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Common budgeting mistakes…and how to avoid them!!!

We see something we like. We have money in our account. So, what do we do? We buy the item without giving thought to whether we can actually afford it. Some of us are guilty…but this is just “one of many” common budgeting mistakes people make. 

Here’s a look at several budgeting mistakes to avoid now.

1. Not Tracking Your Spending Before Creating a Budget

It’s important to know how much you’re currently spending before creating a budget. 

Start by tracking your monthly expenses over a period of two or three months. These include fixed expenses (housing, car payment, insurance) and variable expenses (utilities, food, transportation).

Take note of miscellaneous spending patterns too. In other words, how much do you typically spend on entertainment, shopping, and recreation? Don’t guesstimate these numbers. You want a realistic budget and this requires using the most accurate figures.

2. Forgetting to Budget for Savings

It’s important to budget for savings too. This reduces the financial burden of an unexpected expense. Unfortunately, though, some people don’t account for savings. In which case, they only save if there’s money left over at the end of the month.

The problem with this approach is there’s often nothing left. For this reason, you should always include “paying yourself” as a line item on your budget. In addition, make sure you’re paying yourself “first.” This means treating your savings like another bill and moving money into your account before paying bills or doing anything else. 

It’s recommended to have at least 3 to 6 months of monthly expenses in your emergency savings account. Likewise, a good place for your emergency fund is an online high-yield savings account.

These accounts earn a higher rate than regular savings, and some accounts don’t come with an ATM card (making your money less accessible). If you’re looking for an online high-yield savings, one option is CIT Bank’s Savings Connect. As of January 2023 this account earns an APY of 4.05%.

3. Forgetting to Budget for Fun

Everything doesn’t have to be “all work and no play.” This mindset often leads to savings burnout, and there’s no need to deprive yourself of all fun activities. Therefore, don’t forget to include fun or recreation in your budget. 

Your “fun budget” includes wants like dining out, shopping, entertainment, personal care, and even gift giving. There are no hard or fast rules on how much to spend on wants. However, one recommendation is the 50/30/20 budget plan. This includes spending no more than 50% of your take-home pay on needs, 30% on wants, and 20% on savings and debt repayment.

This is only a guide, so feel free to tweak it according to your circumstances. If you’re currently spending 60% of your take-home pay on needs, a more realistic approach is 20% on wants and 20% on savings and debt repayment. 

4. Starting With Your Gross Income

When creating a budget, don’t use your gross income. This overstates your income, which starts your budget on the wrong foot.

Gross income is the total money earned at your job – before taxes and deductions. You should create a budget using your take-home pay. This is your income after deductions and taxes. 

Related: 10 Creative Ways to Save Money on a Tight Budget

5. Never Updating Your Budget

Expenses change from time to time, so it’s important to periodically review and update your budget. For example, due to higher food costs you might need to reduce how much you spend on entertainment to compensate

Adjusting your budget helps you stay on track and reach your financial goals.

6. Forgetting to Budget for Irregular Expenses

Irregular expenses are those that occur yearly or even quarterly. These might include annual one-time expenses, gifts for family, or annual celebrations. 

Save a little each month so that these expenses aren’t a burden. To do this, estimate and calculate your irregular expenses for the year. Divide that number by 12, and then save this much each month. So if irregular expenses for the year add up to $500, save an additional $42 a month. 

Related: 7 Biggest Budgeting Mistakes (Video) 

What do you think is the most common budgeting mistake to avoid?