Learn to accurately plan your spending A budget is simply an attempt to estimate your income and expenses — but…
Learn to accurately plan your spending
A budget is simply an attempt to estimate your income and expenses — but it’s never perfect. Emergencies pop up, job titles change and higher-than-anticipated costs due to rising inflation can turn any budget on its head. While it’s important to remain flexible, digging into the granular details of your budget as well as learning to account for external economic factors when planning can help you get the clearest picture possible of your financial future. Review these 10 common budget mistakes and correct them, if necessary.
Setting unrealistic goals
It’s easy to make lofty goals and promises to spend less, but following through month after month is the real challenge. A rookie budgeting mistake is creating an unrealistic budget that calls for dramatic lifestyle changes or a sudden influx of cash.
What to do: Take it slow, creating a budget one month at a time. If saving more is your goal, aim to set aside just 2% more this month than you did last. Gradually increase your savings portion each month until you reach your target savings goal.
Forgetting to factor in rising prices
Using last year’s budget as a framework to create this year’s might have worked in the past. But with record high inflation driving up gas prices, housing costs and other expenses, it’s easy to underestimate how much money you need to set aside in a given category.
“Although inflation may be temporary, it’s important to account for it in your financial plan by preparing for the unexpected,” says Adam Waitzman, a partner and private wealth advisor at Northwestern Mutual. “With an increase in the cost of many essentials, it might be time to consider creating a new monthly budget to identify areas where you can cut back.”
What to do: Research current prices with a quick online search or by reviewing your most recent credit card statement. Only use those latest figures when estimating expenses in the coming months. And remember, it never hurts to overestimate your expenses a bit. Then, make the necessary cuts.
Making your plan too rigid
Maybe you used to drive to work but have started taking the train instead as gas prices have risen. Or you’ve recently moved to a new area where the cost of living has changed. Whatever the circumstances, a rigid budget that expects this month to be the same as the last will quickly become obsolete.
“I think the biggest mistake on budgets is that too many people make a budget, review it, and then put it away,” says Vanessa N. Martinez, CEO of Em-Powered Network. “A budget should be a living document, and as life changes, so should your budget.”
What to do: Build in room to be flexible as costs change by creating a miscellaneous line item. Review your budget regularly to be sure it still reflects your latest spending habits and income level.
Doing it alone
You’re ready to experience financial freedom and become debt free — but is your family? Attempting to go it alone when budgeting can be an uphill battle if other members of your household are undoing all of your good saving habits by overspending.
What to do: Talk to your spouse, partner, children or roommates about money. Get everyone involved in creating a budget and take the time to review your progress to motivate the entire household.
Ignoring online resources
If you’ve always used the same budgeting strategy year after year, you might be missing out on more streamlined options for tracking expenses, syncing accounts and receiving payment reminders.
What to do: If a pen and paper aren’t working for you, it’s time to pick up some new budgeting tools. Try downloading a budgeting app or taking advantage of a budgeting spreadsheet template that does much of the hard work for you.
Not budgeting for impulse purchases
You know yourself and your spending habits better than anyone. If you love to take spontaneous trips or throw an extra item in your cart just before checking out, ignoring those behaviors and hoping they’ll disappear when budgeting is setting yourself up for failure.
What to do: If you tend to make impulse purchases, instead of trying to break the habit, simply plan for it. Create a line item in your budget specifically for impulse purchases — so you can still enjoy shopping without breaking your budget.
Failing to save
Aside from tracking income and expenses, a budget should also track your savings. But it’s common for personal savings goals to be forgotten on a budget.
What to do: Pay yourself first. Set up an automatic transfer from your checking account into a savings account. Include that amount in your budget, treating your monthly savings as any other monthly expense.
Maintaining unaffordable fixed expenses
Fixed expenses like your rent payment or car payment seem permanent. But you do have some control over these costs.
What to do: Review your fixed expenses and consider making a change. If you’re estimating your income and expenses for the year and find yourself over budget, taking significant steps like moving to a more affordable apartment might be necessary.
Using your gross income
One common budgeting mistake among beginners is using your gross income to determine what expenses you can afford. But gross income includes items like taxes, health care costs and 401(k) retirement savings. These items must be accounted for in your budget if you’re using gross income as your starting point.
What to do: Use your net income rather than your gross income when budgeting, or be sure to add every deduction from your income as a line item expense.
Not having a budget at all
Of course the biggest budgeting mistake you can make is failing to create one at all. “We all need a budget, and the only way to know if you need to make adjustments is to have something to adjust,” Martinez says. “A budget sheds light on your current picture and gives you the confidence you need to move forward on that next investment you were planning on making.”
What to do: Even a simple estimate of your year’s income and expenses can go a long way. If budgeting feels like too big a challenge, dial back the intensity and simply track your major expenses like your housing payment, credit card bill and grocery bill instead of creating a line item for every category of spending.
Avoid these budgeting blunders:
— Setting unrealistic goals.
— Forgetting to factor in rising prices.
— Making your plan too rigid.
— Doing it alone.
— Ignoring online resources.
— Not budgeting for impulse purchases.
— Failing to save.
— Maintaining unaffordable fixed expenses.
— Using your gross income.
— Not having a budget at all.
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Most Common Budgeting Mistakes (and How to Fix Them) originally appeared on usnews.com