Financial experts will never stop touting the importance of budgeting in maintaining financial wellness. And it appears Americans are heeding their advice now more than ever. According to Debt.com’s recent poll of over 1,000 Americans, 86% of respondents say they track their monthly income and expenses. This percentage is a slight but noteworthy improvement from 80% in 2020 and 2021. Therefore, it is safe to assume that you have a budget that guides your spending. However, budgeting can be tricky, and it isn’t uncommon to make mistakes. Below are some of the most common errors financial experts identify in people’s budgets.
1. Unrealistic expectations
Everyone is understandably desperate to boost their financial health, but experts advise that you shouldn’t set lofty standards. Extreme budgets always look good on paper but are unrealistic and ultimately ineffective in practice. Newbie budgeters are especially guilty of extreme budgeting, particularly those eager to shake off credit card debt. For instance, they may fervently commit to suddenly ceasing to eat lunch out forever despite constantly eating out for years. However, it is only a matter of time before such an approach falls apart. It is better to start with baby steps like packing your lunch twice weekly. Then, slowly add an extra day until eating out five days a week becomes a thing of the past.
2. Classifying wants as needs
Your needs are vital expenditures like your mortgage payments and groceries. For example, paying down your mortgage is so essential that financial experts advise you to calculate a mortgage payoff quote so you can be debt-free faster. As such, your mortgage rightly deserves its position at the top of your budget’s ‘needs’ category. On the other hand, certain expenses you can do without, like eating out and personal travel, are clearly ‘wants.’ However, certain individuals make the critical error of misclassifying their wants as needs. Lumping wants and needs into one spending category is far from ideal because you will struggle to reduce spending on things that are not essential. Therefore, constantly examine the items in your needs category to determine whether you can live without them. If your answer is a resounding ‘yes,’ move this expense into the ‘wants’ category to give your budget more clarity.
3. Mental budgeting
If you are often wondering where all your cash went at the end of each month, you are likely engaging in mental budgeting. Indeed, this mistake is one of the most common blunders people make when budgeting, leading to overspending. This reality is because you are likely to unintentionally exclude an expense or two irrespective of how well you budget in your head. Therefore, even though writing down a budget is no fun, it is a necessary evil you must never escape. A written-down budget helps you get a better grip on your finances, so you can achieve your financial goals faster. In addition, you are likely to stick to a budget when it is written down on paper. The good news is that there are many tools you can leverage to write down your budget with ease. For instance, you can join the 17% of Americans who use at least one budgeting app instead of drawing up budgets with a pen and paper.
4. Leaving out items
Many expenses seem too small and occasional to feature in your budget. Indeed, you may be wondering whether you really need to factor in a small recurring expense like your daily subway ride. In addition, haircuts, birthday presents, annual bills, and one-time expenses such as wedding gifts may seem unworthy of featuring in your budget. However, financial experts advise that these seemingly small expenses can hurt your finances without proper planning. No matter how small a cost is or how rarely you incur it, paying for it outside your budget can significantly upset your monthly financial planning efforts.
Consequently, your monthly budget should have no room for surprise expenses. You can map out all possible expenses in a year on a calendar, including costs for birthdays, vacations, gifts, and events. This way, you can know which seasonal or one-time expense is approaching, so you can readily include it in your budget and avoid surprises.
5. Assigning expenses by paycheck
You may be assigning certain costs to each paycheck if you are paid weekly or biweekly. This budgeting error can be costly because money will be tight the week you pay your rent or mortgage, and things will only worsen if multiple bills are simultaneously due. Therefore, avoid allocating a whole paycheck to the biggest expenses and leaving no cash for other spending categories. Instead, put money aside from each paycheck using the 50-30-20 budgeting rule to prevent any cash flow problems that might force you to reduce spending in other categories or make late bill payments.