4 Budgeting Mistakes (and How to Avoid Them)
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Ah, budgeting. Like it or not, budgeting is the backbone of successful personal finance and the heart and soul of good financial health.
Many of us who have finally found the path to financial health and independence now realize just how important budgeting is. However, obtaining this knowledge is rarely easy. Our stint with budgeting began in 2011 after we started tracking our spending and realized that we were wasting more than $1,000 per month on food. Oink, oink. Who knows how many thousands of dollars we let fly out the window before we actually realized the error of our ways and – more importantly – how to correct them.
All along our journey to financial freedom, we made some common budgeting mistakes that we’d like to help you avoid. Here’s a few of those mistakes (and how to avoid them):
Mistake #1: Your Budget Lives in Your Head
Look, I used to think that I was a genius too. “Sure, we can afford that this month,” I’d say to myself after earning a bonus from work. I had all of our “expenses” tracked in my head. Of course, buying one extra item morphed into two. Three date nights a month worked its way into four restaurant meals a week. It didn’t matter as long as the account balance stayed positive at the month’s end. We “budgeted” for all of that…in our heads. Only when we began tracking our expenses did we realize that our imaginary budget wasn’t really a budget at all.
Until you begin using a written budget, money just has a way of disappearing. I know, I’ve been there. So, whether you use the latest budgeting app on your iPhone or good old paper and pencil, write that budget down…and do it today!
Mistake #2: You Are Only Budgeting for Bills
Newsflash: Making sure you have enough money to cover your bills is NOT budgeting. For realsies, I’m glad that you can pay your bills, but budgeting includes a lot more than that. After all, you don’t want to live paycheck to paycheck, do you?
If you really want to make your money work for you, first write it down (see above, yo!). Second, at the beginning of the month, create a “job” for every single dollar you expect to earn by using a zero-sum budget. When you give each dollar a purpose, you’ll begin to find all kinds of money you didn’t even know you had!
Mistake #3 You Aren’t Being Realistic
I know it is fun to find ways to lower your car insurance premiums or cut down on unnecessary bills like cable TV. Trust me, I get it. I geek out every time I find a few extra bucks we can shave off my phone bill or discover a new way to free up some cash. However, your budget has to be realistic when it comes to how much you think you are going to spend. For example, while $1,000 a month for food is way to much, you probably aren’t going to get by on $20 either. In other words, look for ways to cut spending, but don’t set yourself up for failure by setting unrealistic expectations.
Mistake #4 You Aren’t Planning for Any Fun
When you first start budgeting, it is easy to get your monthly expenses down on paper and tell yourself that you don’t need any “fun money” this month. Theoretically, that sounds great. Unfortunately, you may find that you do need a little fun money. We all deserve to enjoy ourselves occasionally, right? In order for your budget to work, it must be inclusive- it has to have wiggle room for things that pop each month, including your need to be entertained. Got it?
Learning how to create (and live by) a zero-sum budget has truly changed our lives. And the good news is, it can change your life too. So create a zero-sum budget of your own, be realistic, and give each dollar you earn a “job.”
Once you start using a monthly budget, you may find that you have a lot more money than you think.
What budgeting mistakes have you made? What have you done to correct them? Fire away in the comments below!
Food! It’s so tasty! And so expensive :)! We actually budget backwards. We don’t operate with a budget all month, but then we review every single expense at the end of each month to make sure we’re on track with our savings rate. This works well for us because we go through each day assuming we won’t buy anything and then when we do, we make sure it’s a necessary expense.
Sounds like you have a plan that works well for you! Food is always our issue too- we love to eat!
I used to have a monthly budget when it comes to groceries, but I observed that it was so hard for me to follow it. Right now, I’m trying to make a weekly budget and I’m happy with the result!
Sweet! Way to be flexible. I’m glad you are making it work for you!
We budget for big expenses too, not just the every day stuff. We took a look at how often we needed random car or house repairs and set up a “house fund” and “car fund” for these irregular bills. Now we almost never have to reach into our emergency fund thanks to this better planning.
Great point! If you see a big expense coming up, it is always a good idea to budget for it ahead of time. That way, it doesn’t hurt quite as much when the time comes to pony up.
We used to have a major problem with eating out too much. What finally saved us was when we started paying much closer attention to money coming in and going out AND we started menu planning. Essentially, the menu saves my husband from himself, because if there were no menu he would constantly want to eat out!
Eating out is a budget-killer! We still do it, but I try not to let it happen.
