Have you ever invited friends over to talk about budgets? Of course not. No one does that, because budgets are boring. But like many boring things -- vacuuming and doing laundry come to mind -- budgeting is important. Most people find it impossible to reach their financial goals without a budget.
Even so, household budgeting isn't something everyone does. A 2016 study by U.S. Bank revealed that only 41% of Americans actually follow a budget. That number might be less daunting if Americans were fond of keeping large emergency funds on hand. But the opposite is true. More than two-thirds of Americans have no savings at all, according to a 2017 survey by GOBankingRates.
Combine a lack of discipline around budgeting with no cash savings, and you'll struggle financially every time an unexpected expense arises. You might end up borrowing to get by, and taking on debt makes it even harder to budget and save in the future.
Spare yourself that fate and get started on a realistic household budget today. The first step is getting a firm handle on your household's income. Add up what you deposit each year from your paychecks and any other income sources. Note that your paycheck income is less than your gross salary because you're not counting payroll taxes and other deductions.
Two types of budgets
You can approach your budget in one of two ways. The traditional approach involves estimating all of your expenses based on past experience. You'd then track your spending against those estimates. Each month or quarter, you'd review how you did and make adjustments as needed.
A zero-based approach, used in the business world, is another option. Instead of building on what happened in previous periods, you'd start fresh once annually. In other words, you wouldn't use how much you spent last year on eating out as a baseline. You'd budget a new number that's achievable and in line with your financial goals.
Each approach has its advantages. The traditional format is efficient, but zero-based budgeting may uncover extra opportunities to save. Neither method eliminates the potential for mistakes, however. Here are five common budgeting errors to avoid.
1. Being too restrictive on your spending
If your budget is so restrictive that you can't follow it, you're likely to get discouraged and give up on the whole process. Head off this problem by allocating money for entertainment and other nonessentials. Call it your fun money.
Stretch your fun budget by using free local resources as much as possible. Try the library for books and movies, take up nature-walking, and check out city calendars for free weekend events. You can also host happy hours and trivia nights at your place instead of going out.
2. Tracking spending in your head
Listing out dollar figures by spending category is only the first step. The real work of budgeting is tracking your spending, and making buying decisions (or not) based on your budget. When you track spending in your head, it's too easy to overspend and not realize it.
Those overages eventually end up coming out of your savings account or getting charged to a credit card. And that's when you know your budget isn't working. Try tracking your spending on paper, in a spreadsheet, or using a budgeting app like Mint or YNAB.
3. Creating a budget without the help of your spouse
If you share credit cards, bank accounts, or any household expenses, you'll have to share a budget, too. Without collaboration, the budget won't be complete or realistic. Plus, no one likes it when a spouse mandates spending limits, right?
The budget conversation is a great opportunity to ensure the two of you still share the same financial goals. Make it a team effort and you'll reach those goals faster.
4. Overlooking financial goals
You might dive into budgeting in the short term to curb spending. But keep your eye on the long game, too. Where do you want your finances to be in one year or five years? Think of your budget as your roadmap to reach that goal. You might be paying off debt, padding your emergency fund, or saving for retirement.
If you have high-interest debt, make paying it off your top priority. If you are rolling over balances, add up how much you're paying in interest each month. To make headway on the debt, you'll have to stop charging things to your credit cards completely and send well over the monthly interest expense to those credit accounts.
If you have the debt under control, allocate money in your budget to build an emergency cash fund. Your target balance in that fund is enough to cover three to six months of living expenses, to rely on should you lose your job.
And finally, your budget should provide for retirement savings. How much you save monthly for retirement depends on how old you are and your target savings number. For example, if you are 30 and you invest your retirement savings to earn 7% annual growth, you can build a $1 million balance by saving $555 monthly for 35 years.
5. Not updating your budget
A budget is a fairly fluid set of rules. Of course, that's not to say you should freely ignore your self-imposed spending limits. But in the beginning, you might need to make adjustments. It's easy to overlook annual bills like property taxes, for example. And, your first pass at estimating food expenses might be grossly unrealistic.
Once you work out those kinks, plan on reviewing your budget at least once a year, and anytime you experience a major life change. Circumstances like getting a new job, buying a house, moving to a new state, or starting a business are all reasons to reassess your financial goals and crunch your budget numbers again.
Budgets are empowering
Did we say budgets are boring? Maybe they are at first -- but once you start seeing your finances improve, budgets can be pretty empowering, too.