It's not too hard to build a basic budget. A few tips and tricks can help you make it really solid. But even a good budget can go awry. There are a handful of mistakes that throw people off, but the good news is: these mistakes are easy enough to fix.
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Making Your Budget Too Strict
Budgeting is far from exciting — it's right up there with doing your taxes and changing the cat's litterbox — but the feeling you get from starting a budget and getting your finances in order can be kind of fun.
And in that excitement, a lot of us get carried away with an unrealistic budget that's too strict.
I've been there. I've written about this before, but after college, I read a lot about personal finance, and I was pumped about using my money to do things I wanted to do. I wanted to pay off my student loans asap, so I built a budget that allocated zero room for fun, indulgences, or discretionary spending. Big surprise: it backfired. Even the tiniest discretionary purchase would obliterate my budget, making it pointless.
Another problem with an overly strict budget is you get tired of restricting yourself, so you go on a spending spree. You then end up spending more than you would have if you just gave yourself a small amount of "fun money" to spend.
A better option? Budget for the life you have. When you're going through your budget and assigning spending categories, 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.
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: a Foxtel 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 check until then."
The numbers and dates might add up, but it still 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. If this sounds familiar, it's probably a good idea to start from scratch. Assess your financial situation, cut back on your expenses, prioritise your money goals, and then come up with a new spending plan.
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.
After I got out of debt, my budget didn't have much of a purpose. I knew I wanted to save money and live below my means, because that's what all those personal finance books said to do, but there wasn't a specific reason I was saving, so I wasn't very proactive about it. I'd buy a lot of stuff I didn't need, and I didn't keep track of my restaurant spending. My plan was basically: spend whatever I want, then save the rest.
You might do this if you're in debt, too. You have no real direction, so you just make your minimum monthly debt payments and spend 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 I got out of debt, I took a moment to think about what I wanted to do with my money, and decided I wanted to travel outside of the States — something I'd never done. So that became my new budgetary goal.
The 80/20 budget is great for this, because you put 20% toward your goals and 80% toward everything else. It's sort of what you're already doing, but your goal now has a number on it, and you can adjust that number as you see fit.
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:
- Car insurance premiums
- Higher utility bills in winter and summer
- Holiday spending
- Web hosting costs
- Predictable pet bills, like vaccinations
- Oil changes and other car maintenance
- Home repair projects
- School supplies
You can easily factor these into your budget by taking the annual expense and averaging it out monthly. So your $500 holiday spending becomes a monthly "payment" of $50 or so. You simply set that amount aside every month so when the "bill" comes, you've got the cash. There are plenty of online budgeting tools available that will even do the work for you.
But maybe there are expenses you don't see coming. A relative's wedding one month. Your car needed a new battery the month after that. If something comes up every month, you might as well budget for it. Add an "Everything Else" budget that allots some cash for the expected, unexpected costs that pop up every month. Your budget may be stretched thin, but at least now you have something to work with.
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.
Beyond having a safety net in the form of an emergency fund, it also helps to err on the side of over-budgeting. As Femme Frugality says, "Budget Liberally. Spend Conservatively." Here's how she puts it:
Budgeting liberally means when you think you'll spend $US75 on gas this month, you budget $US100. It means that however much you think you'll need, you schedule in more. It means not fudging the numbers to an unrealistic low in order to fit your income. When you get your numbers, you can see if you need to hustle to bring in more. This is far better than getting to the end of the month and realising you should have hustled to earn more, because now you don't have enough food to put on the table.
It's a preemptive move, and when it comes to your budget, it's a smart move.
While we're fans of automating your finances, that doesn't mean forgetting about them and never revisiting them again. Your budget can change, along with changes in your life. Check in on it every now and then and make sure it's still serving you well.