I’ve fallen victim to each one of these mistakes at some point. It’s never fun to admit you are doing something wrong and it needs to be fixed, but it takes a big person to actually acknowledge the mistake and fix it going forward!
I think we have all been guilty of one of these at one point or another!
Been there, done that. The worst is that the budget is in my head rather than both D’s and mine, so I’m stressing out saying “nope, we can’t afford it” and he’s like “what? we’re fine”.
LOL, been there!
We’ve never had a written monthly budget and we’ve certainly never had a zero-sum budget. There are other methods for doing just fine without that kind of structure that work better for some people, while zero-sum budgeting works better for others. 48 percent of retirees interviewed in the retiree next door didn’t have a monthly budget, and 38 percent didn’t have a budget at all. If a person is having money problems, it’s something to try, but for others it just adds unnecessary hassle and stress and can lead to greater rather than smaller spending.
This post isn’t meant to apply to everyone in the world!
My parents never had a budget either and they are doing just fine (and always have). On the other hand, I do think it can help people identify what their problem is if they are struggling in some way. If you’re doing okay without a budget, then you might not have any problems to begin with.
I track all of our spending, which I guess could be considered a form of budgeting. The point is to just make sure you know where your money is going and not just have it in your head like you mentioned.
Yep, totally. Or else it disappears.
In the end it’s all about balance and as you said, you need to be able to reward yourself for your good work but not spend so much that all the saving goes to waste!
Balance is the goal, right? I certainly think so!
Having a plan in a form of a written budget really change things for us. It gave us the ability to gain control of our spending. I realize t doesn’t work for everyone, but worked well for us.
The written budget is the tool that turned our life around. Honestly, in just 2 years, we now have a completely different financial future due to budgeting.
I made all these mistakes at first. Well, first of all I thought I could keep track in my head and soon discovered that I was wrong. Having a written budget is what helped me save and get out of debt.
I then went on to budget only bills and not have the right allocation of funds.
All in all, it took me about three months to get my budget right. I still tweak it every now and then but not as much.
When you are first starting out, budgeting certainly takes a little practice. We still make tweaks to ours occasionally, which is a good thing. I think a lot of people don’t get the results they want that first month and give up. However, if they can avoid some of these mistakes, hopefully they will be able to sustain it for years to come.
I’ve definitely been guilty of #1. Writing it down makes all the difference!
Absolutely! I couldn’t agree more.
Budgeting for fun is advice I give to people. What’s life without living? You have to have some wiggle room!
Jay
Totally. Of course, if we are trying to dig ourselves out of deep debt we may skip it for a while, but overall people definitely need to budget in a little fun money.
I’ve run into the same problem as Alicia – I know our numbers, but the boyfriend doesn’t! My parents do the “mind budget” thing, and I can already tell just by asking them that they’re overspending. Writing things out can be eye-opening!
Absolutely. I’d venture to guess that almost anybody who doesn’t write it down is overspending in some way. When you see the numbers on paper and have a plan for where each dollar goes, your money tends to obey your orders. If you don’t, it tends to go AWOL.
Even though we don’t have financial issues/debt I still have prepare a monthly budget and compare the actual spending to it once the month is done. It helps me to identify which categories are being overspent and see if it’s just an off month or a pattern is developing.
Good for you Kass! Writing it down is a great habit, and probably a major reason you don’t have any financial issues to begin with.
When I first did our budget I didn’t factor in any fun money whatsoever, then got frustrated when, each month, we went over budget. Now, I factor in something for fun, so we don’t go mad!
Good for you on recognizing that. It can be really demoralizing to continue going over budget – which can lead to scrapping the whole thing. Keep on keepin’ on!
Great advice. We track to the dollar where everything goes during the month. It does hold us accountable and stay on top of what we do. I especially like your inclusion of staying realistic. Too many times I hear people complain that their budget robs them of any pleasure. Setting a realistic budget where you aren’t feeling like you are living a deprived life is the only way the budget will be sustainable. Find your personal frugal threshold and then constantly challenge it but not break it to the point you hate your lifestyle so you can stay on track over the long haul.
Agreed. Budgeting is like dieting. If you completely deprive yourself for too long, you are bound to become frustrated and binge spend. You need to make a lifestyle change in order for it to work long-term.
#3 is why I recommend people track their expenses before making a budget. You can always make smaller goals to reduce your spending a little more each month, but if you start out with a budget that’s half your actual spending, you’re probably setting yourself up for failure and frustration. Great post.
