Anyone who wants to use their income wisely can benefit from learning how to build a budget and stick to it. Despite the importance of living on a budget, most Americans don't even have a plan for their money.
If you're part of the minority, Americans who do actually have a budget, you're already ahead of the game. But that doesn't necessarily mean the budgeting process works perfectly. In fact, many budgeters unknowingly make a few common errors that make it harder to succeed in controlling their spending. Here are three of those pervasive and easy-to-make errors.
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1. Failing to track your spending before you make your budget.
A friend recently asked me for help with her budget. She came to me with a list of what she wanted to spend on things, and was frustrated she couldn't keep her spending within the limits she'd set. I asked her about her budgeting process, and she indicated she'd taken her income and divided it up the way she thought make sense.
The problem: She hadn't tracked her spending first. If you don't know what you're currently spending, it's almost impossible to make a realistic budget. Instead, you're just making a wishlist of what you want your money to do -- but this aspirational budget very likely won't work in reality.
If you want your budgeting process to be effective, start by tracking all your spending for 30 days, or a month. See how spending compares to your income, where you're overspending, and where you can make cuts. If you're currently spending $400 on groceries, it may be realistic to try to clip a few coupons or find a cheaper store to cap food costs at $350 -- but if you only allow for $200 for food in your budget, you're setting yourself up to fail.
You can use apps to track spending -- Mint works well if you categorize your transactions -- or just load everything into a spreadsheet. Once you know where your money is currently going, you can make a realistic plan for how it can be better allocated to meet your goals.
2. Not leaving wiggle room.
Does your budget allocate every single dollar you earn to a specific purpose, such as saving or groceries or rent or eating out?
If it does, remember that life often doesn't go as planned. Unexpected expenses pop up all the time, and if you haven't left yourself a little leeway in your budget, paying them is going to be a challenge.
If you depend on your emergency fund, which is a cash safety net you build for yourself, to pay for these unexpected costs, doing so will leave you consistently depleting your emergency fund. So, instead, build wiggle room into your budget to deal with an out-of-the-ordinary expense, by setting aside "surprise expense" money in your monthly budget.
If you make $5,000 monthly and you account for every dollar, you could have a $100 line-item in your budget for "unexpected expenses." If you don't use the $100, just move it to savings at the end of the month.
3. Forgetting about irregular expenses.
Many expenses reoccur monthly, such as rent or mortgage payments and buying groceries. It's easy to account for those expenses in your budget.
But most people also incur some pretty costly irregular expenses too. These irregular are usually one-offs, like holiday gifts, car or home repairs, or summer camp for your kids.
These irregular expenses could be budget busters if you're trying to find a few hundred -- or a few thousand -- in one month's budget to cover them when they arise. To avoid this situation, incorporate these irregular expenses into your monthly budget. This could mean setting aside $100 monthly into an account that's intended for car maintenance, or saving $50 a month toward holiday gifts so you have a big pot of cash ready for the festive season.
To identify the irregular expenses you need to save for, look at a calendar and look back at a year's worth of credit card statements. Make a list of your irregular expenses, along with how much you estimate they'll cost. Once you know what you need, figure out how much you should be saving every month to cover the expense and build that right into your budget. Remember things like tax season, seasonal vacations and birthday dinners.
Don't make these budgeting mistakes
If you've gone to all the trouble to make a budget, you don't want mistakes to undermine your efforts to live on it. Now you know how to avoid three of the most common budgeting mistakes, and can rework your own budget to avoid the errors. This is sure to make your budget work better for you.
