And How to Solve Them
Congratulations! You’ve decided to establish a monthly budget — a wise financial move! Budgeting can be a powerful tool that sets you on a path toward achieving your financial goals. However, there are several missteps that may push you off that path if you’re not careful. It’s important to avoid the following budgeting mistakes.
#1 – Estimating costs
As you begin planning your budget, it can be tempting to simply estimate your expenses. After all, tracking down the exact amount you spend each month on every single expense can seem like an overwhelming chore. However, having accurate numbers is key to budgeting success.
Often, it’s the variable expenses that are the most difficult to track down. To gain an accurate picture of these costs, review your bank and credit card transactions over several months for specific expense categories. Use this information to come up with the most accurate number possible.
#2 – Forgetting to include savings
One of the best ways to save regularly is by incorporating savings targets into your monthly budget. Treat saving for the future just as you would any other monthly expense. Once you have a savings goal in mind, consider increasing your salary deferrals into your 401k plan or setting up automatic transfers from your checking account to your savings account each month. This practice will make saving for the future a simple process you won’t need to think about. If your employer offers a 401k, contribute at least enough to get the full match from your employer.
#3 – Leaving out expenses
As you go through your monthly expenses, it can be easy to overlook less-frequent costs, such as insurance payments, home repairs, holiday gifts, membership dues, school tuition, taxes, etc. That’s why you may want to consider going through an entire year’s worth of bank and credit card statements to refresh your memory on less-regularly occurring expenses.
Once you have identified these expenses, the challenge becomes how to incorporate them into your budget. One strategy is to set up a separate savings account specifically dedicated to covering these irregular expenses. That way you can direct money toward the account each month as part of your budget and use the savings to cover expenses as they come up without derailing your other budget goals.
#4 – Not tracking
Establishing a budget is great, but if you want to be successful in sticking to it, it’s essential to track your expenses on a regular basis. You may want to purchase budgeting software to automate the process. Or you can manually track your expenses in a spreadsheet. Whatever method you choose, be sure to stick with it, as consistency is key when it comes to budgeting.
#5 – Being too restrictive
While extreme budgeting may seem like a great way to make strides toward your financial goals, being too restrictive can quickly backfire. It’s not realistic to cut back on all discretionary expenses, so a little flexibility is important. The key is to find a balance that allows you to enjoy life — and treat yourself once in a while — while still living within your financial means and accomplishing your goals (saving for retirement, debt repayment, etc.).
#6 – Budgeting based on gross pay
When determining your income, use your net (i.e., take-home) pay rather than your gross. If you use gross pay numbers, you’ll likely overestimate the amount you have available to spend each month, as that gross number is often significantly reduced by insurance, taxes, 401k and HSA contributions and other regular deferrals.
#7 – Not having partner buy-in
Budgeting as a couple can be challenging, but no one partner should solely control household spending. It’s absolutely essential to be on the same page when it comes to your monthly budget. Discretionary spending comes into play here (spending money on things you enjoy either with each other or as individuals). After you’ve listed out all your fixed and variable mandatory expenses, you and your partner can have discussions on the money left over to allow each other to spend that money as you wish, cutting down on financial strife. Before implementing any changes, be sure to communicate with your partner and agree on terms.
Creative Planning is here for you. Our teams help ensure your entire financial life is working toward achieving your long-term goals. To discuss how we can help you, schedule a call with a member of our team.