A budget is a financial plan created by an individual or an organization based on projected income and expenses for a designated period. It can be useful to help save money or just to see where money is being spent each month. Budgets take work and many fail. Here are some common budget mistakes.
- Not having a budget
A budget can’t exist in your head. A written plan is best to see the flow of income and outflow of expenses.
- Not having an emergency fund
The general rule for an emergency fund is having enough in your savings to cover three to six months of living expense. One does not hope emergencies will happen but when they do, we often find ourselves wondering how to pay for them.
- Forgetting the fun
It is easy to get focused on the saving when starting a budget but a life of ramen noodles and staying home is not a life and will not last long. A budget needs to allot funds to “wants”. One rule a budget could follow is the 50/30/20 rule. This rule allows 50% of a paycheck to housing and other needs, 30% to wants and fun, and 20% to savings and debt.
- Not revisiting the budget
A budget should grow and change with the growth and changes of your financial situation. A budget should be revisited each month.
- Overcomplicating the process
A budget is work but should not cause an overabundance of stress. A simple plan handwritten in a notebook is truly all it takes for a budget. You can also check out the Bill Pay feature in online banking. This feature allows you to connect many of your online bills and pay them in one easy dashboard. Payments will deduct from your account in a matter of minutes, thus making budgeting a little simpler.
- Failing to negotiate
Many continue to pay higher prices for a service because they have paid that price for so long and are comfortable or they don’t know to shop around. Some companies will lower a rate with the prospect of losing a loyal customer.
- Rounding or Guessing
Failing to plan for the exact amount of an expense can add up to hundreds of dollars off your budget causing it to fail.
- Forgetting about semiannual and annual expenses
A budget needs to have a plan of payment for every expense. Larger semiannual and annual expenses can be divided into smaller installments and saved for throughout the year. For example, car insurance premiums. A $600 six-month premium can be divided into $100 installments in your budget.
- Not tracking spending
A successful budget gives every dollar a job. If there is a budget surplus, you must know where that surplus is going. Mindless spending can break a budget. An envelope system (virtual or physical) can help keep track of spending.
- Misclassifying “wants” as needs
Look at each item that you classify as a need and ask if you can live without it.
- Not automating bills
You don’t want to break your budget with late fees and/or other charges because you forgot to pay a bill. Automate where you can.
- Not fixing budget mistakes and failures
A budget is not going to run smoothly on the first try. It will also not keep running smoothly with time. You must adjust and readjust for your budget to be effective.
A budget can provide a clear picture of your net worth. Give every dollar something to do and happy budgeting.