Which of these additional costs will most likely be the most expensive?
Have you ever asked yourself why your carefully crafted budget doesn’t seem to work? You sit down with your notepad write the sources of income list the categories of expenses and at the end of the month you wonder where your money went. It’s like trying to fill up a bucket with a hole in the bottom of it. Must-have things have no place in your plans or budget, no matter how well you plan. In this post, I’m going to take you through should NOT be considered when creating a current budget and how overlooking these mistakes can allow you to obtain peace of mind.
Overestimating Income
It is common mistake to estimate how much you can save where the people carry budget based on the expectation of incoming cash flow rather than your stable and actual earnings. Perhaps you’re anticipating a raise, a bonus or a substantial tax refund, so you accommodate that in your budget. But what happens if that raise is slow in coming, the bonus is smaller than you hoped or your refund is smaller than you expected?
I have, personally, fallen into this trap. One year I was sure I was going to get a hefty end-of-year bonus. So I bought a new phone and figured I would pay for it when my bonus came in. But, surprise! The company didn’t have a good quarter, and my bonus was much lower than expected. I had to tap my emergency fund which put me back months. The lesson? Always budget for your assured income, not your earnings potential. Then, if additional money comes in, it’s a gift, not a need.
Neglecting Irregular Expenses
The majority of us remember to include our rent, utility bills and groceries in a budget, but what about those sneaky expenses that come up every couple of months? Things like annual insurance premiums, car maintenance, holiday shopping, birthdays, etc. can sidetrack a budget if not planned for. This is about something fabulous that happened to me a couple of years ago. When the bill arrived, I had no alternative but to pay it, having budgeted for groceries in order to do so for the month. Since then, I learned to put a small part of my salary each month aside for irregular expenses like these.
A great way to handle this? Make a “sinking fund” for occasional purchases — small, lump-sum contributions that you make regularly into a savings account to enable you to pay for these big things when they come due without financial stress.
Neglecting to Keep Tabs on Small Purchases
Ever seen your bank statement and thought, Where did all my money go? Small purchases do add up, often without us noticing it. For instance, I used to stop for a $5 coffee en route to work every day. It seemed minor in the moment, but when I added it up, I was spending more than $150 on coffee a month! That was money that could have been spent on savings or debt repayment.
I made the switch to brewing coffee at home, which not only saved me money, but also gave me control over what I was consuming. But tracking the tiniest expenses does surface those areas you can cut back by without sacrificing too much.
Being Overly Restrictive
When I began budgeting, I wanted to eliminate all non-essential spending. No dining out, no entertainment, no fun at all. I assumed this would equal saving more money. Guess what happened? Two weeks later, I caved and treated myself to a lavish dinner out, going way over budget. The truth is, when your budget seems too austere, you’re not going to maintain it. This doesn’t mean no fun at all — assign a reasonable amount for eating out, hobbies or entertainment. This ensures that your budget remains sustainable and your life remains gratifying.
Ignoring Lifestyle Creep
Lifestyle creep is when your costs grow in line with your salary. You receive a promotion, and before you know it, you’re upgrading your car, splurging on fancy clothes or renting a nicer apartment.
I’ve been in this trap after a promotion. I told myself I deserved a better lifestyle, so I began spending more. Next thing I know, my income grew but I am still living paycheck to paycheck. To prevent lifestyle creep, act like you didn’t get a raise — at least temporarily. Instead of using the added income for spending, apply it to savings, investment or debt payoff.
Not Accounting for Fun
A zero-fun budget is a budget that doesn’t work.
I have done a budget that did not include any fun. No movies, no dining out, no vacations — nothing. I felt miserable within a month and went completely off budget. I now always put away a little bit for what I enjoy. A “fun fund” allows me to stay on my budget but still enjoy life.
Overlooking Emergency Savings
Life is unpredictable. Medical bills, home repairs and car breakdowns come out of the blue. I learned this lesson the hard way, courtesy of a sudden medical expense that drained my checking account. As a result, I moved building an emergency fund to high on my list of priorities. Even if you begin small, putting something away monthly can help ease the impact of unanticipated bills.
Relying on Memory
Thinking you will remember all of your expenses is a disaster waiting to happen. I thought I could keep track of what I was spending in my head, but my account started to show these discrepancies.
Now I have budgeting apps, and I track every expense. This tiny change has really transformed the way I think about my finances and spend money.
Setting Unrealistic Goals
Ambitious savings goals are one thing, but they have to be realistic.
I used to set myself the goal of saving 50% of my income which was frankly unreasonable given my outgoings. I decided to get my sights for harder goals down to something I could accomplish: 20% was probably doable, given how long I’d been failing. Practical goal setting will help you in the long run.
Not Conducting or Revisiting the Budget
A budget is not a “set it and forget it” tool. Circumstances change that affect your life, your budget should adapt to it. I stayed with my initial budget without modifying it, which made me ineffective. Now I check my budget monthly and adjust it according to new things I need to spend money on, save up for or unexpected changes in my income.
Final Thoughts
Budgeting is not just about tracking some numbers — it’s about making a financial plan that works for you. Steering clear of these common errors will allow you to create a budget that keeps you organized about your finances and enabled rather than forced. Note, budgeting is not about perfection, it’s about progress. Take small actions, do it consistently, and experience the wealth that comes with managing money better! What’s one error you’ve made in the past when it comes to budgeting? Tell me — I’d love to hear your story!