A budget is one of the most important things you can have for your financial health, but it can be hard to make it right the first time. Like any hobby or skill, creating a budget can take practice before you’re good at it.
It’s all too easy to make a few mistakes until you perfect this financial talent. Unfortunately, your practice run can lead to wasting money or worse, getting stuck between paychecks without any money to keep you afloat.
Luckily, you can learn to budget like a pro. Find out how to make a budget you can stick to by avoiding these common mistakes.
1. Working with an Old Budget
In order for your budget to be effective, it has to be current. You need to keep it updated with today’s costs for everything. Otherwise, you could find yourself in hot water pretty soon.
Working with dated information is a bad idea at any time, but it’s especially dangerous today. Inflation has taken consumer pricing for a ride, so everything in your budget is more expensive than it was last year — or even six months ago!
To make matters worse, most wages haven’t kept pace with inflation’s grueling pace. That could mean your money isn’t stretching as far as it once did at a time when things cost more.
Without updating your budget to reflect inflation, you can keep spending like nothing has changed. You could go out for drinks, sign up for a few subscription boxes, and book a hotel, only to find out you don’t have any more cash left over for groceries.
Before this happens to you, tweak your budget to reflect today’s income and expenses — whether you’ve lost a contract or earned a promotion, saved a bundle on car insurance or started paying more in rent. Keeping things accurate will prevent you from going broke between paydays.
2. Not Preparing for the Unexpected
Sometimes, you can’t always predict when your spending will increase, but you can prepare for the unexpected by saving a bit of every paycheck in an emergency fund.
An emergency fund is your failsafe when things go wrong, and you don’t have the cash to fix them. Like if your car breaks down on the side of the road one day. Your emergency fund may help you afford a costly tow to the shop and the expensive part your car needs.
The standard savings goal for an emergency fund is three to six months of living expenses, although some financial advisors recommend saving more if you’re particularly risk-averse.
That’s a lot of money to save but be patient. No one builds an emergency fund overnight. A tidy sum of savings is the result of hard work and consistent, sometimes small, contributions.
If disaster strikes before you attain your goal, you may consider using an emergency loan as a bridge between paychecks. You can compare emergency cash loans online to find out how much they cost.
Once you find an option you can afford, you can apply for your emergency loan online. This way, you don’t have to take time out of your day to visit a bank branch.
3. Overlooking Infrequent or Irregular Bills
It’s easy to build a budget around the bills you pay every month. After all, who can forget about rent and utilities when they’re due the same day each month like clockwork?
While these big bills may take the spotlight, they aren’t the only things you spend your money on. Everyone has irregular or infrequent bills that pad out their budget. You can throw off your entire plan if you don’t list yours in your budget.
If you can’t think of all the sporadic ways you might spend your money, review your statements from the past year and highlight the irregular essentials that show up.
4. Estimating Your Bills
Rounding your bills to the nearest dollar makes them easier to think about or calculate. But you can find yourself in financial hot water when you cut corners like this.
Let’s say your emergency loan is $133.83 each month, but you think of it as roughly $130 in your head. Don’t underestimate this $3.83 difference. That winds up being $45.96 over an entire year.
If you’re rounding every bill the same way, these little discrepancies add up. You might find yourself unexpectedly short. Instead of estimating costs, look at your bills and check your statements for transaction histories to find accurate expenses.
5. Cutting Every Frill
When most people hear the word “budget,” they think of an austere spending plan that cuts out all the fun things in life. But this couldn’t be further from the truth.
Extreme frugality may seem like the best way to save money and pay down debt, but it’s not realistic. Penny pinching at every opportunity is a stressful way to live.
But more importantly, this type of budgeting can make you hyperfocus on all the things you can’t buy. The pressure piles up, wearing down your willpower, until one day you can’t take it anymore. Next thing you know, you’ve splurged on something big, spending more than if you had just budgeted for something fun in the first place.
While some sacrifices may be necessary to balance your spending, they shouldn’t feel impossible. As soon as you feel like you don’t have any wiggle room, you run the risk of toppling your budget.
To keep things balanced, try the 50-30-20 Budgeting Method. This breaks down your fun spending as a percentage of your income so that you can set appropriate boundaries.
6. Automating Every Bill
Automating bill payments is one of the biggest conveniences of modern banking. If you set up a payment schedule with your bank, you won’t have to transfer money every time a bill comes due; your bank will do this for you.
Automating your bill payments comes with a lot of benefits. For one thing, you’ll save time with a hands-free money management style. For another, you’ll never miss a due date again, as your bank will always transfer money according to the rules you set.
But for those living on a tight budget, automating bills can get you into trouble. Your bank doesn’t care if you don’t have enough in your account to pay your bills. It will still try to transfer money even if your balance is at a cool zero.
To make matters worse, your bank will charge you overdraft and Non-Sufficient Fund (NSF) fees for the trouble. You may also run into late fines, added interest, and credit damage from your creditors when they don’t receive their money.
If you live paycheck to paycheck, you might reconsider automation. Try instead setting up reminders to pay your bills on time.
7. Using Your Gross Income
Using the wrong figure for your income is a small mistake that can have a huge impact on your budget. While on paper, you might earn $50,000, this isn’t what you take home at the end of the year. This is your gross annual income, which reflects your salary before taking out any deductions for taxes, union dues, or health insurance.
Using your gross income when making a budget will make you think you have more money to spend than you actually do. For an accurate accounting of your earning, make sure you rely on your net income. You’ll find this by looking at the deposit amount on your next paycheck. Remember to add other streams of income, such as Social Security checks, dividends, or side jobs.
If At First You Don’t Succeed, Try, Try Again
Everyone makes mistakes from time to time, so don’t dwell on anything that you might have done in the past to jeopardize your budget. Focus on what you can do in the future to fix these mistakes. Follow the tips you learned here today to make a more accurate budget that prioritizes savings and balanced spending.