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Budgeting is everyone’s least favorite personal finance topic. Why? Because it’s a lot more fun to think about making money (investing, side hustles, etc.) than it is to think about managing the money you have earned. I get it – I used to loathe the idea of budgeting. I never had a budget. While I was in college, I was fortunate that I didn’t need to budget, as I had two very supportive parents. However, after college, I was in for a wakeup call and had to start budgeting. Learn the common budgeting mistakes to avoid – the hard lessons that I learned along the way that I want to help you avoid.
Every month, my credit card bills would roll in and somehow I found that they were higher than what I was earning. I was every parent’s worst nightmare – at the end of each month, I’d call mom and dad and ask for some help. However, after a little while, I realized this was ridiculous. I had a good job and it was time to stand on my own two feet. That’s when I learned that budgeting was the best way to learn to live within my means.
I’ve now gone from someone that hated the idea of budgeting to it being one of my favorite personal finance topics. The reason for this: budgeting works if done right.
Mistake #1: Not Having a Budget at All
This is the most common of budgeting mistakes to avoid. How do I know this? For a long time, I didn’t have a budget either. And most of my friends didn’t either after they left college.
Having a budget is the best way to choose your spending. While budgeting doesn’t sound like fun, once you realize that you have the power to choose where your money is going, it is gratifying to know your dollars are helping you do the things that are important to you. Everyone has unique financial priorities, and a budget allows you to identify those that are most important to you.
Mistake #2: Using a Budget to Document what has Already Happened
When I first started budgeting, I used a program called Quicken. Around the holidays in December, I would map my budget for the upcoming year. Care to guess how many times I looked at that budget during the year? 0. Yes, 0.
Budgets only work when they are proactive, meaning you look at it before choosing to spend money. Let’s use a simple example. You want to take your significant other out for a nice dinner and think it’ll cost around $200. If you don’t use a budget proactively, you may go out to dinner, only to get your credit card bill at the end of the month and realize you really couldn’t afford that dinner. However, if you had a proactive budget, you’d look at it before going out to dinner. Have $200 to spend in your budget? Fantastic! Go! Guilt-free spending. If you don’t, maybe you can shift some money around to match your priorities (see #3).
This is why budgeting solutions like Mint aren’t my favorite and why I recommend YNAB (You Need a Budget). YNAB is a proactive solution that guides you to make spending decisions before you spend money.
Mistake #3. Not Budgeting your Priorities
A budget works best when it allows you to spend money on the things that are important to you. That said, use a budget to spend more on the things that are important to you and less on the things that aren’t. Love having Amazon Prime 2-day delivery? Great – get it! But that means cutting $119 out of your budget somewhere else.
Choosing where to spend money is powerful. Knowing that your dollars are maximizing the things you value is a huge encouragement to continue budgeting.
Mistake #4. Not Adapting your Budget Each Month
Budgets that are fixed do not work. Budgets are meant to be flexible. Let’s say you take your car in for service and budgeted out $200. However, turns out you need new brakes. This $200 service just turned into an $800 service.
How does this work in the real world in your budget? Just move money between budget categories to cover this overspending. If, for example, you had planned to buy a new TV a few months out, maybe you can move some money from this category to cover the cost of the brakes and just delay that purchase for a few months (or buy something less expensive).
However, surprises like these aren’t fun, and while a budget should be flexible, constantly moving money for unanticipated expenses will take the fun out of having control over your money. See mistake number 5 to avoid these surprises.
Mistake #5. Failing to Plan for the Future
Not all expenses can be anticipated, but quite a few can. Take the example we used above. Cars require maintenance, and it should come as no surprise when regular repairs pop up. The best way to deal with that is to budget each and every month for these unpleasant, infrequent expenses.
When these expenses do roll around, they’ll be less of a surprise and you will feel less stress, as you will have long been budgeting for this. No guilt, no stress, just budgeting bliss.
Some examples of expenses to budget for each and every month include:
- Insurance (you can often get a discount by paying annually!)
- Car Maintenance/Annual Registration Fees
- Property Taxes/Home Maintenance
- Holiday Gifts (the average American spends over $1,000 on holiday gifts according to the NRF, it shouldn’t be a surprise every year)
- Subscription Renewals (Amazon Prime, anyone?)
This, too, is one of the most common budgeting mistakes to avoid. If you can plan for long-term expenses, your budget will work much more effectively.
Mistake #6. Forgetting the Small Stuff
A comprehensive budget is an effective budget. While the setup can be a bit painful, budgeting for all categories in which you’ll likely spend money is hugely helpful. While I may be a bit overboard on budgeting, I even budget for little things like books.
Alternatively, some people have a category called “stuff I forgot to budget for”; if you don’t like the comprehensive approach, this is a good option to consider.
Just remember that the small stuff adds up, so it’s important to budget for it one way or another.
Mistake #7. Not Paying Yourself First
Lastly, your budget should tell you what you can afford and allow you to optimize your life around it. What I mean by this is pay yourself first. Aim to save 20% every single month (for emergency funds, retirement, etc.).
Once you allocate money to your savings, figure out what you have left to live on, and then build your life around that. While some expenses are fixed in the short-run (e.g. apartment lease, car payments, etc.), all expenses can be modified in the long-run.
While this is one of the more difficult steps, your future self will thank you.
Get to Work on Your Budget Today
Now that you’ve learned the common budgeting mistakes to avoid, get to work on making your budget work for you! If you aren’t currently using a budget, check out my #1 recommended budgeted solution (and the one I use myself) – YNAB. They offer some great tips on how to budget well, like this article on 5 budgeting truths.
It is built around solving many of the problems I have outlined here and it is the most proactive approach I have seen to date. And check out my personal story of how I saved $1,500 a month using it.