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Budgeting your money is a super important skill to have if you want to grow your wealth and achieve your financial goals. But even if you're a pro at it, there are some common mistakes that can trip you up. In this article, we're going to dive into six budgeting mistakes that you seriously can't afford to make, and chat about solutions to fix them. Trust us, we've been there and we want to help you avoid these pitfalls so you can stay on track and build that sweet, sweet cash.
Mistake 1: Not Knowing Your Spending Patterns
One of the biggest budgeting mistakes you can make is not knowing your spending patterns. If you're not tracking where your money goes, how can you make informed decisions about your finances? If you're not aware of your spending habits, it's easy to overspend and blow your budget. You could be wasting your hard-earned cash on things you don't even need!
Solution:
Take the time to figure out where your money is going. You can use a spreadsheet, a budgeting app, or even just a good old-fashioned notebook. Whatever suits you best, just make sure you're keeping tabs on your spending so you can stay on track and reach your money goals. Some of the budgeting apps we love are Mint, and Goodbudget.
Mistake 2: Not Knowing the Difference Between Wants and Needs
Not being able to differentiate between your wants and needs is another big budgeting mistake. We get it - sometimes it's hard to resist buying the new AirPods that just came out. But the thing is, if you're constantly spending money on things that aren't essential to your survival or well-being, you're putting your financial security at risk. It's important to prioritize your needs (like rent, food, and bills) over your wants (like that new pair of sneakers you're eyeing). That doesn't mean you can't treat yourself here and there, but you've gotta be honest with yourself about what's really necessary and what's just a fun extra that’s not exactly a priority.
Solution:
Make a list of all the things you buy, from dish soap to life insurance. Group them into two categories, which will be your wants and needs. For example, a gym membership would go under wants, and a phone plan would go under needs. Document the totals that each expense costs, and determine what are considered priorities. Lastly, follow the 50/30/20 rule, which we love to recommend here at Investing Hero. 50% of your monthly income is allotted to needs, 30% to wants, and the remaining 20% is saved for savings and debt repayment. Plug your monthly income into this budget calculator to save some time.
Mistake 3: Guessing at Costs
Sometimes we try to budget by guessing how much we're going to spend in certain areas, but this is actually a common mistake in budgeting. Guessing costs might seem like an easy way to plan out your finances, but the issue is that it's not very accurate. You might end up underestimating how much you'll spend, which means you'll blow your budget and maybe even end up in debt. Or, you might overestimate and end up being too constrictive with your spending, missing out on things you could have enjoyed.
Solution:
This solution is easy! Instead of guessing what you spend in a month, track your actual expenses for a few months and then use that info to create a more realistic budget.
Mistake 4: Being Overly Constrictive
You may think that cracking down on your spending is the most efficient and effective way to budget. In reality, it might cause you to become discouraged with your budget, and in turn not follow it at all. It’s not a sustainable method, and plus, what’s life without a little enjoyment? If you follow a realistic budget, you will be able to afford things that bring you happiness each month, even if those things are small.
Solution:
Instead of overly constricting your budget, find a balance between saving money, and treating yourself every once in a while. Another tip is to continue following the 50/30/20 rule as mentioned earlier. This is the key to a balanced budget!
Mistake 5: Forgetting an Emergency Fund
It can be easy to focus on your day-to-day expenses and forget about the unexpected stuff that life throws your way when you're trying to budget. That's why forgetting to set aside money for an emergency fund can be a budgeting mistake. You never know when something unexpected might come up - you have a medical emergency or your car breaks down - and if you don't have any money saved up, it can significantly affect your bank account. Having an emergency fund means you'll be prepared for those unexpected expenses and won't have to dip into your regular budget or even worse, take on debt to pay for them.
Solution:
Set aside some money each month for your emergency fund - it might not be the most exciting thing to think about, but it'll give you peace of mind knowing that you're prepared for whatever comes your way.
Mistake 6: Not Budgeting At All
The last mistake, and arguably the most detrimental one is to not budget at all. If you aren’t organizing your expenses in any way, you can be wasting so much of your hard-earned cash without even realizing it. This is a very common mistake; Many people avoid budgeting for the simple reason that planning your finances can seem very daunting. However, in the long run, it is very important to put in the time to both learn how to budget, and implement it into your daily life.
Solution:
Keep in mind that budgeting is something that takes practice, so don't beat yourself up if you don't get it perfect on your first try. There's no right way to budget, so it's important to figure out what works for you. As long as you avoid some common budgeting mistakes that can get in the way of creating a plan that actually helps you manage your spending, you'll be going the right direction.
Conclusion
Budgeting is a crucial skill for managing your finances, but there are several common mistakes that can hinder your progress. By understanding your spending patterns, distinguishing between wants and needs, tracking actual expenses, striking a balance between savings and enjoyment, creating an emergency fund, and budgeting consistently, you can stay on track and achieve your financial goals.