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6 Common Budgeting Mistakes to Avoid

Preparing a budget might not be the most exciting task, but it is a powerful tool for gaining control of your finances and reaching your money goals.

A Gallup poll found that only “32 percent of Americans prepare a monthly budget,” meaning many more people live each month without a spending plan or a guide for their money.

We continue to hear from experts about the importance of budgeting. We know we should have one, but the thought of budgets can often make some cringe.

Achieving your goals starts with a budget, which helps you live within your means. It’s far too easy to overspend when you don’t know what’s coming in and what’s going out.

I confess I didn’t have a budget for years. It took me a long time to understand why it was important. When I started budgeting (because it was the financially smart thing to do), I made mistakes along the way.

Here are 6 budgeting mistakes to avoid.

1. Guesstimating Your Income and Expenses

Everyone has their own tips and advice for preparing a budget. But many experts agree that budgeting doesn’t work if you cut corners.

If you’re impatient and don’t want to sit down and add up all your expenses and income, you might get into the bad habit of guesstimating these numbers. This approach doesn’t provide an accurate picture of your finances.

“A budget should always include actual numbers, such as the actual income received that month and actual expenses,” says Michelle Schroeder-Gardner, blogger at MakingSenseofCents.com. “Too many people use numbers that they estimate or numbers where they wish they were at, which is a big mistake because an estimate doesn’t help you grasp the real picture of your finances.”

Look at your paychecks to see how much you bring home monthly, and factor in other consistent income sources. Next, make a list of all your monthly expenses. Grab monthly bill statements and review bank statements to understand how much you spend in variable categories, such as groceries, transportation, entertainment, etc. This is a cash flow analysis.

2. Forgetting to Budget for an Emergency

Life happens, so you need to budget for unexpected expenses and emergencies. Ideally, your monthly expenses shouldn’t be the exact amount of your take-home pay. It’s important to leave wiggle room for expenses outside your budget, such as home or car repairs.

“Most of us have a hard time setting aside the recommended six months’ worth, and no one gets there by magic,” says Kimberly Rotter, personal finance expert and contributor at CreditRepair.com. “Take it one step at a time. Ideally, save 10 percent of each paycheck. If that number isn’t realistic, set a smaller dollar amount and stick to it.”

Make room to allocate money to a rainy-day fund. This fund will help you pay for emergencies like a flat tire or medical bill.

3. Never Budgeting for Annual Expenses

There’s nothing like an annual expense to bust your budget, but these expenses don’t have to catch you off-guard. Technically, you can always dip into your emergency fund to cover these expenses, but you should try to limit needless withdrawals from this account. A better approach might be to include yearly expenses in your monthly budget.

Infrequent but expected expenses aren’t emergencies.

Think back to your past spending habits. If you typically spend about $800 a year on annual expenses (gifts, personal property taxes, etc.), you can divide this number by 12 and deposit the appropriate amount into a savings account—preferably an account other than your emergency savings.

4. Forgetting to Revisit Your Budget

A budget isn’t something you set and forget about. Your income and expenses can fluctuate up or down. Gas prices and food costs can change, so you may need to adjust how much you spend in certain categories to continue living within your means.

“Costs change all the time, so avoid any cash flow problems by updating your budget on a regular basis,” says Barry Choi, a personal finance expert at MoneyWeHave.com. “Don’t forget to add any increases to your income. Instead of spending that raise, add it to your savings or your emergency fund.”

Never reevaluating your budget can be just as bad as guesstimating.

5. Taking Money from Other Categories

Occasionally robbing Peter to pay Paul isn’t the worst thing that can happen to your budget. Sometimes, you might need to pull from another category to deal with a situation beyond your control. But you don’t want to make this a habit.

Let’s say your budget includes $150 a month for recreation, and you’ve allocated $200 a month to grow your emergency savings account. It may be tempting to steal cash from your savings category to pad your recreation budget and have a little more fun. Understandably, this is your money—but fight the urge.

You could end up hurting yourself in the long run. The less you put in your emergency savings, the less you’ll have available for life’s unexpected events, such as salary disruption or job loss. To help keep your budget on track, consider the envelope system for variable expenses like groceries and entertainment.

6. Depriving Yourself

If you’re serious about getting your finances under control and paying off debt or saving money, you might reach your goals by any means necessary, even if it means depriving yourself of all fun. Committing to a life of free entertainment and Netflix weekends can put you on the right path, but everyone needs a little cash to blow off steam.

“No budget on earth will work long-term if don’t allow for some fun stuff, even if it’s as small as a chocolate bar once a week, says Avery Breyer, author of Smart Money Blueprint: How to Stop Living Paycheck to Paycheck. “When you get to a stage where the money is more abundant, you can start to splurge on bigger and better things, like that vacation you’ve always wanted!”

Preparing a budget might not be the most exciting task, but it is a powerful tool for gaining control of your finances and reaching your money goals.  If you don’t have one, it’s time to prepare one. If you do have a budget, there’s always room for improvement.

Jason Vitug

Jason Vitug is a bestselling author, entrepreneur, and founder of phroogal.com and thesmilelifestyle.com. His purpose to help others live their best lives through experiential and purposeful living. Jason is also a certified yoga teacher and breathwork specialist and has traveled to over 40 countries.

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