Stop Making These 7 Basic Budget Mistakes
Budgets are the foundation of frugal living and personal financial success. Clear and realistic budgets help us better understand our financial picture, rein in irresponsible spending, and develop stronger saving habits. If you're having a tough time sticking to your budget, maybe it's not your willpower that's broken — maybe it's your budget. Here are seven important budget mistakes you may be making.
1. Not Establishing a Goal
Your budget should be fueled by a crystal clear purpose. Before you make (or remake) your budget, decide exactly what you want to accomplish. Is the goal to get out of credit card debt? To save more aggressively for retirement? To pay off the house five years sooner? Or to simply develop a greater awareness of where your money goes? Having a goal will help you stay on-track and on-budget. (See also: 5 Tricks to Beating Budget Burnout)
2. Skipping Your Retirement Savings
Saving for the future? If it's not part of your budget, it's probably not happening. Make sure that your monthly budget includes a healthy contribution to a money market account, IRA, or 401K plan. It's one the few expenses that will actually pay you back in the long-term.
3. Relying on Inconsistent or Uncertain Income
Funding your budget with tax refunds, year-end bonuses, and other income you're yet to (and may not) receive, is a bad idea. With one little hiccup, your entire financial plan can be thrown into chaos. Instead, focus on regular and reliable sources of income. When you receive extra cash, funnel it into your savings or retirement account. (See also: Saving for Retirement and Other Long Term Goals on a Variable Income)
4. Not Expecting the Unexpected
Emergencies happen. Cars break down, pipes burst, and appliances bite the dust. If your budget doesn't include a savings plan or emergency fund, it doesn't reflect the realities of life. Avoid blowing your budget or relying on high-interest credit cards when the inevitable happens — make sure your budget has a line item for what-if's and oh-no's.
Most importantly, avoid the temptation to consider this part of your budget negotiable. Often, budgeters will simply pull from the savings column to inflate discretionary spending. As you can imagine, this approach is a slippery slope that can quickly wipe out the best intentions.
5. Ignoring the Small Stuff
Budgets are for major — and minor — expenses. If you ignore the $4 coffees, the $12 movie tickets, and the lunches out twice a week, your budget will quickly become more abstract than exact. Monitor and account for each expenditure to get a clear idea of what you're spending and where adjustments need to be made.
6. Making Things Too Complex
When it comes to household budgets, simpler is better. For most budgeters, a basic Excel spreadsheet will do the trick and allow for easy updates. The old-school envelope system is an even simpler and more direct way to way to track and tally monthly expenditures. (See also: Easy Budgeting for People Who Hate Math)
7. Designing a Budget That Won't Budge
While budgets are designed to impose limits on spending, they should still offer some degree of flexibility. Certain expenses fluctuate around the holidays, during major life events like weddings and graduations, and even in response to changing weather. If your budget doesn't allow for a little bit of responsible wiggle room, it won't be useful and you'll soon abandon it. Remember, your budget is your creation. It should respond to the needs of your life and be able to bend without breaking.
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