5 Ways Budgeting Can Go Wrong

Getting on the budgeting bandwagon can be daunting. Here are five mistakes to avoid.

There are many reasons people follow a monthly budget, from keeping track of their spending to making sure they pay their bills on time. Your budget might help you both stick to your financial goals and know how close you are to achieving them. Seeing where your cash goes makes it much easier to identify areas you can cut back and so sock more away in your savings account. 

Still, like most things in life, there are also plenty of ways a budget can go wrong. Here are some of them: 

1. You decide to skip budgeting altogether

The most obvious problem is that several surveys last year showed that around one-third of Americans don't budget at all. If you're one of them or yours is woefully outdated, now is the time to create a new budget. In addition to the benefits mentioned above, a budget helps prevent chaos in your life -- including the anxiety associated with not knowing where you stand financially, an inability to properly plan for the future, and missed investment opportunities. 

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2. You have your head in the clouds

Head-in-the-clouds budgeting is when you create a budget that would be awesome -- if it was at all accurate. Say you normally spend $4,000 a month, but optimistically plan to spend $3,500 next month. Unless you have a real plan for cutting that $500, it's just a pipe dream. 

Why frustrate yourself that way? You benefit from creating a realistic budget and identifying achievable savings goals.

Try this: If you truly want to cut your expenses, create a budget that reflects the way you actually spend money. Factor in the money you spend without thinking, like eating out, going out with friends, and buying birthday gifts.

Line item your budget and then decide where you can cut back. For example, you can downgrade your cable or cell phone plan, cancel subscriptions, look for a more affordable hairstylist, and conserve energy in your home, without feeling much of a pinch. 

And instead of adopting an all-or-nothing mentality, decide to cut those extra expenses in half for the first month. Once you get through that, see how much more you can realistically cut. 

3. You don't pay yourself first

It's easy to create a basic budget. What most of us were never trained to do was to pay ourselves first. That means putting money into your savings before you do anything else. 

Whether it's contributing all you can to an employer-sponsored retirement plan (or another retirement program), building up your emergency savings, or paying down high-interest loans, this budgeting method involves putting your savings front and center. The income left after paying yourself first is what you have to spend on bills. 

If you're scared that this won't leave you enough to cover your essentials, begin by contributing 1% of your income. What you are likely to find is that you don't miss the money, a fact that makes contributing another 1% easier. Map it out. Say you decide that by this time next year you want to save 6% of your income. Begin with 1% and add another 1% every other month. 

4. You don't properly communicate

If you share finances with a significant other, things can get tricky. One of you may be on board with budgeting while the other is happy to let chaos reign. Before initiating a budget of any kind, you need to talk about your finances. 

Decide jointly what you need, what you want, and what you can live without. Determine how much you can spend without consulting the other and agree on ground rules. For example, are you both going to pick up groceries as needed or will one of you be in charge of the shopping (and food budget)? 

Which of you will pay the bills each month, and is the other partner able to take over the task if needed? What are you working toward? Having a shared goal -- or several shared goals -- can help keep you on the straight and narrow. 

5. You can't say no

The value of any financial plan is its ability to help propel you toward your goals. But it will only work if you are someone who can occasionally say no -- whether to yourself, your partner, children, or friends. The not-so-fun part of a budget is that it clearly illustrates how much you have coming in and going out each month. It announces how much you have left when your obligations to yourself and others are paid. That means not spending money whenever the mood strikes. And learning how to use your budget as a reason to say no to things you can't afford.

Getting on the budgeting bandwagon can feel daunting. And while there is always room for improvement, ultimately, having a budget is always better than not having one. Just as we wouldn't set out for a long trip without a GPS, we can't expect to get where we want to go financially without a budget.