A budget is a valuable tool in the quest for financial freedom. However, there are common budgeting mistakes that can cause you to declare your budget worthless.
If you already have a budget or spending plan, congratulate yourself!
If not, you’ll want to create one since not having a budget is a mistake. It doesn’t need to be complicated—it only needs to exist. If a budget feels too intimidating, consider a spending plan instead.
So use this list of common budgeting mistakes to either improve the budget you have or for guidelines when you create one.
Okay, now let’s dive in.
1. Ignoring Reality
A budget needs actual data, not guesses. You can create a simple budget, for example, one with only ten spending categories. But your budget needs to have real numbers, not what you think you spend each month.
Inaccurate numbers are useless and defeat the whole concept. You need to have real numbers that reflect your spending. Because without this information, it’s easy to overspend and not know it.
Even being off a small amount could equal big trouble if you’re living off a retirement portfolio.
It’s a pain, but you need to track all your expenses, at least for a month. For the most accuracy, track expenses for an entire year.
Because of all the irregular expenses that are easy to miss at the monthly view. Insurance premiums paid yearly or property tax paid twice a year are two examples.
Fix this mistake by watching every penny that leaves your hand so you can catch all your expenses, not only the obvious ones.
Don’t ignore all the little things—they do add up.
2. Having Tunnel Vision on The Small Stuff
Small stuff is important because it will add up, but don’t neglect those big categories!
The two big expense categories, housing and transportation, ate up 50% of U.S. household budgets in 2019.
Think of how absurd it would be to spend your time reading frugal blogs about reusing vacuum cleaner bags in your 6,000 square foot house. Or to drive to the grocery store in your $90,000 car after spending hours cutting coupons. (Unless this is your idea of fun.)
Avoid expensive houses or luxury vehicles, and you’ll free up plenty of money for the little things.
Also, don’t forget the giant budget category—income. It’s easy to focus only on expenses, but there are two ways to make a budget work. You can cut costs, or you can increase your income. Consider picking up a side hustle or starting a mini-business for more cash flow.
The three categories of housing, transportation, and income make up most of your budget numbers. Spend time here first to avoid the mistake of focusing only on the small stuff.
3. Neglecting an Emergency Fund
You may already know why an emergency fund is essential for your financial health. But why is this a budgeting mistake?
Because it’s the fastest way to trash a well-thought-out budget. If you don’t have an emergency fund, the first unexpected, overwhelming expense that hits will have you declaring “budgets are useless.”
No matter how carefully you plan, life will contain surprises. You need to have the savings to handle them.
Unplanned expenses not only ruin budgets, but they can also expose you to debt, or they can force you to raid your retirement savings to make ends meet.
How much should you have in an emergency fund? A rule of thumb is around 3 to 6 months of living expenses. But how much YOU need depends on your personal situation.
Build in the savings for an emergency fund and replenish it as needed. If you expect the unexpected, you can keep your budget relevant.
4. Leaving No Room for Error
An emergency fund covers unexpected expenses, but it’s meant for the big stuff. You want to create a budget that allows for smaller unexpected expenses as well.
If every single dime you earn is being spent, ouch, there’s a budget with no breathing room.
You want to add in a cushion. If you don’t have one, you need to make one. How?
Don’t view all of your living costs as non-negotiable. Look into ways to live more frugally. You don’t need to embrace them all, just enough to give you room in your budget. Because no wiggle room or room for error will discourage you quickly.
First, look at the short-term things you can change. Can you call your cable company to downgrade your service? What about cutting back your data plan with your cell phone provider?
Then consider the long-term things. Is your mortgage or rent too high? Can you move to a more affordable zip code?
Give yourself the best shot at succeeding at this budgeting thing by providing a margin of error between your income and expenses. Bonus tip: funnel that money to savings. Nothing increases financial confidence like money in the bank.
5. Having Unrealistic Expectations
You need to build breathing room into your budget but beware of making significant budget cuts immediately. Instead, go slowly. Small changes added in over time have far higher odds of working.
Adding in savings and investment accounts to your budget is critical. But be realistic about how much you can save. Begin with a smaller amount, then build it once you find you’re comfortable with the standard of living you set for yourself. Again, give yourself breathing room, using a general savings account as your buffer.
Budgeting is a skill to develop over time, so be realistic about your ability in the beginning. Make your budget easy to use by keeping it as simple as possible. Don’t overcomplicate it.
Another unrealistic expectation is that once you’re done creating your budget, the work is done. Instead, realize a budget is only a blueprint, and you still need to do the work to meet your financial goals. As an example, practice reviewing your numbers each month to gain insight into your spending habits.
Don’t ignore your budget after it’s built, as it only provides value through use.
6. Setting Your Budget in Ink, Not Pencil
It’s a mistake to think you’ll create your budget once, check it off your to-do list, and you’re done.
Budgets need to be adjusted for life changes, both big and small. Massive changes like getting married or re-married, moving, or being promoted can alter your budget significantly.
But even smaller events should be reflected in your budget. For example, deciding to eat healthier foods can cause a higher food bill, so you’ll want to adjust your plan for it.
Also, it’s a mistake to believe you’ve “failed” when you overspend.
Nope, that’s part of the process.
I’ve used a budget for over 25 years. I frequently overspend, either in a category or in a month. But then I’ll underspend in another category or month to offset it. Constant adjustments help me spend close to the total budget number I determined at the beginning of the year.
Remember—it’s part of the process to be off. Success comes when you catch it and adjust your numbers to get back on course.
Updating and revising your budget is what makes it useful.
7. Neglecting Fun
First, make sure you aren’t classifying wants as needs. You need a clear idea of what expenses can be cut in an emergency, and not knowing the difference makes it tough to act quickly.
But what I’m talking about is identifying your wants, not excluding them. Once you meet your needs and fund your savings and investment goals, include those wants! Make sure your budget not only allows for wants but embraces them.
If you don’t have fun as a category, you’ll end up resenting your budget. Or you may find the rebound spending will be worse if you deny yourself.
Add in a line item for splurges. If you barely have wiggle room, make it tiny, but put something in.
Being frugal is important, but within reason. Never forget that this is a marathon, not a sprint. The purpose of a budget is to live your best life, not suck all the fun out of it.
It’s a mistake to create a strict, no-fun budget. You need a little money for stupid stuff or splurges. Build a sustainable budget to reflect the lifestyle you want to live by adding in a category for fun.
Conquer Common Budgeting Mistakes
Simply by having a budget, you’re giving yourself an excellent shot at financial success. The fact you’re interested in common budgeting mistakes shows your devotion to one that’s first-class.
Think of how magnificent your budget would be if:
- Your budget contains real data, no financial fiction or guessing for you.
- You focus on the big stuff first, leaving more money for the little things.
- You’ve got an emergency fund in your plans to defend against the unexpected hits in life.
- You have (or are creating) breathing room in your budget, so it isn’t so restrictive that you give up in disgust.
- Your expectations for what a budget does and how quickly you can make changes are realistic.
- You see your budget as a feedback loop, not as something to do once and file away.
- You include a category for fun in your budget so you can enjoy life, not endure it.
Before you move on, pick one of these common budgeting mistakes and resolve to work on it today!