Budgeting is tough. It can be easy to make mistakes. But with some practice and persistence, anyone can have a successful budget – no matter what your financial situation!
To help increase your odds of having a successful budget, follow the tips below to avoid some common budgeting mistakes.
You’ve got this!
1. Omitting a key spending category
One of the first steps to creating a budget is identifying the different areas where you spend your money. These are spending categories. Examples of spending categories include food, clothing, and entertainment.
Once you decide your spending categories, you then allocate amounts of your budget to each spending category.
But what happens if you forget a key spending category? Omitting a key spending category can quickly derail a budget. If you didn’t include a key spending category, then you didn’t budget for it. And that means that you might not have available money in your budget to cover these costs.
In my first year of budgeting, I forgot to include personal property tax as a spending category. Where I live, this is a big expense. But it only comes once a year, so I didn’t think about it when I first created my budget. It was a major blow to my budget when I got that bill in the mail.
So how do you avoid omitting a key spending category? I recommend using your electronic purchase history with your bank and credit card companies to see how you’ve spent your money in the last year. If you look back at 12 months of data, you’re more likely to capture all the different ways you spent your money. If you make this the first step in creating your budget, you’re less likely to forget a key spending category.
To learn how to use your purchase history to create a budget, check out this post.
2. Budgeting an incorrect amount
You’re not going to know the exact amount to budget in each spending category. It’ll probably take a few months of managing and adjusting your budget before you land on the right amount to budget in each spending category.
However, if the amounts you budget are completely off, it’ll be much harder to manage your budget.
For example, say you estimate $100 for groceries for the month. But in reality, you spend closer to $600 for groceries a month. A big difference like that is harder to recover from because the rest of your budget might not have wiggle room to cover the over-spending in this category.
To avoid this problem, I recommend that you again turn to your purchase history with your bank or credit card company. Take a look at your spending habits to determine what is the general amount you spend in each category. Then use that amount to set your budget.
By using your purchase history, your budget will be more aligned with your actual spending habits. And that means you’ll be more likely to be successful with your budget.
3. Budgeting an unreasonable amount
Even when we know how much we spend in a certain category, it can be tempting to drastically reduce the budgeted amount. Especially if we want to meet savings goals or spend the money elsewhere.
This can work in some situations. An example might be that you’ve decided to reduce your entertainment budget and have committed to only going to free or inexpensive events during the next month.
But there are certain situations where drastically reducing your budget may not work. Take your food budget. This is an area where many people try to cut back with mixed results. Eating pasta and ketchup for a month to meet your budgeting goals just isn’t healthy or sustainable.
There are just some areas of your budget that you can’t drastically reduce.
Before making the decision to cut back in a certain area, come up with a plan on how you’re going to make that reduction a reality. Are you going to go to half-priced burger night instead of an expensive steak dinner? Are you going to only buy clothes when they go on sale?
You may find that there are certain areas where you just can’t cut back. And that’s okay. You’ll find reductions in other areas. If you set unreasonable spending limits, you’re less likely to stick to your budget and might abandon it altogether.
4. Not tracking your spending
You put together the perfect budget. You identified the right spending categories. You set reasonable amounts in each spending category. But then you didn’t track your spending.
Tracking your spending is essential to meeting your budgeting goals. It gives you the vital information to understand where your budget is working and where it needs some adjustments. Without this information, you won’t know how to fix your budget if things don’t seem to be going according to plan.
With so many financial apps out there, tracking your spending is incredibly easy. For tips on how to easily track your spending, check out this post.
5. Not planning for the unexpected
It may seem strange to associate “planning” with the “unexpected.” But if you look back over the course of the year, you may find that “unexpected” spending items come along pretty often.
There may be a surprise engagement that requires a present. Your car may need maintenance. Or the water heater decided to throw in the towel.
You may not know what the unexpected event might be, but you do know that there is going to be some type of event that will cause unexpected spending.
I like to set aside a little bit each month for unexpected events. In months where there isn’t an unexpected event, I don’t spend the money. So it’s available to me in those months when there is an unexpected event.
I also keep a separate emergency fund. I use my unexpected events fund for non-necessities like tickets for unplanned concerts or gifts for surprise parties. My emergency fund is strictly for necessities. This might include things like emergency car or home repair.
You might find it easier to have a combined fund for unexpected events and emergencies. Whichever method you choose, it’s important to plan for unexpected costs and have money set aside for those situations.
6. Not re-evaluating your budget
It can be time-consuming to create a budget. For that reason, a lot of people will just keep their budget the same month after month.
But life changes from one month to the next. You could have major life changes like marriage, kids, or retirement. You could have seasonal changes like summer travel or holiday parties and gifts.
Each month, re-evaluate your spending needs for the next month. Add or remove categories and shift spending between categories.
The same financial apps that help you track your monthly spending are great for helping you to re-evaluate your budget each month. During your first few months of budgeting, it may take a little longer to create your budget. But it gets easier every month.
Who knows – maybe you’ll be like me and start looking forward to your monthly budget re-evaluation session!
7. Not committing to your budget
Budgeting can be like a diet – you have to commit to it to be successful.
Treat a budget as a goal that you’re trying to achieve each month. Every month, you’re trying to improve your budget a little more and move yourself a little closer to your financial goals.
It’s difficult to achieve those goals if you’re not fully committed to your budget. Each month, decide what your budgeting, savings, and other financial goals are for the month. Then work to make them happen. While you may not achieve all your goals every month, your commitment to the process creates a habit that will increase your chances of success.
8. Being too hard on yourself
While you should commit to meeting your budgeting goals each month, you need to give yourself a break when you don’t achieve those goals.
Budgeting is tough. There’s a reason that so many people struggle with it.
If you don’t meet your budgeting goal for the month, acknowledge it. Assess why it happened. Then come up with a plan to meet your budgeting goal for the next month.
You may struggle to get your budget right for the first few months of budgeting. It took me about six months before I felt confident in my budgeting process.
But the struggle is worth the benefit of achieving your financial goals.
You’ve got this.