Common mistakes people make when budgeting
At one point in time or another you found yourself short on cash. You review your budget and realize that you have to pull from the savings account just to make it to next pay period. At that point you have gone over budget.
Making mistakes while budgeting happens. Lets take a look at a few common mistakes and look at ways to get back on track.
1. Not having an emergency fund
This is an essential. An emergency fund keeps you prepared for the unexpected. Their are going to be things like car repairs, medical expenses, and bills that just have to get paid that will fall out of the initial plan. You want to set aside at least 3-6 month of expenses in order to cover for emergencies. Also you want to make sure that your emergency fund is in an interest bearing account and that it is keeping up with inflation which on average is 3%.
Fix: start to take steps to build an emergency fund, you want to have this money available and on hand in case one loses a source of income such as a job. Establish a small goal like $500 and $1000. Once that is complete move on to 1-3 months of expenses, then to 3-6 months. Once there depending on if your single/married/have dependents and risk level, you can decide if you want to have a full year of expenses in an emergency fund.
2. Dipping into emergency fund too often
It is one thing to have an emergency fund. It’s another to dip into it every month. This can set some poor precedents if you have a savings goal you want to hit. Are you consistently checking all your regular and irregular expenses so you can get the budget for the pay period? If not, you will find yourself dipping into emergency funds that could have been used for real emergencies.
Fix: Track all expenses. This includes irregular expenses which are often come up unplanned. This will allow you to prepare your monthly budget more efficiently.
3. Skipping Retirement Savings
Not adding money to retirement in favor of paying off debt is another mistake. Even if retirement is a long way away. Compound interest is also a long way away and if your not able to take advantage of because of not funding a retirement account will set you back even further than dealing with short-term debt. To get around this take advantage of employer sponsored 401k if they match. If the employer doesn’t match open up a Roth IRA and add a small amount each month to start building retirement money.
Fix: Open up a retirement account, either a 401k or an IRA and start contributing monthly to it. Plan the contributions out so you can max out the contribution limit each year.
4. Not updating the budget
Not updating the budget
You want to keep the budget up to date as much as possible.
Fix: Review Expenses and Adjust.
Course correcting the budget means reviewing bank statements and outliers in the budget. How many purchases show up as Misc or Starbucks? Isolating these and getting them to space either on an irregular expense or dedicated item line will help keep the budget on track.
Budgeting is an easy thing to suggest but these are some common pitfalls that one can run into if not taking them into account. Take a look at fixes and adapt these into your budgets to take the next steps in taking control of your finances.