Thanks Gary! Tracking that spending is the first step.
I don’t even want to know how much money we used to spend on eating out pre-children. It was so easy. So tasty. We did it all the time. I’m not even sure a real budget would have motivated us to reign it in. Fortunately, having a toddler who cannot be taken anywhere fancier than Chick-fil-A has motivated us to eat 99.999999% of our meals at home. Heck, we eat dinner at my parents’ house once a week, and I consider that to be dining out.
Yeah, eating out with kids is overrated. Who wants to pay $50 for a meal when you spend the entire time picking up forks off the floor? Not me! =)
#4 has been a hard one for us! We tend to be kind of extreme when it comes to budgeting so much a month for debt (only a few months to go!) that we forget those little things like clothes or dates. 😉 So allowing us to have SOME fun with our goal to be debt free is something we’re working on!
I totally understand! We are the same way, especially when we were paying off debt. Don’t forget those date nights, though. Finding cheap ways to stay connected as a couple is super important!
I have made the mistake of budgeting too tight, so now I just have a rough figure and it doesn’t matter if it is spent on food or travel or clothes, as long as the figure stays more or less the same month after month.
Good point. We tend to shift money from one category to the other as well…just as long as we don’t go over the allotted amount per month.
Great point in #4. People often stop budgeting because they find budgeting is too restrictive and they cannot have any fun. This is why having some money allocated to “fun” is a good idea.
Thanks! The goal is to get people to budget long-term, and being happy is certainly part of sticking with any program.
Mind budgeting is a dangerous thing. I did it for a while but I figured there are enough crazy things running through my head as it is I should write out a list of expenses. Not only did I get a crystal clear look at my expenses, but it freed up space in my mind which comes at a premium.
Ha! Same here. Writing things out tends to clarify any thoughts, whether that is plans for the future or budgeting.
The biggest mistake I have seen is making a budget that isn’t flexible and can’t be changed. I think a good budget needs to be reviewed once and a while to make sure it’s still realistic. Life happens and things change – a lost job, a promotion, side income, increasing expenses, etc – they all affect the budget and it needs to change accordingly
Absolutely! You’ve got to review that budget periodically to make it work for you.
Great point on this idea of only budgeting for bills. Gotta have the fun stuff in there!
Thanks Stefanie!
I’ve made 2 of the ones listed. First, my budget was only in my head. Yeah, that didn’t work out so well. I then started to write a budget out and it worked mostly. The part that didn’t work was not being realistic. I was limiting myself to $25/month in fun money. I really wanted to save, but went overboard with it. I ended up rebelling against my budget. I ended up revising it and allowed more fun money. Now I have a working budget.
That is the key: a “working budget,” especially when your primary goal is saving. Way to go!
I have clients all the time who set unrealistic budget numbers. It’s like the numbers in the excel spreadsheet are made up out of the blue. I was meeting with this couple one time and I told them that they would have $4,000 a month to live off of when they are both retired. I told them they should start cutting costs now. The husband pushed back at me and told me their budget was fine. He showed me a copy of it and their monthly spend is $6,000. I told him there was NO way they could live like this and he just looked at ME like I was crazy.
Sounds like he is going to be working through retirement 😉
One of my budget mistakes is not looking at the calendar for events. May was terrible for us because I didn’t budget for events.
Without a budget, you may not have been able to pinpoint the issue, so great work!
LOVE this post! Budgeting for savings and for fun are two main points that stick with me. And when you first budget, it’s hard. But over time, it gets easier. Something I try to tell people when I help them.
It does get easier, you just have to make it a habit. Once you see that progress being made, it is hard to ever turn away from a budget again 🙂
I think you assume you are doing the best you can, but until you write it down at least once then you really don’t understand what you are spending. We do that once a year just to see where we are at on expenses overall and we were able to make a change and boost our savings up another $10,000 which was awesome, but made me wonder if we had missed out. You can assume you are doing your best…or you can actually do the work and find out.
Absolutely. Like Katie said above, there are just a lot of people who don’t really want to know, though.
When I first started budgeting, I too budgeted my expenses too ideally. It took quite some time for to have the budget that I’m comfortable with, so that I can still enjoy life but not beyond my means. Great article!
Thank you! Just like anything else, budgeting takes practice before you reach your ideal spending/saving levels.
Right?!? The first step to getting better is finding and acknowledging the problem 🙂