For the first few days, budgeting can be sort of fun: You make a plan and sort your day-to-day expenses into neat little categories. You review your fixed expenses, and you decide how much you’ll spend on things like groceries and the occasional nice dinner. You happily imagine how much extra cash you’ll be able to sock away in savings or how quickly you’ll be able to knock down the high-interest credit card debt that’s been hanging over your head since grad school.
And then, you try to start actually living with that budget: Suddenly, those neat little categories seem too rigid and confining. You spend way more on groceries than you expected. Your car breaks down and you have to shell out a few hundred bucks for repairs. You get tired of tracking your spending down to the penny. Eventually, you give up on your budget entirely.
Sound familiar?
If you’ve ever tried (and failed!) to stick to a budget, you’re definitely not alone. But you shouldn’t let a few failed attempts get in the way of living a financially stable lifestyle. By looking at some of the common reasons that budgets don’t work, you can take steps to make sure that your next budget is a success.
Before you create another budget, check out this list of five common budgeting mistakes – and how to avoid them.
Budgeting Mistake #1: Choosing the Wrong Budget
Let’s face it: Budgeting only works if you find a budget you can stick to. That’s why it’s important to make sure that you’re choosing a budget that actually fits with your lifestyle and personality. Budgets are not one-size-fits-all, and spreadsheets are not always necessary.
What to Do Instead: There are plenty of creative budgeting ideas out there, so if you do a little research first, you’re sure to find one that suits you. Are you a super-organized “Type-A” personality? You might like a traditional, spreadsheet-style budget. Love numbers? Try the 50/30/20 budget. Prefer a less rigid structure? Check out this post and this post for a few flexible (and spreadsheet-free!) ideas.
Budgeting Mistake #2: Underestimating Your Expenses
When most people create budgets, they usually have a pretty good idea of what they spend on fixed expenses, like rent or mortgage payments, car payments, and debt repayment. But when it comes to more flexible expenses like groceries, gas, or entertainment, people often end up using estimates. More often than not, they tend to underestimate what they spend, which results in a budget that doesn’t really fit their actual lifestyle and spending patterns.
What to Do Instead: Before you create a budget, try tracking your spending for a few weeks or even a month. Save your receipts, or check your online banking activity to get a more accurate picture of what you actually spend. You can use that information to come up with a more accurate estimate of how much you spend on certain types of purchases each month, which will result in a better budget.
But keep in mind that, no matter how good your estimates are, you’ll probably still have to tweak your budget a bit here and there – which leads me to our next mistake . . .
Budgeting Mistake #3: Not Adjusting Your Budget
All too often, people think of their budgets as being set in stone. They sit down with their monthly bills, decide how much they think they’ll need to cover monthly expenses like rent or mortgage, gas, and groceries – and then, they get discouraged and frustrated when they realize that they didn’t budget enough for food or gas. Instead of simply going back and making some minor adjustments, they give up on budgeting entirely.
What to Do Instead: A good budget should be viewed as a work in progress. Your budget might have looked great on paper – but when you put it into practice you might realize that you underestimated the amount you spend on groceries every month. You might decide that you budgeted too much for entertainment and miscellaneous. You might even decide that you’d like to try putting more in savings every month.
Bottom line: If your budget isn’t working for any reason, make adjustments until you have something that you can live with long-term.
Budgeting Mistake #4: Not Planning for the Unexpected
A good budget should include categories like rent or mortgage; utilities; debt repayment; groceries; and entertainment. But what about unexpected expenses that don’t fall into a set category? What happens if your car breaks down or your water heater decides to quit on you? What if you lose your job? What if you need to buy a gift for a friend’s baby shower or chip in for a party for your parents’ wedding anniversary? It’s too easy to ignore these unexpected or emergency expenses when setting a budget.
What to do instead: Every good budget should include an emergency fund. Most experts recommend having anywhere from three to six months’ worth of living expenses socked away just in case. If that goal seems a bit too lofty, I recommend saving whatever you can. You’ll probably be surprised by how quickly the money adds up. For smaller unexpected expenses, like gifts, try including a “miscellaneous” category in your budget.
Budgeting Mistake #5: Buying on Price – not Qualities or Features
When you’re trying to live on a budget, it might seem like a good idea to make all of your buying decisions based on price alone. After all, starting with a set budget will help you spend less, right?
Wrong. Or, maybe not wrong, exactly. But there’s more to responsible spending than simply setting a spending limit – especially when it comes to purchasing larger and more expensive items like computers, major appliances, and furniture. If you say, “I am going to spend $600 on a new computer” you might just overlook a $500 machine that offers the same features at a lower price. Another disadvantage of focusing too much on price? You might end up purchasing a lower-quality item simply because it’s a bit cheaper.
What to Do Instead: When it’s time to make a major purchase, start by identifying the features or qualities you want, and begin your search from there. Read customer reviews, and look at options from a few different price points before you narrow things down.