It’s not too hard to build a basic budget, and a few tips and tricks can help you make it really solid. But even a good budget can go awry. Here are 5 common mistakes that throw people off.
But the good news is...these mistakes are easy to fix.
Mistake #1: Making Your Budget Too Strict
The feeling you get from starting a budget and getting your finances in order can be kind of exhilarating. But in that excitement, a lot of us get carried away with an unrealistic budget that’s too strict.
If you make your budget too strict even the tiniest discretionary purchase can feel like it will obliterate your budget, making it completely pointless. It happens so often that people get tired of restricting themselves and end up going on a spending spree. They end up spending more than they would have if they just given themselves a small amount of “fun money” to spend.
Instead, budget for the life you have. When you’re going through your budget be realistic. Don’t tell yourself you’ll never buy a single discretionary item, because you’re setting yourself up for failure. Give yourself some breathing room.
Mistake #2: Budgeting for a Life You Can’t Afford
On the flip side of that coin is a little thing called lifestyle inflation. Lifestyle inflation becomes a problem when you’re spending for a life you can’t afford. It can creep up on you: an HBO subscription here; a fancy dinner there. Before you know it, your budget has inflated and you’ve got more going out than you have coming in. To justify these expenses, a lot of people will simply budget for next month’s paycheck to pay for last month’s expenses. “Rent is due on the 1st, but I get paid on the 5th; hopefully they won’t cash the cheque until then.”
This puts pressure on your budget and encourages you to live in a paycheck to paycheck cycle. Many people are stuck in that cycle because they truly can’t make ends meet, but plenty of people can get stuck because they’re budgeting for an unrealistic lifestyle. Assess your financial situation, cut back on your expenses, prioritize your money goals, and then come up with a new spending plan.
Mistake #3: Budgeting Without a Purpose
It’s hard to stick to a budget that doesn’t have a goal. What’s the point? When there isn’t one, your budget becomes an afterthought rather than a spending plan to reach your financial goals.
Many people get caught in the: I spend whatever I want, then save the rest. But is there any left to save and what are you saving it for? If you are in debt and have no real direction, you may be just making your minimum monthly debt payments and spending the rest.
Instead of making your savings or debt goal an afterthought, take a moment to define it. What do you really want to do with your money? If it’s a big goal, you might have to set smaller milestones. Either way, come up with a goal for your budget, and then give that goal a category. For example, after you pay off your debt, what do you want to do with your money? Set a budgetary goal. It could be to do some traveling or buy a cottage…the sky is the limit but be realistic and make it something that will make you want to stick to it.
Mistake #4: Forgetting About Irregular Expenses
If you keep blowing your budget because expenses “pop up” every month, you’re probably not budgeting for irregular expenses. It’s a common budget problem with an easy fix: find those quarterly, annual, and other seemingly random expenses, and add them in!
Think about all of your irregular expenses, and if you’re stumped, check out your bank statements for the past year. Here are some common expenses people often forget to add into their budget:
- Insurance premiums (Car, home & life)
- Higher utility bills in winter and summer
- Holiday spending
- Predictable pet bills, like vaccinations
- Oil changes and other car maintenance
- Home repair projects
- Quarterly taxes
- School supplies
Mistake #5: Not Having a Cushion
Irregular expenses also illustrate why it’s important to have an emergency fund. When your car breaks down, you have money to pull from, rather than screwing up your budget for the next few months until you get back on track. It might take you some time and slow down your goal progress, but building an emergency fund will keep you from blowing your budget.
Budget Liberally. Spend Conservatively.
This means when you think you’ll spend $75 on gas this month, you budget $100. It means that however much you think you’ll need, you build in more. It means not fudging the numbers to an unrealistic low in order to fit your income. On the flip side, just because you budget extra, doesn’t mean you have to spend the extra!
Your budget can change, along with the changes in your life. Check in on it every now and then and make sure it’s still serving you well.
The thought of making a budget can overwhelm many people but we can help…book an appointment today and we can help you set up a personal cash flow planner.