Ever wonder which mistakes to avoid in your budget? Today I’m sharing five of the worst budgeting mistakes you should avoid at all costs.
The holidays are over and the new year is here! And with the new year comes resolutions. Our hopes, our dreams for the new year, in the form of goals to complete.
If improving your finances is one of your New Year’s resolutions this year, I’m here to help! The unfortunate truth is that most of us don’t stick with our resolutions past the month of February. I hope to help you change that.
So today, we’re talking about those things that kill your budget. Everything comes to a stand-still, and any momentum you had built up is shot down.
The good new is, these are preventable!
Mistake #1: Sticking With a System that Isn’t Working
When my husband and I first started budgeting, we kept all of our money in the account and saved our receipts. We then spent several hours every month recording our spending onto the budget sheet.
It worked for a while, but eventually we would fall behind recording, and then we would go over-budget because we didn’t remember what had been spent.
We stuck with that system for over a year before we realized it wasn’t working. More than 12 months of blown budgets, frustration, and scrambling to cover expenses we shouldn’t have had to scramble for.
Eventually we switched to Dave Ramsey’s cash envelope system and it has been working very well for us these past 5 years.
Maybe you’re using an app for your budgeting, but when you go back to look at your finances it mis-sorted your purchases into the wrong categories.
Don’t get me wrong–I’m all for automation! It’s an easy way to make budgeting as painless as possible. But only if it’s working for you.
Staying with a system that isn’t working is one of the worst budgeting mistakes that you need to avoid. Because if your system isn’t working, then you basically might as well not have a budget at all!
So take a look at the system you’re using. Where is it failing you? What do you need it to do better? Then see what systems–or tweaks to your current system–might fit your needs better.
Mistake #2: Not Planning Ahead
This budgeting mistake should be avoided at all costs! If you don’t plan ahead, you often end up stressed and need to rely on credit card debt in order to cover those expenses you forgot to plan for.
But let’s be real–it’s easy to forget about the expenses that don’t happen every month. Routine car repairs, tuition payments, license renewals, birthdays and holidays are all big expenses.
But just because it’s so easy to forget about them doesn’t excuse us from paying for them.
The answer? Sinking funds.
These are accounts or cash envelopes that you add a little to every month so that when the expense comes around again, you have enough to pay for it. We have sinking funds for Christmas, haircuts, clothing (kids grow so fast!), tuition, and car repairs.
Basically, if it’s an annual, bi-annual, or quarterly expense–you need a sinking fund.
Mistake #3: Not Growing Your Savings
If we are going to plan ahead for the known, then we also need to plan ahead for the unknown.
You need an emergency fund.
This one is actually a pretty simple budgeting mistake to avoid. It takes self control and some patience to build up a savings account, but it’s totally doable!
So, how big should your emergency fund be?
Recommendations range from $1000 all the way up to 6 months worth of expenses.
Personally, I feel that $1000-$3000 is a good amount to have in your first emergency fund. After you’ve paid off your debts, you can always build it up to 3-6 months worth of expenses.
Mistake #4: Making Your Budget Too Restrictive
Very few people love their budget.
Personally, I love having a budget, but I’m well aware that I fall solidly in the minority on this topic.
Having to operate within the confines of your budget can sometimes feel like a cage if you let it.
The good news is, your budget is customizeable to your life. Too many people believe that a budget is all or nothing–bare bones and saving every penny (with a budget) or care-free and living your best life (without a budget).
This just isn’t true!
Your budget doesn’t have to be bare bones or feel restrictive at all. You don’t have to live on rice and beans and sit in the dark to “be doing it right.” If you can afford to have some small luxuries, feel free to add those into your expenses.
We’ve paid for television service for years and we don’t regret it. Why? My husband would go crazy if he couldn’t watch his sports. In other words, a budget that didn’t include sports would be too restrictive for our family.
I also splurge on my haircuts every few months. I feel more confident with a proper haircut, and that confidence is well worth the cost of a quality cut in my mind.
The line of what is too restrictive is different for every family. If you can afford it, start by cutting back in baby steps. If you go out to eat once a week now, budget for 3 times a month.
After a few months, go down to twice a month, then once a month. This allows you and your family to adjust expectations and gradually get used to the new budget.
Mistake #5: Not Including “Sanity Money”
This is one of the mistakes that can make your budget feel like you’re sitting in a rusty, clausterphobic cage.
Some people call this personal money, blow money, or spending money. I like to call it Sanity Money.
My husband and I often say that without our spending money, we would have gone insane a long time ago.
No matter how tight your budget is, I strongly believe that you NEED to budget a little money for yourself every month.
We have been through some rotten times. We’ve had to pull our belts tight. We first chose to cloth diaper our baby so that we could afford food and utilities. At times, we’ve had to use government assistance.
But we’ve always budgeted a little spending money for ourselves, even if it was only twenty dollars a month.
Because if the rest of your budget has to be restrictive by necessity, then that tiny bit of spending money is like a lifeline. You can use it on whatever you want, no questions asked.
Because your sanity is worth it.
Bonus! Mistake #6: Having Budget Categories That Are Too Vague
All too often, I’ll see people online ask something like, “How much do you spend on groceries? Our grocery budget is $XXX and includes food, diapers, cat litter, etc.”
If your budget looks like this and it’s working for you, feel free to skip ahead. But the truth is, this kind of budget doesn’t work for most people.
If you are lumping too many expenses together, it becomes difficult to see where you went wrong if you overspent for the month.
Instead, group your budget categories by like expenses. Groceries should be only food. Everything for the kids–diapers, wipes, potty training supplies, etc–should come from a category labeled specifically for their needs. Pets need their own category, and household items like cleaning supplies and lightbulbs also need a separate category.
By really honing in on what items belong in which category, you will save yourself a lot of stress. Instead of, “All the money is gone!! How did that happen!?” you’ll find yourself saying, “Oh–we bought Bootsie that pet bed so that’s why we’re running low on money for cat food.”
Neither situation is ideal, of course. But going over-budget happens–it’s just life. At least if you know where you overspent, you have the knowledge to make changes for the better in the future.
What changes will you be making to your budget in 2020? What did you struggle with in 2019?