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Budgets are one of the most commonly recommended tools for getting control of your spending, paying off debt, and building up your savings. Yet there are many mistakes people make when sorting out finances that prevent them from getting the most out of their budget – or derail it altogether. And few know how to get back on track when these issues occur. Here are 10 common budgeting mistakes and how to fix them.
#1 Forgetting to Budget for Taxes
- #1 Forgetting to Budget for Taxes
- #2 Using the Same Budget Every Month
- #3 Keep Track of Your Spending
- #4 Not Trying to Cut Spending
- #5 Making Poor Purchasing Decisions
- #6 Buying New when You Could be Buying Used
- #7 Assigning Expenses to Paychecks
- #8 Not Working as a Unit
- #9 Making it Too Strict
- #10 Not Planning for Emergencies
- Summing Up
A common mistake is failing to take taxes into account. For example, your first budget may dedicate every dollar of your pre-tax income. The problem is that income taxes consume anywhere from 15 to 50 percent of your income. You may also want to budget some money to cover any income taxes due when you file your tax return.
You want to set a budget so that you’re paying just enough in income taxes not to get a refund. Tax refunds mean you gave the government a tax-free loan, and that money could have been used to pay down debt or avoid going into debt in the first place.
Another reason to avoid getting a tax refund is how often people treat it like a windfall and blow it. If you do get a tax refund or other surprise, apply it to your debt or add it to your savings. Always have a plan for the money, so you don’t waste the opportunity.
#2 Using the Same Budget Every Month
Budgeting should be done every month, but that doesn’t mean you should use the same budget every month. For example, childcare costs may be higher for you over the summer than they are during the school year.
Your electric bill will probably be higher, too, when you’re running the AC all day. Or you may find that certain expenses are rising, and you need to budget for these higher costs.
Another mistake is failing to account for quarterly or annual bills like insurance. You can set up a budget line item where you’re setting aside money every month for these big bills, but always ensure that the expense is part of the budget so you don’t find yourself unable to pay them. You can also refer to our exclusive How to Budget Guide to get a better understanding.
#3 Keep Track of Your Spending
It is incredible how many people create a budget but don’t track their spending relative to their budget throughout the month. Then they’re left wondering where the money went or why they went over budget.
Tracking spending on at least a weekly basis allows you to check habits like eating out or spending on entertainment as you’re approaching the end of the month. You might use apps, spreadsheets, or paper logs to track your spending. Just don’t make it hard, or you won’t stick with it.
#4 Not Trying to Cut Spending
Your first budgets should be based on what you spend, though you may need to reduce spending to live within your means. However, you should take a hard look at where your money is going.
You might decide that being able to pay for medical emergencies or save for retirement is more important than going out every weekend. This doesn’t mean you can’t have fun. It would help if you had a little blow of money in your budget.
However, you shouldn’t drop everything to go on weekend trips if you don’t have the money to pay for it. Look for reviews and discounts, so that you spend less on various items and always enjoy your evening out.
And review all those little things that come out of your paycheck or bank account. You may want to cancel unneeded coverage at work or subscriptions you don’t get enough out of. Now you have more money to spend in other areas.
#5 Making Poor Purchasing Decisions
One of the best ways to cut spending is to make better buying decisions. There are tons of ways that you can end up saving on everyday purchases if you change your habits, and have a better understanding of how retail works.
First of all, we recommend that anyone who wants to save money on groceries should invest in a good chest freezer. This could be one of the best purchases you’ve ever made.
One of the reasons why buying a chest freezer is such a great idea is that it will allow you to take advantage of specials on perishable items that can be frozen. That includes things like meat, certain vegetables, but even things like cheese, for instance. But another reason why it’s so great is that you can buy more substantial cuts of meat, and save a lot of money.
Primal cuts cost a lot less to make, and you have much more control over the quality. When you buy ground beef or precuts like stew meat, you have no idea from which part it came from. And supermarkets often use them to get rid of cuts people don’t like. If you want more bang for your buck, learn how to do some basic butchering, and invest in a meat grinder.
The next thing you should do is make sure that you refrain from buying anything that is prepackaged or frozen. One of the few exceptions is frozen vegetable mixes that could allow you to save on produce that is out of season. But even buying things like frozen fries can be a huge waste of money. You could get much more quantities and better quality if you buy fresh potatoes. And you’ll be able to use them for multiple recipes.
#6 Buying New when You Could be Buying Used
One of the worst mistakes you could make is buying a new vehicle. You’d be better off buying a vehicle that just came off the lot. If you’re trying to save money, buy a vehicle that is at least three years old. Not only could you be getting pretty much the same model, but its value will have decreased significantly, and you’ll still have some warranty left.
You should also consider looking at thrift stores if you spend a lot of money on clothing. You’d be surprised at some of the gems you could find. While you don’t want to go second hand for items like shoes, for instance, thrift shops are great if you want to save on things like jeans.
Another thing that you should consider buying used is tools. If you’re a handyperson or need tools to do some repairs around the house, you won’t get much value from a brand-new wrench or pressure washer. Not to mention how many people buy tools or pieces of machinery and only end up using them once. Sites like Craigslist are a great place if you’re looking for things like saws, shovels, hammers, or any manual too that you need.
#7 Assigning Expenses to Paychecks
A lot of people will make the mistake of assigning certain important expenses to paycheck. For instance, if your mortgage payment is due for a certain week, you might be a bit tighter around that time.
The right thing to do is to take money out for these expenses on each paycheck so that you’re always even. Another thing you could do is save up an entire month of income. You can then use that money to pay for these expenses while saving up money from your paycheck for the next month.
#8 Not Working as a Unit
You and your partner should be working as a team when building a budget. It would help if you always were discussing where your personal finances are and where they need to be.
You need to have clear objectives, see if you are meeting them, and hold any party responsible for overspending. Doing so will prevent you from blowing through a specific category in one day, or missing categories altogether.
#9 Making it Too Strict
Don’t overestimate yourself and think that you’ll be able to survive without some fun money. This has really little to do with self-control. You need to set money aside for yourself in order to decompress.
If you try to keep things too tight, it’ll have a spring back effect, and you may go on a spending binge. Most experts agree that you should set aside 5% to 10% of your total after-tax income on entertainment.
#10 Not Planning for Emergencies
Emergencies will happen – the hot water heater will go out; your car will break down; you may lose your job. You must have an emergency fund! An emergency fund should contain at least a thousand dollars since this will cover the average auto repair or plumbing bill.
Eventually, you want to have an emergency fund equal to several months’ wages so that you can cover major emergencies or your living expenses if you’re out of work.
Also, read – How to Make Money Without a Job (25 Super Easy Ways)
There are a lot of myths and misconceptions about budgeting. However, you can’t afford to skip the budget, and you need to avoid these common budgeting mistakes to get the most out of it. So, make sure that you keep those in mind when building yours, and make sure that you commit to it 100%.