Every money management plan requires a budget, no matter how wealthy or comfortable you may be. Budgeting provides a window into your personal finances, and with the right budget, you’ll know exactly how to allocate your money to ensure you never lose it.
While there’s no hard and fast rule for creating a household budget, there are certainly some common mistakes you should avoid in order to keep your finances in check and your mind at peace. Here’s a look at 7 of the biggest errors people commit when budgeting.
1.Confusing tracking for budgeting.
Tracking your expenses is not the same as budgeting your expenses. Budgeting requires you to set goals and thresholds for expenses by category before you actually spend anything. Tracking is performed after the deed is done. Before creating a budget, track your spending for a month or two to capture exactly where your money is going and your true cost-of-living. Only then will you be able to conceive a realistic budget.
2.Neglecting the unexpected.
Unforeseen expenses like birthday gifts, car repairs, home maintenance and the like do arise, so you’ll have to incorporate those into your budget. Just as you factor in fixed and variable expenses, carve out a rainy day fund that you can treat like any other expense. It will essentially serve as a savings account to be accessed whenever unanticipated purchases come up.
3.Forgetting irregular payments.
Besides unexpected expenses, there are also one-time fees you have to dish out from your budget. These include annual insurance payments, city taxes, water facilities, and mécanique for your vehicle. Build those expenses into your budget by estimating the yearly cost and dividing that sum by 12.
4.Juggling too many financial accounts.
If you possess a wallet-full of credit cards and multiple checking accounts at different banks, it’s easy to lose sight of your expenses. Unable to track your spending, you might miss payment deadlines, incur late fees, tarnish your credit score, and ultimately, overspend. Simplify and streamline all your accounts to make life (and budgeting) easier.
5.Buying a house beyond your means.
We all believe in dream homes and being the masters of our own castles, but if you buy a house that’s more than you can afford, you’re sabotaging your budget. You’ll quickly plummet into financial distress thanks to unsustainably high mortgage or rent payments. If so, don’t hesitate to move into something cheaper and smaller.
6.Keeping up with your entourage.
Stop looking at how your friends and coworkers are spending their money. They may not share your financial blueprint, or they could be drowning in financial woes of their own. Stick to your budget firmly, and be conscious of who you shop with.
Making no room for fun. You can be serious about your money and expenses, but that doesn’t mean you have to sign your life away. Blow off some steam from time to time—within reason, of course! If you don’t allow yourself some play, your budget will buckle (and you’ll explode!).