A budget is a calculative financial plan usually but not always financial. Common man, governments, and private organizations use budgets for a definite period to express strategic plans of activities in measurable terms.
A good budget always intends to strike a balance between income and expenditure. During dire times, especially now when inflation and interest rates are at highs, it is always prudent to make a sound budget.
Most people think budgeting is about money. It’s not. Budgeting is actually about life goals. Money is used as a tool while budgeting to achieve those goals. Budgeting your money is an important part of managing your finances Before you create a budget, it is important to ask yourself: “What am I budgeting for?” Well, to save so that you can buy a house or retire early. This is the common mistake most people make and these pitfalls can add to your financial anxiety.
Budgeting for the present keeping future in mind is a sound budget that helps you to live life in a fulfilling way rather than waiting for retirement and giving up on the present.
However, budgeting isn’t always easy. Let’s see the budgetary potholes in our path to financial stability and fix them to avoid falling for budgetary constraints. Listed below are 9 common budget mistakes to avoid, fortunately, they’re all avoidable.
1. Budgeting Based on Your Gross Income
A common mistake made by beginners during budgeting is to consider gross income which is an individual’s total earnings before any deductions.
You might earn 50,000/- a year, but after taxes, health insurance, and other deductions, your actual earnings are much less.
For a realistic budget, you’ll need to create a spending plan based on your net or take-home pay or make sure to add every deduction from your income as a line item expense.
2. Stop, think, and put it on paper.
When you are constantly unsuccessful in making your budget work, take a step back and look at every problem. Is overspending the root cause of your problem? Are you not making adjustments to the budget?
Think about the results of your last budget. A budget needs to be realistic and also flexible. Focus on finding the issues, and then fixing any specific budgeting failures like overspending. Be aware of common budgeting mistakes.
Budgeting is not a duty that can be completed in your head. Writing down your budget on paper is a crucial component of attaining financial objectives. Whether you create your first budget with an online tool, or a piece of paper, creating a visual is the first step in a successful budget. You will be likely to stick to it when it’s written down somewhere.
3. Use Technology and be stress-free
You can focus on tracking your expenses accurately and automatically, so you can spot the loopholes in your budget easily.
If you can adjust your expenses from time to time as they change, automating the payment of bills is a great way to organize your finances.
The apps shown below offer useful features for personal finance and debt management.
YNAB (You Need A Budget)
4. Know your Limits
Not everyone can increase their income for extra spending. Although it may not be a cakewalk at first, cutting down expenses is essential to stick to your budget.
Be mindful of the things that you spend your income on each month. Work on the expenses that can be reduced. After identifying such unnecessary expenses, reduce or eliminate those categories. For instance, if you spend a lot on food every month, try to figure out alternatives to save money on groceries or cut down on eating out. Also, you should keep count of the monthly housing expenses like electricity bills and other payments that can`t be avoided.
5. Know Your Lifestyle and Make Room for Fun in Your Regular Expense.
A budget is a tool that helps in achieving financial goals, but the tool can only do what you tell it to do. Setting goals too high or too low can make a budget too strenuous to keep up with. Always be realistic yet don`t miss out on the fun part of life and know your lifestyle not to compromise on comfort. Otherwise, the whole purpose of a budget is made null and void.
Create a budget that suits your style of living and income not based on your dreams or your friend`s way of living.
Talk with your friends or your partner about the plans you want to budget for. When the time comes for a vacation or a weekend getaway, you’ll know exactly how much you have available to spend
6. Set aside a Sinking Fund for Irregular Expenses
“Sinking fund” is a term taken from the book of investment, where the fund is allocated to pay off debts or bonds.
For a common man or an individual saver, a sinking fund is where money is set aside every month to cover future but definite expenses.
You can treat this as a separate savings goal in your budget.
Here is a list of irregular expenses.
- Insurance payments
- Home repairs
- Broken tech replacements
- Annual subscriptions (Amazon Prime or Netflix)
- School tuition and fees
- Holiday shopping
- Membership dues
- Holiday gifts
- A kitchen remodel
- Medical or dental expenses
- A wedding
- A new car
- Estimated taxes
- Donations to charity
7. Never Neglect Emergency
Even if you budget all your regular expenses carefully and fail to make room for emergency expenses, it can turn out to be a disastrous budget. Always consider unexpected expenses or emergency medical expenses, otherwise, there is the probability of increasing debt.
Create an emergency fund amounting to at least six months` worth of living expenses. You can start taking out a small portion of your salary every month and transfer it into an emergency fund, this strategy of budgeting is called the envelope system which is mentioned in the later part of the article. This will always come in handy if you were to lose a job, repair your home, or during any sort of health emergency.
8. Strategize your budget
Make sure you customize your budget to your income and expenses to avoid feeling overburdened.
Here are a few budgeting strategies that account for budgetary planning.
A. 50/30/20 budget plan:
50/30/20 budget plan which directs 50% of your income toward expenses, 30% toward spending, and 20% toward savings.
B. Zero-based budgeting:
Zero-based budgeting refers to allocating every rupee of your income toward expenses and financial goals like saving and debt repayment.
C. Pay yourself first:
If you struggle to save money for your future then “paying yourself first” say for EMIs, can come in handy.
D. The envelope system:
The money in each envelope is used for the setlist. If the cash is exhausted, the budgeting limit has been reached and no more should be spent on that list.
E. Values-based budgeting:
In this, you will spend only on the things that are important to you.
9. Classifying Wants as Needs
Another typical mistake is to misclassify wants and needs. Ask yourself if you can lead your life without it, if ‘yes’ then it should be put under the list of wants. Eg- A new car when the old one is working fine.
Here are additional budgeting mistakes you may be making:
- Setting unrealistic goals.
- Forgetting to factor in rising prices.
- Making your plan too rigid.
- Doing it alone.
- Ignoring online resources.
- Not budgeting for impulse purchases.
- Failing to save.
- Maintaining unaffordable fixed expenses.
- Not having a budget at all.
- Not considering cheaper alternatives
So, if you’re presently budgeting or about to create a budgeting plan, make sure you’re avoiding the potholes on your ride to ‘financial’ freedom. Budgetary should bring a smile to your face. Enjoy planning your financial year and invest in your happiness.