, make sure you budget every expense.
Even corporations worry about every dollar they spend or lose. What do you think would happen if you owe a corporation $1.0? You cannot get away with it. The company will hunt you down until you pay it off.
So, you should do the same thing. Treat every dollar like the most significant money you ever handled and budget every piece. Without budgeting every expense, you could put your budget out of balance and find it difficult to follow it. Those expenses you ignore can make you spend the money you saved on something else.
6. Budgeting Mistakes: Making a complicated budget
Did you know that one of the reasons people fail at budgeting is that they create complex budgets?
Your budget should include everything. But at the same time, it should be easy to understand and follow. If you make a budget that is hard to understand, it will be harder to follow. If you can’t follow your budget, you can’t stick to it.
This is one of the biggest budgeting mistakes people make. They put down complicated calculations and numbers that are hard to understand. Later, they go back to their budget and start wondering how they came up with those numbers. As a result, they start ignoring the budget and abandoning it.
TIP: Keep your budget simple, easy to understand, but meaningful at the same time.
7. Forgetting to update your budget
Do you remember the last time you updated your budget? Do not freak out if you have not updated it in a very long time. You are not the only one. Many people make budgets and use them for a long time without updating them.
Why do you need to update your budget?
There are many reasons you should continually update your budget. For example, if your income decreases due to economic conditions or a layoff, you must immediately update your budget to reflect changes in your earning potential. You should not keep your entertainment and other leisure expenses without an income.
Without changing your budget, you will burn all your savings fast.
As your living and earning conditions change, you must adjust your budget to reflect these changes. In addition, some of your expenses may no longer exist 10 months from the day you created the budget.
Do not be like some people who have used the same budget for 10 years and have lost money on unnecessary expenses.
8. Budgeting Mistakes: Not budgeting at all
Not creating a budget is probably the biggest budgeting mistake I have seen so far. Credit says more than 27% of U.S. consumers don’t need a budget, while 24% think they will not stick to it. No wonder why about 28% of American consumers have less than $1,000 saved, according to a recent survey from Forbes. Without a budget, it is difficult to know exactly how much you are making and how you are spending it.
A lack of a budget leads to bad financial decisions, making it harder to achieve your financial goals. Living without a budget is like running a marathon without knowing where you are going and without keeping track of how many miles are left. You can’t know where to go or when to arrive without a precise map.
This is why you need a budget. A budget is probably the most important tool in your financial planning. Whether you are in your 20s or retired already, you must have a budget to help manage your finances.
Many people do not have a budget, which is their biggest budgeting mistake. They live blindly and struggle their entire lives without knowing why they can’t get ahead. So, if you don’t have one already, create your budget today.
